7th Mar 2007 07:04
Carillion PLC07 March 2007 March 7 2007 Carillion plc 2006 Preliminary Results UK support services and construction company Carillion plc announces itspreliminary results for the year ended 31 December 2006. Highlights • Revenue (including joint ventures) up 57% to £3,593m • Profit before tax* up 48% to £82.1m • Earnings per share up 15% to 23.5p • Strong operating cash flow - net debt 31 December £108m • Final dividend 5.9p per share - total 2006 dividend up 12.5% to 9p per share • Mowlem integration substantially complete - cost savings of £15m p.a. delivered • Order book more than doubled - up from £7bn to £16bn Financial summary 2006 2005Revenue- including joint ventures £3,593m £2,284m- excluding joint ventures £3,065m £2,025mProfit before tax* £82.1m £55.5mEarnings per share 23.5p 20.4pProfit before tax £67.6m £51.5mBasic earnings per share 21.6p 18.7p* Net of tax on profit from joint ventures (2006: £8.1m; 2005: £5.0m) andexcluding restructuring costs, non-operatingitems and amortisation of intangible assets related to acquisitions (2006:£14.5m charge; 2005: £3.6m charge) Commenting, Chairman Philip Rogerson said, "I am pleased to report thatCarillion made good progress in 2006 and either achieved or exceeded all our keyfinancial and strategic objectives. In particular, the benefits of acquiringMowlem plc in February 2006 have been greater than expected at the time ofacquisition: integration cost savings have increased, new order intake has movedstrongly ahead and the acquisition has been significantly earnings enhancing in2006, rather than earnings neutral. "With an order book of £16 billion and strong positions in a wider range ofgrowth markets, we have created a more resilient business, capable ofaccelerating our strategy for growth. This positive outlook for the Groupconfirms the Board's view that Carillion is firmly on track to delivermaterially enhanced earnings in 2007. "In view of the Group's performance in 2006 and prospects for 2007, the Board isrecommending a final ordinary dividend for 2006 of 5.9 pence per share, makingthe total full-year dividend 9 pence per share, an increase of 12.5 per cent onthe total paid in respect of 2005 (8 pence per share)." For further information contact:Chris Girling Finance Director 01902 422431John Denning Director Corporate Affairs 01902 316426High resolution photographs are available free of charge to the media atwww.newscast.co.uk telephone 0207 608 1000 Chairman's statement I am pleased to report that Carillion made good progress in 2006 and eitherachieved or exceeded all our key financial and strategic objectives. Inparticular, the benefits of acquiring Mowlem plc in February 2006 have beengreater than expected at the time of acquisition: integration cost savings haveincreased, new order intake has moved strongly ahead and the acquisition hasbeen significantly earnings enhancing in 2006, rather than earnings neutral. In 2006, revenue increased by some 57 per cent to £3,593 million, includingjoint ventures (2005: £2,284 million), which reflects both organic growth andthe acquisition of Mowlem. Profit before tax, non-operating items andamortisation increased by 48 per cent to £82.1 million (2005: £55.5 million).Earnings per share on the same measure rose by 15 per cent to 23.5 pence pershare (2005: 20.4 pence). Cash flow from operations was again strong and average net debt in 2006 was £110million, well below the £200 million we expected at the time of acquiringMowlem. At 31 December 2006 the Group had net debt of £108 million. The strength of the enlarged Group is also clearly evident in the value of itsorder book, which more than doubled to £16 billion at the year end (2005: £7billion). Mowlem's order book at acquisition was approximately £2.5 billion;therefore most of this increase came from new orders won during the year. The good progress we have made in 2006, particularly with the integration of theCarillion and Mowlem businesses, is due to the leadership of our management teamand the commitment and professionalism of our people. On behalf of the Board Ishould like to thank all our employees for the contributions they have made tothe integration process and to Carillion's success in 2006. With an order book of £16 billion and strong positions in a wider range ofgrowth markets, we have created a more resilient business, capable ofaccelerating our strategy for growth. This positive outlook for the Groupconfirms the Board's view that Carillion is firmly on track to delivermaterially enhanced earnings in 2007. In view of the Group's performance in 2006 and prospects for 2007, the Board isrecommending a final ordinary dividend for 2006 of 5.9 pence per share, makingthe total full-year dividend 9.0 pence per share, an increase of 12.5 per centon the total paid in respect of 2005 (8 pence per share). The final dividend for2006 will be paid on 22 June 2007 to shareholders on the register at close ofbusiness on 27 April 2007. Philip Rogerson Chairman Chief Executives Review The acquisition of Mowlem in February 2006 marked a step change in Carillion'sdevelopment as a leading support services and construction company. Greater thanexpected benefits from this acquisition, combined with continuing organicgrowth, enabled us to deliver profit and earnings per share ahead of ouroriginal expectations, backed by strong cash flow from operations. More specifically, we have achieved or exceeded each of the six key objectiveswe set for 2006, namely to - attract and retain excellent people, by becoming an employer of choice- integrate Carillion and Mowlem successfully- achieve cost synergy savings at a minimum running rate of £10 million per annum by the end of 2006 and be on course to achieve a minimum running rate of £15 million per annum by the end of 2007- reduce net debt to circa £200 million by the end of 2006 and be on course to reduce it to below £100 million