9th Mar 2005 07:02
Carillion PLC09 March 2005 9 March 2005 Carillion plc 2004 Preliminary Results UK support services and construction company Carillion plc announces itspreliminary results for the year ended 31 December 2004. Highlights • Pre-tax profit up 8% to £54.7m (2003: £50.8m) pre exceptionals and goodwill• Earnings per share up 18% to 19.9p (2003: 16.8p) pre exceptionals and goodwill• Pre-tax loss of £6.4m (2003: £23.8m profit) post exceptionals and goodwill of £61.1m• Strong cash flow and net cash of £153.6m• Final ordinary dividend 4.825p making 2004 total 7.5p• Ordinary dividend to be rebased at 7.5p per share• Order book and frameworks £5.0bn plus probable orders of over £2bn Note: Exceptional items and goodwill amortisation are explained in the Operatingand Financial Review on page 11 of this announcement. Commenting, Chairman Sir Neville Simms, said, "In this, my last statement toshareholders before I stand down as chairman, I am pleased to report thatCarillion made good progress in 2004. This reflects the strength of ourbusiness, which comes from the clear vision and consistent strategy that havemade Carillion a very different company from the one we launched over five yearsago. Carillion has already made a good start to 2005, which supports the Board's viewthat the outlook for the Group continues to be positive and that we will makefurther progress in 2005. In view of the Group's financial performance andprospects for further growth, the Board is recommending a substantial increasein the dividend. It is also recommending that the 2004 ordinary and additionaldividends should be consolidated. On that basis the ordinary 2004 dividend wouldbe rebased at 7.5 pence per share and this will become the starting point fordetermining future dividend payments". For further information contactChris Girling Finance Director 01902 422431John Denning Director Corporate Affairs 01902 316426 High resolution photographs are available free of charge to the media atwww.newscast.co.uk telephone 0207 608 1000 CHAIRMAN'S STATEMENT In this, my last statement to shareholders before I stand down as chairman, I ampleased to report that Carillion made good progress in 2004. Profit before tax,goodwill and exceptional items increased by eight per cent and was again backedby strong cash generation. Earnings per share before goodwill and exceptionalitems increased by 18 per cent. Our programme of PPP equity disposals continued with two further sales in 2004,generating an exceptional profit of £7.7 million. One third of this profit hasalready been returned to shareholders by way of an additional dividend of onepenny per share, paid with the 2004 interim dividend. Our equity sales haveconsistently supported the directors' valuation of our PPP equity portfolio,which is currently some £83 million, based on discounting the cash flows fromour equity investments at 10 per cent. The value we have created is increasinglybeing recognised by the market and our future policy will be to sell equityinvestments only when this achieves returns in excess of those we would expectif we retained them over the life of our concession contracts. Delivering healthy earnings growth in 2004 despite the impact of transferringrail maintenance to Network Rail, reflects the resilience and strength of ourbusiness. This comes from our clear vision and consistent strategy, which havemade Carillion a very different company from the one we launched in 1999. Then,we were predominantly a construction company. Today, we generate nearly half ourturnover and over two thirds of our profit from support services and equityinvestments in Public Private Partnership projects. Changing our business mix and establishing strong well-balanced positions in allour key markets has significantly improved the risk profile of our activitiesand the predictability of our earnings. These changes are also clearly reflectedin our order book, which has grown and lengthened considerably since 1999. It is not only what we do that has changed, but also how we do it. Our valuesguide the way we work together with all our supply chain partners to providehigh quality services for our customers. In addition, our focus on sustainableprofitable growth by continually seeking to improve our impacts on theenvironment and on the communities in which we operate, has made Carillion arecognised leader in corporate social responsibility. To one area of corporateresponsibility, Health and Safety, we give absolute priority so that all ourpeople can expect to work safely wherever they are. Carillion's transformation over the past five years owes most to the leadershipof our senior management team and to the skills and commitment of all ourpeople. I should like to offer my personal thanks and those of the Board toeveryone in Carillion for the contributions they have made to our success. As previously announced, the Board has been reviewing its independent directorstructure to reflect the strategic direction of our business and has made anumber of changes. Two new non-executives joined the Board in 2004, David Garmanand Philip Rogerson, who is also deputy chairman. Jean-Paul Parayre, who was afounder member of the Board and latterly our senior independent director, leftthe Board at the end of 2004. I would like to thank him for his personal supportand wise counsel to the Board. Andrew Parrish, who has been a member of theBoard since 2000 and has acted as Chairman of the Remuneration Committee since2001, will not be seeking re-election at the AGM. I should like to thank him forhis significant contribution to Carillion's development. As I have already indicated, now that the new appointments have settled in, Ipropose to stand down as chairman and as a director of Carillion on 11 May 2005,at which point Philip Rogerson will succeed me as chairman. I have greatly enjoyed leading the business and I am proud to have played a partin what has been achieved. I leave Carillion in good shape and in the capablehands of a restructured and refreshed Board that I am confident will build onthe success that has been achieved during our first five years. Carillion has already made a good start to 2005, winning a number of significantnew contracts to add to its strong order book. This supports the Board's viewthat the outlook for the Group continues to be positive and that we will makefurther progress in 2005. In view of the Group's financial performance and its prospects for furthergrowth, the Board is making a number of recommendations regarding dividends. Itis recommending a final ordinary dividend of 4.825 pence per share, which willbe paid on 24 June 2005 to shareholders on the register at close of business on24 April 2005. The total dividend for 2004 would therefore be 7.5 pence pershare, including the additional dividend of one penny per share. This representsan increase of 11 per cent on the total dividend paid in 2003, 56 per cent on2002 and 88 per cent since Carillion was launched in 1999. The Board no longerintends to pay additional dividends in respect of any future PPP equity sales,but is recommending that the additional dividend paid in 2004 should beconsolidated into the ordinary dividend. This would rebase the 2004 ordinarydividend at 7.5 pence per share, which would become the starting point fordetermining future dividend payments in line with our progressive dividendpolicy. Sir Neville Simms Chairman OPERATING AND FINANCIAL REVIEW CHIEF EXECUTIVE'S REVIEW In 2004, we achieved our key financial objectives and made good strategicprogress. We have substantial net cash, a large order book and strong positionsin all our key growth markets. The Group is now ready to move forward into ournext phase of growth, building on the strong platform we have created over thelast five years. Strategic progress Implementing our consistent strategy has created a well-balanced business, whichis focused on selected growth markets and with UK sales divided broadly equallybetween public and private sector customers. In 2004, we completed our programme of major disposals by selling Crown Houseand Carillion BTP, our contracting business in France. Over the last five yearswe have sold businesses and withdrawn from non-core markets that previouslygenerated around £700 million of Construction Services turnover per annum. Over the same period we have grown