by the end of 2007- be on track to deliver materially enhanced earnings for the enlarged Group in 2007- be a recognised leader in the delivery of safety and sustainability Our performance against each of these objectives is discussed in the followingsections of this review. Acquisition of Mowlem When we acquired Mowlem, we said it was an outstanding strategic fit and thatintegrating Carillion and Mowlem would deliver substantial cost savings, createa stronger, more resilient business and accelerate our strategy for growth. Immediately after acquisition, we restructured the group to create 14 businessunits, each aligned with key growth markets and supported by lean and effectiveshared central services. By the end of 2006 the integration process wassubstantially complete. When we acquired Mowlem we announced that we expected todeliver integration cost savings at a running rate of £15 million per annum bythe end of 2007, for a one-off implementation cost of £10 million. We now expectto achieve cost savings at a running rate of £26 million per annum by the end of2007, for a one-off cost of up to £28 million. Carillion is now one of the largest support services' businesses in the UK withenhanced positions in its key market sectors and a greater ability to meet theneeds of its customers, whether this involves a single service or fullyintegrated solution. Combining the PPP investment activities of Carillion and Mowlem has deliveredsignificant benefits, including a larger, more valuable portfolio of equityinvestments, a stronger pipeline of new projects and a considerable increase inour capacity to win and deliver PPP projects. Mowlem's strengths in construction, particularly in the regional building andcivil engineering markets where previously Carillion had relatively littlepresence, have broadened Carillion's construction base and given us thecapability to provide integrated solutions for customers in these markets. The good progress we have made with integration resulted in the acquisitionbeing significantly earnings enhancing in 2006, rather than earnings neutral asexpected at the time of acquisition. Furthermore, we remain firmly on track todeliver materially enhanced earnings in 2007 through both revenue and margingrowth. Business performance Total revenue in 2006 increased by 57 per cent to £3,593 million (2005: £2,284million) including revenue from joint ventures of £528 million (2005: £259million). Total operating profit increased by 78 per cent to £117.1 million (2005: £65.8million), including profit from joint ventures of £47.7 million (2005: £21.4million). After central costs of £20.3 million, a net interest charge of £6.6million and tax on joint ventures of £8.1 million, profit before tax,non-operating items, restructuring costs and amortisation was £82.1 million, anincrease of 48 per cent (2005: £55.5 million). Earnings per share on the samemeasure increased by 15 per cent to 23.5 pence per share (2005: 20.4 pence). Non-operating items, restructuring costs and amortisation amounted to £14.5million, leaving profit before tax of £67.6 million (2005: £51.9 million).Profit after tax was £60.4 million (2005: £40.8 million) and basic earnings pershare were 21.6 pence (2005: 18.7 pence). Our pre-tax profit margin was broadly unchanged at 2.3 per cent despite theeffect of lower margins in the businesses acquired with Mowlem, as we continueto implement our Group-wide cost reduction and margin improvement programme. Aspreviously indicated, the potential to drive profit growth through improvingmargins in the businesses acquired with Mowlem remains a significantopportunity. Our continuing focus on cash management has again delivered strong cash flowfrom operations of £91 million. Average net debt in 2006 post the acquisition ofMowlem was £148 million, including finance leases of £47.9 million. Financial reporting segments We continue to report our financial results in three segments - Investments,Support Services and Construction Services - in which we group togetheractivities of a similar type and risk profile to make it easier to value ourearnings on a consistent basis. The businesses acquired with Mowlem made no contributions to profit in SupportServices or Construction Services in the first half. However, as expected, allthese businesses made good second-half contributions in all three reportingsegments, as summarised below. A more detailed analysis of these segmentsfollows in the Finance Director's review. Investments generated revenue of £148 million in 2006. Operating profitincreased by over 200 per cent to £26.5 million, due to the addition of Mowlem'ssubstantial portfolio of investments in Public Private Partnerships (PPP),achieving financial close on a number of major new projects during the year andthe effect of projects moving from construction into operation. In September 2006, we sold equity investments in eight projects with a totalbook value of £21.1 million. The net proceeds from this sale of £46.7 milliongenerated an exceptional profit of £25.6 million and reflected a net presentvalue of the cash flows from these investments based on a discount rate of lessthan five per cent. Given that we target an overall internal rate of return of15 per cent from PPP equity investments, an equity sale has once againdemonstrated the considerable long-term value we are creating for shareholdersthrough our ability to win and deliver PPP projects successfully. The Directors' valuation of our equity portfolio at 31 December 2006 wasapproximately £238 million, based on discounting the cash flows from investmentsin financially closed projects at an average of 8 per cent (December 2005: £89million, based on a 10 per cent discount rate). We also have a good pipeline of new PPP projects, including three projects forwhich we are the preferred bidder, in which we expect to invest some £11 millionof equity, and eight projects for which we are shortlisted, with a potentialequity requirement of up to £69 million. In Support Services, revenue including joint ventures increased by 56 per centto £1,539.7 million, due to further healthy organic growth and the acquisitionof Mowlem. Operating profit increased by almost 43 per cent to £58.2 million. The operating margin in this segment reduced from 4.1 per cent to 3.8 per centdue to lower margins in the businesses acquired with Mowlem and also in railinfrastructure, as expected. As previously announced, we took action in thesecond half of 2006 to downsize our rail business to reduce its overheads andfocus the business on sustainable areas of the rail infrastructure market. This,together with our drive to improve margins in the businesses acquired withMowlem, is expected to improve operating performance in this segment in 2007.In Construction Services revenue including joint ventures increased by 55 percent to £1,902.4 million, due primarily to the acquisition of Mowlem. Operatingprofit almost doubled to £32.4 million and the operating margin increased from1.4 per cent to 1.7 per cent, as the effect of lower margins in the businessesacquired with Mowlem were more than offset by margin growth in other businesses,particularly in the Middle East. Order book The value of our order book more than doubled to £16 billion at 31 December 2006(December 2005: £7 billion). Mowlem's order book at acquisition wasapproximately £2.5 billion; therefore most of this increase is due to new orderswon during the year. This outstanding performance reflects the strength of theenlarged Group and our ability to accelerate our strategy for growth. Some 86per cent of the order book is for Support Services and PPP concession contracts.This continues to provide long-term visibility, with over 70 per cent of our2007 order book for support services already secure. We have also strengthenedour Construction Services order book, with some 60 per cent of orders for 2007already secure. Furthermore, we have maintained a healthy pipeline of probablenew orders worth around £1.6 billion at 31 December 2006. Our people As a services business, our success depends primarily on the quality of ourpeople. Only through their efforts every day can we meet or exceed theexpectations of customers and maintain our competitive advantage. In order toattract, develop and retain excellent people by becoming an employer of choice,we have a wide range of policies and programmes in place across the Group, thesuccess of which rests on how well we communicate with all our people, includinglistening to what they tell us and acting upon it. We have a structured approach to communication, from one-to-one individualperformance and development reviews to monthly team talks and an award winninggroup-wide newspaper. We also conduct regular surveys through which our peoplecan share their views openly and frankly. These surveys culminate annually in"The Great Debate" in which over 2,500 people from across the Group took part in2006, including around 1,000 people who joined us from Mowlem. This enables usto monitor and measure our progress on a wide range of issues, such as how wellwe engage with our people to recognise and value the contributions they make toour business and to help them fulfil their potential. The acquisition of Mowlem and its integration with Carillion was the main focusof internal communications in 2006. It will naturally take time for the largenumber of people who joined us from Mowlem to identify fully with Carillion and,in particular, the importance we place upon living our values. We know we havemuch to do to build a culture of excellent communication across the enlargedGroup, but the results of surveys carried out in 2006 were encouraging and weshall continue to drive this forward in 2007. Good two-way communication startswith our business leaders and the "Power of Engagement" workshops, attended byaround 2,000 Carillion managers and supervisors in 2005, were extended in 2006to include some 230 business leaders who joined us from Mowlem. Health and Safety Our absolute commitment to Health and Safety is being translated into positiveresults through "Target Zero", the initiative we launched throughout Carillionat the end of 2004 aimed at eliminating reportable accidents by 2010. Target Zero, which is being led by our Board, applies to all our people, thosewho work with us and those who are affected by Carillion's activities. Itrequires the continual vigilance and commitment of everyone in Carillion toensure that safe working practices are always used and is supported by regularand rigorous reviews, audits and training. Target Zero is an extremely ambitious target that will be achieved only if wecan create a culture of zero tolerance to accidents within Carillion, ourcustomers, suppliers and partners. I am delighted to report that we have madegood further progress towards this target. In 2006, the Group's AccidentFrequency Rate (AFR) reduced by 25 per cent to 0.18 reportable accidents per100,000 hours worked compared with an AFR of 0.24 in 2005, itself a 35 per centreduction on our AFR in 2004 of 0.37. This performance ranks Carillion among thevery best in our industry. The total number of reportable accidents under RIDDOR (Reporting of InjuriesDiseases and Dangerous Occurrences Regulations 1995) reduced by 24 per cent to346, after taking account of the increase in our workforce resulting from theacquisition of Mowlem, and follows a reduction of 27 per cent in 2005. 2006 was free of fatal accidents to our own people and to those who work on ourproject sites and contracts. We were the subject of one prosecution by theHealth and Safety Executive, which related to an incident in 2005, and one ofour subcontractors received an enforcement notice in respect of work beingcarried out on Carillion's behalf. In April 2006, around 200 people from across the Group attended our first"Safety Action Group" conference, focused on delivering Target Zero. Similarevents will be held in 2007 to ensure we maintain this focus and the momentum wehave created towards achieving this challenging target. In September 2006, Carillion Rail was suspended by Network Rail from bidding fornew projects, following an increase in less serious workplace accidents over anapproximate four-week period. We believed this increase was temporary and not representative of our overall performance. However, we entirely share NetworkRail's objective of improving workforce safety and regard any accident asunacceptable. Since September 2006, our AFR has reduced significantly andNetwork Rail lifted the suspension in February 2007. In December 2006, Carillion was the first and only major construction company tosubmit information on its Health and Safety performance to the benchmarkingprocess sponsored by the Health and Safety Commission. The "Corporate Health and Safety Performance Index" resulting from this process will enable us tobenchmark our performance against all participating companies and help us todeliver continuous improvement. More detailed information on Health and Safety will be included in our 2006Sustainability Report that will be published on our website atwww.Carillionplc.com/sustainability, in April 2007. Sustainability Our commitment to becoming a more sustainable business has made Carillion arecognised leader in developing and adopting socially responsible businesspractices. We continue to believe that this commitment not only creates positive impacts onthe environment and the communities in which we operate, but also deliversmeasurable business benefits. We systematically quantify the links between ourbusiness objectives and our impacts on the environment and society and setspecific targets for performance improvement. The targets we set and ourperformance against them are externally audited and the results published in ourannual sustainability report. We also benchmark our performance externally. For example, we participate inBusiness in the Community's Corporate Responsibility Index. Since the inceptionof this independent annual survey in 2003, Carillion has been ranked in the topquartile of all companies participating in the Index. Carillion is also a memberof the FTSE4Good index. Our 2006 Sustainability Report containing detailed information on oursustainability programme and performance will be published on our website atwww.carillionplc.com/sustainability in April 2007. Risk management The rigorous policies and processes we use to identify, mitigate and manage riskcontinue to be a cornerstone of our business. They enable us to addressstrategic risks and those specific to individual businesses and contracts,including social, environmental and ethical risks. Our risk management processes apply to every aspect of our operations, fromchoosing our market sectors to the contracts we bid for and the selection of oursuppliers and sub-contractors. They also apply to every stage of a contract frominception to completion, in order to deliver the cash-backed profit we expectand a service that delights our customers. The more significant areas of risk where our failure to perform well or changesto macro-economic or market specific environments would affect our business, aresummarised below. • Attracting, developing and retaining excellent people: the success of our business depends primarily on the quality of our people.• Managing major contracts: completing contracts on time and to the required standards avoid financial penalties and damage to our brand and reputation.• Closing out existing contracts: settling completed contracts and collecting the cash we are owed is essential to reducing debt and delivering the earnings growth we expect.• Winning new work: our ability to remain competitive by adapting our strategy and service offering to the changing needs of our markets and customers is essential to the continuing success of our business.• Managing our pension schemes: the cost to Carillion of funding its pension schemes depends on the macro-economic environment, equity market stability and regulatory requirements.• Process and systems: doubling the size of our business through the acquisition of Mowlem has increased our dependence on having efficient and effective integrated project, financial accounting, internal audit and HR systems. 2007 key objectives In order to build on the substantial progress made in 2006, we have set thefollowing key objectives for 2007. • Attract, develop and retain excellent people by becoming an employer of choice.• Be a recognised leader in the delivery of safety and sustainability.• Deliver revenue growth of a minimum of 5 per cent through exceeding our customers' expectations.• Deliver Mowlem integration cost savings at a running rate of £26 million per annum by the end of 2007.• Generate cash-backed operating profit.• Achieve average net debt of around £150 million.• Deliver materially enhanced earnings. Markets and outlook In the UK, Carillion has eight principal market sectors - Defence, Education,Health, Building, Facilities Management and Services, Roads, Rail and CivilEngineering. In the Middle East, our two principal market sectors are construction andfacilities management. In Canada and the Caribbean, our main market sectors arePPP projects and roads maintenance. With the exception of rail infrastructure, where volumes have declined asexpected, we have made progress in all our market sectors in 2006. In 2007, weagain expect opportunities for growth in our UK and International markets. Defence, Education and HealthIn the defence, education and health sectors we provide a wide range of design,construction, facilities management and integrated service solutions, includingprivate finance. DefenceWe made further outstanding progress in this sector in 2006, winning new ordersworth nearly £6 billion. This followed the major breakthrough we achieved inthis sector in 2005 when Carillion joint ventures won two major support servicescontracts - Housing Prime and Regional Prime Central - for Defence Estates,together worth around £600 million to Carillion. In 2006, we generated some £232 million of revenue from the Defence sector,almost a ten-fold increase on 2005 (£24 million). Growth has been driven bymobilising the two support services contracts won in 2005 and by achievingfinancial close in 2006 on two major PPP contracts for the Ministry of Defence -the £12 billion Allenby Connaught project and the £880 million Permanent JointHeadquarters, Northwood, project. We will invest some £70 million of equity inthese projects, on which we also commenced construction and the provision offacilities management services in 2006. The outlook in this sector in 2007 is for continuing growth as construction andfacilities management services reach full-year volumes on the Allenby Connaughtand Northwood projects. In addition, we are the preferred bidder for the £250million Royal School of Military Engineering project and there are goodprospects for further substantial construction work associated with the RegionalPrime Central contract. Education In 2006, we reached financial close on the £76 million South Ayrshire PPPschools project, our sixth such project, and we were appointed as a frameworkcontractor for Academies to be built under the Government's Building Schools forthe Future programme. The education sector contributed around £162 million of revenue in 2006 (2005:£141 million), with growth driven primarily by full-year contributions from the£100 million Renfrewshire Schools PPP project and the £100 million Leeds schoolsproject.The outlook in the education sector continues to be very positive. Although theBuilding Schools for the Future programme has made a slower than expected start,the Government remains committed to this programme under which it plans toinvest up to £60 billion over the next 15 years in replacing secondary schoolsand some £1.6 billion over the next five years in building Academy Schools. InScotland, investment continues to be made in new PPP schools and Carillion hasbeen shortlisted for a further project in West Dunbartonshire, worthapproximately £130 million. Health In 2006, our activities in the health sector generated revenue of £229 million(2005: £146 million). We made good progress in facilities management in thissector, winning and mobilising a £330 million contract for Barts and The LondonHospital and mobilising services at two of our UK PPP hospitals - the JohnRadcliffe, Oxford, and the Queen Alexandra, Portsmouth. Our Clinicenta joint venture also made further substantial progress in 2006,winning preferred bidder positions on two more Independent Sector TreatmentCentre (ISTC) contracts - London South and London North - to add to thepreferred bidder position it already has on a similar contract for ISTCs inBedfordshire and Hertfordshire. Since the year-end, Clinicenta has also beenappointed as the preferred bidder for a fourth ISTC contract to providediagnostic services in South East England. These four contracts, which involvefully integrated solutions including clinical services, are expected to generatearound £450 million of revenue for Carillion over five years. Clinicenta istherefore on course to become a key supplier of community based clinicalservices. Looking forward, we expect continuing opportunities for growth in the healthsector. In 2006, the Government reviewed its PPP programme for acute hospitalsand confirmed its commitment to this programme and to investing between £7billion and £9 billion in 20 new hospitals. In addition, the Government plans toinvest around £150 million per annum over the next five years in communityhospitals. Facilities management and services We provide a wide range of facilities management and other support services topublic and private sector customers, with large, integrated FM solutions as oneof our key strengths. In 2006, we generated some £656 million of revenue from this sector (2005: £370million), reflecting the acquisition of Mowlem and further organic growth. As we indicated at the half-year, we are now much more positive than we were in2005 about the outlook for this sector in which there is a growing number ofopportunities, particularly for larger integrated solutions. We won new ordersin 2006 worth some £700 million, including a £100 million, five-year extensionto our contract with ntl TeleWest (now Virgin) and a £360 million, three-yearclaims management contract for Norwich Union. Carillion has also been appointedby the Office of Government Commerce as a framework supplier of facilitiesmanagement services to the public sector. Currently we are bidding for further contracts worth approximately £100 millionper annum for public and private sector customers and we believe the positiveoutlook is this sector is set to continue. Overall, the UK outsourcing marketgrew by around 5 per cent to £110 billion in 2006 and growth is forecast tocontinue at this level over the next five years. About 60 per cent of the marketis forecast to be contracted out by the end of this period. With building fabricmaintenance and facilities management expected to be among the areas ofstrongest growth, we are well positioned to take advantage of growth in thissector. Building Our National and Regional UK building businesses provide construction servicesto a wide range of public and private sector customers for projects with valuestypically between £1 million and £300 million. In 2006, UK building contributed £848 million of revenue (2005: £528 million)with the increase primarily due to the acquisition of Mowlem. New orderstotalling £885 million in 2006 reflected positive trading conditions in ourtarget sectors of the UK building market. The UK building sector is expected to remain buoyant in 2007, with non-housingnew build forecast to grow by around 6 per cent per annum over the next fiveyears. Although we propose to bid only selectively for projects let by theOlympic Delivery Authority (ODA), the ODA investment programme should helpmaintain buoyant trading conditions across the UK market by attracting suppliersfrom regions beyond the South East. Furthermore, as well as the facilitiesneeded for the Games themselves, substantial regeneration investment is plannedfor London over the next 10 to 15 years and this represents an importantopportunity for us, given our strength in providing integrated solutions forurban regeneration. Roads and Civil Engineering In these sectors we are focused primarily on long-term road maintenancecontracts, the design and construction of road projects under the HighwaysAgency's Early Contractor Involvement (ECI) programme and civil engineeringprojects for Local Highway Authorities, Network Rail and Water companies.These activities contributed £465 million of revenue to the Group in 2006 (2005:£172 million) with the increases due primarily to the acquisition of Mowlem'sregional civil engineering business whose portfolio included six ECI roadcontracts. In 2006, we won a steady flow of new orders in the roads sector, notablyconstruction of the £122 million ECI project to upgrade the A74 in Cumbria tomotorway standards (the "M6 missing link") and two further ECI contracts, theA5117/A530 improvement scheme on Deeside and the M25 junction 28 improvementscheme. Since the year-end, we have also won £120 million contract for theoperation and maintenance of the M40 motorway between the M25 and Warwick. Forregional civil engineering, 2006 was a year of consolidation in which weimplemented a more selective approach to the projects for which we bid. The outlook for the roads sector in 2007 is encouraging. We expect to bid forHighways Agency maintenance contracts for Areas 6 and 8, potentially wortharound £500 million over seven years. Carillion is also an equity partner in aconsortium that has been shortlisted for the Design, Build, Finance and Operate(DBFO) project to widen the M25, which has an estimated total value of around £5billion. Carillion's interests in this project lie in being an equity investorand the maintenance provider over the life of the concession. Carillion iscurrently the maintenance contractor for the M25 and Area 8 and we believe weare well positioned to bid for all these contracts. The outlook in our targetsectors for regional civil engineering is for modest growth in 2007. Rail In the UK rail infrastructure market we provide project services to upgrade andimprove the national heavy rail network, together with track renewal, signallingand other specialist services, including welding and testing and the supply oflabour and plant. Revenue from these activities was £368 million in 2006 (2005: £410 million) andreflected the decline in the UK rail infrastructure market, on which we havecommented previously. Consequently, during the second half of 2006 werestructured Carillion Rail to reduce overheads and focus the business onsustainable areas of the rail infrastructure market. Although the outlook in this sector is still uncertain, it has improved since wereported at the half-year and is now expected to stabilise in 2007 rather thandecline further. In October 2006, a Carillion joint venture won the £363 millioncontract for Transport for London for the East London Line. In December 2006,Network Rail announced its intention to reduce the number of suppliers it usesto provide track renewal services from six to four by July 2007. This representsan opportunity to increase our market share and we believe Carillion Rail iswell positioned in this market, particularly in the more specialised area ofswitches and crossings renewals. The Middle East Our operations in this region are based in Dubai and Oman and focused on twosectors, construction and facilities management. Revenue in the Middle East grew strongly in 2006 to £274 million (2005: £165million), maintaining a compound annual growth rate of around 60 per cent overthe last three years. This reflects the strength of our market sectors and ofthe relationship with our joint venture partner and main customer, the AlFuttaim Group. During 2006, the Al Futtaim Group joined Carillion and EmaarProperties as a third partner in our facilities management joint venture,Emrill. This opens up significant new opportunities for growth, as Emrill is nowthe preferred supplier for the property portfolios of both Emaar Properties andthe Al Futtaim Group. In 2006, our joint ventures secured orders worth £360 million to Carillion ofwhich some £275 million were in Dubai with the balance in Oman. We also have astrong pipeline of construction and FM opportunities in Dubai and forconstruction in Oman. Consequently, we expect growth in the Middle East toremain strong in 2007. Beyond that, the prospects for further healthy growthcontinue to be encouraging in Dubai and Oman and there are emergingopportunities in other territories and countries in the region, notably AbuDhabi and Egypt. Canada and the Caribbean In Canada, our key sectors are PPP hospitals and roads maintenance. In theCaribbean, we provide construction services to public and private sectorcustomers. In 2006, revenue in this region increased to £163 million (2005: £132 million).New orders worth approximately £230 million were secured in 2006, the largest ofwhich was a seven-year road maintenance contract in Alberta, Canada, worth £137million. Carillion is already established as the leading supplier of roadmaintenance services in Ontario and the contract in Alberta extends ouroperations to a new and growing market. We have made good progress with construction of the first two PPP hospitals tobe built in Canada: the Royal Ottawa has been completed on time and to budgetand is now operational and the new William Osler Hospital in Ontario is nearingcompletion, also on time and to budget. This has firmly established Carillion inthis growing sector of the Health market in Canada. Currently, we areshortlisted for two more PPP hospitals - the Sault Sainte Marie and NiagaraHospitals in Ontario - and there are prospects to bid for further PPP hospitalsin British Columbia over the next 12 to 18 months. New order intake in the Caribbean improved significantly in 2006, the largest ofwhich was a £46 million building contract for the Viceroy Resort complex inAnguilla and the prospects for further growth in 2007 are encouraging. With an order book of nearly £1 billion, the outlook in this region is thereforepositive and we expect it to continue to deliver healthy growth. John McDonoughChief Executive FINANCIAL REVIEW Accounting policies The Group's annual consolidated financial statements have been prepared inaccordance with International Financial Reporting Standards (IFRS) and therehave been no changes in accounting policies during the year. Acquisitions On 23 February 2006 we acquired Mowlem plc for a total consideration ofapproximately £350 million, comprising £117 million in cash and 66.2 million newordinary Carillion shares. At the point of acquisition, Mowlem had net debt of£122.5 million. Intangible assets of £550 million, comprised £532 million relating to Mowlem plcand £18 million relating to Pall Mall previously recognised in the acquiredbusiness. The increase of £36 million in intangible assets relating to theacquisition of Mowlem since the half-year (30 June 2006: £496 million) is dueentirely to the application of IAS 12 "Income Taxes". Of the original £496million of intangible assets, £119 million will be amortised over its period ofconsumption. Under IAS 12, a deferred tax provision equal to 30 per cent of thevalue of assets to be amortised (£35.7 million) has been established with acorresponding increase in the total value of intangible assets. Amortisation of intangible assets Amortisation of intangible assets relating to business acquisitions was £16.8million, which relates to the £119 million of intangible assets arising from theacquisition of Mowlem in 2006 and £6.2 million arising from the acquisition ofPME in 2005. Interest and cash The Group net interest credit of £1.4 million (2005: £4.0 million) reflectsaverage net debt in 2006 of £110 million (net of average finance leases of £42million), offset by an interest credit from pensions of £3.5 million. Net debt at 31 December 2006 was £108 million after finance lease liabilities of£47.9 million (31 December 2005: net cash £90.8 million, after finance leases of£37.7 million). Strong cash generation from operations of £91 million and dividends receivedfrom jointly controlled businesses of £15.7 million continue to demonstrate ourfocus on cash management and the resilience of our business. Capital expenditurewas £41 million, the main components of which were investments in the previouslyannounced project to outsource business processes for Human Resources andFinance and in highways maintenance plant. Dividend payments in 2006 were £23.2 million and net corporate tax refunds of£1.7 million were received. Jointly controlled businesses An important part of our strategy for Public Private Partnership (PPP) and largeconstruction projects is the development of jointly controlled businesses thatenable us to structure the resource and risk profiles of these activities togenerate reliable returns. In 2006, these businesses generated £528.5 million ofrevenue (2005: £258.7 million) and £47.7 million of operating profit (2005:£20.3 million) for Carillion. This reflected growth in joint venture activitiesin PPP investments, in construction services, notably in the Middle East, and inUK support services. After an interest charge of £8 million, profit before taxfrom joint ventures was £39.7 million (2005: £21.4 million) and profit after taxwas £31.6 million (2005: £16.4 million). Taxation The Group's effective rate of tax on underlying profit remained at 27 per cent.We have £242 million of corporate tax losses in the UK and overseas that arepotentially available to reduce future tax liabilities. Of these losses some £33million, with a cash value of £10 million, have been recognised as a deferredtax asset. Non-operating items The Group had a net exceptional profit of £2.7 million in 2006. This comprisedthree main items, namely an exceptional profit of £25.6 million from the sale ofeight PPP equity investments, exceptional costs of £18.4 million in respect ofintegrating the Carillion and Mowlem businesses and exceptional costs of £4.2million in respect of restructuring Carillion Rail. Pensions The Group's ongoing pensions charge against profit in 2006, calculated on thebasis of IAS19, was £35.1 million (2005: £21.4 million), with the increase on2005 due to the acquisition of Mowlem.In addition, cash payments totalling £31.8 million were made in 2006 to theGroup's pension schemes to reduce funding deficits in line with plans agreedwith the trustees. The Group's pension schemes had a net deficit of £75.8million at 31 December 2006 (2005: £47.5 million). Financial reporting segments The table below shows revenue by business activity and the segments in which itis reported. Business sector Financial reporting segments£ million Investments Support Construction Services ServicesDefence - 176 56Education - - 151Health - 110 119UK Building - - 848FM & Services - 618 38Roads & Civils - 181 284Rail - 368 -Middle East - - 274Canada & Caribbean - 46 117Private Finance 148 - -Other - 41 15 Total 148 1,540 1,902 Investments £ million 2006 2005Revenue ------- ------Group 1.3 0.8JVs 146.7 64.6 ------- ------ 148.0 65.4 ------- ------Operating profit* 26.5 8.3JV Interest & tax (12.1) (0.6) ------- ------Profit from operations* 14.4 7.7 ------- ------* Before restructuring costs of £0.2m (2005: Nil) goodwill impairment of £0.4 m(2005: £0.3m) and after tax on joint ventures of £3.8m (2005: £3.1m) In this segment we report the equity returns on our investments in PublicPrivate Partnership (PPP) projects. Through our ability to win and deliver PPP projects successfully, we continue tobuild a portfolio of good quality equity investments that is generatingsignificant value for the Group. At 31 December 2006, our portfolio comprised 24 financially closed projects(December 2005: 19) in which we have invested or commitments to invest some £168million. During 2006, the acquisition of Mowlem added 10 projects to ourportfolio, we sold our investments in eight projects and reached financial closeon three projects - the Allenby Connaught and Joint Permanent Headquartersprojects for the Ministry of Defence, and the South Ayrshire Schools project. Profit in this segment increased substantially due to growing returns from ourmaturing investment portfolio, contributions from the investments acquired withMowlem and reaching financial close on the three new projects. The sale of equity investments in eight PPP projects in September 2006 generatedproceeds of £46.7 million and exceptional profit of £25.6 million. The proceedsreflected a net present value for the cash flows from the investments sold basedon a discount rate of less than 5 per cent and further demonstrated thesubstantial value being created from these investments. In a full-year, effectof the sale will be to reduce operating profit by approximately £7 million. In view of the value achieved from this sale and the continuing strength of thesecondary market for good quality equity, the directors now value the cash flowsfrom our equity investments using an average discount rate of eight per cent,rather than the 10 per cent used previously. On this basis, the directors'valuation at 31 December 2006 was £238 million (December 2005: £89 million),reflecting the reduction in the valuation discount rate and the increase inequity invested and committed. Construction Services £ million 2006 2005Revenue ------- -------Group 1,667.8 1,050.1JVs 237.9 180.0 ------- ------- 1,905.7 1,230.1 ------- -------Operating profit* 32.4 16.9JV Interest & tax (1.9) (3.1) ------- -------Profit from operations* 30.5 13.8 ------- -------* Before restructuring costs of £1.5m (2005: Nil), amortisation of intangibleassets £3.6m (2005: Nil) and a JV non operating loss of £0.8m in 2005 and aftertax on joint ventures of £2.0m in 2006 (2005: £1.8m) In this segment we report the results of our UK building and constructionactivities and International Regional businesses. Revenue in Construction Services increased by 55 per cent, due primarily to theacquisition of Mowlem. Operating profit increased by 92 per cent and theoperating margin increased from 1.4 per cent to 1.7 per cent. Margins improveddespite the effects of lower margins in the businesses acquired with Mowlem asthese were more than offset by margin improvements in other businesses, both inthe UK and our International Regions. The approach Carillion takes to recognising profit on major constructioncontracts has been extended to the enlarged Group. No profit is taken on thefirst 20 per cent of revenue on such contracts and this profit is deferred untilcontracts are completed. On revenues between 20 per cent and 100 per cent,profit is recognised broadly in proportion to revenue after taking account ofrisks and uncertainties. The effect of this approach in 2006 has been to reducereported operating profit by a net £2.2 million (2005: £5.4 million), comprising£5.6 million of profit deferred and £3.4 million of profit released in respectof contracts completed successfully during the year. Total deferred profitcarried forward at 31 December was £10.9 million. Support Services £ million 2006 2005Revenue ------- ------Group 1,395.8 974.6JVs 143.9 14.1 ------- ------ 1,539.7 988.7 ------- ------Operating profit* 58.2 40.6JV Interest & tax (2.1) (0.2) ------- ------Profit from operations* 56.1 40.4 ------- ------* Before restructuring costs £6.0m (2005: Nil), amortisation of intangibleassets of £11.9m (2005: £2.5m) and after tax on joint ventures of £2.3m (2005:£0.1m) In this segment we report the results of our activities in rail infrastructure,roads maintenance, facilities management and other support services. Revenue in Support Services increased by nearly 56 per cent, reflecting theacquisition of Mowlem and organic growth, partially offset by the expectedreduction in revenue from rail infrastructure. Organic growth was drivenprimarily by facilities management, particularly in the Defence sector, ourmechanical and electrical engineering business, PME, and highways maintenance. Operating profit increased by 43 per cent, but lagged revenue growth due tolower revenues and margins in rail infrastructure services and lower margins inthe businesses acquired with Mowlem. Consequently, the overall operating marginin this segment reduced from 4.1 per cent to 3.8 per cent. As previously reported, in response to declining activity levels and margins inthe UK rail infrastructure market we restructured Carillion Rail in the secondhalf of 2006 to reduce overheads and focus the business on sustainable areas ofthe rail infrastructure market. This, together with improving the margins inbusinesses acquired with Mowlem, is expected to improve operating performance inthis segment in 2007. Committed Bank Facility As previously reported, a new committed bank facility, originally totalling £490million, was arranged in connection with the acquisition of Mowlem. Of theoriginal amount, £331 million remained in place at the year-end of which £141million is repayable over the four years up to December 2010 and £190 million isrepayable in December 2010. Chris GirlingFinance Director This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Carillion Plc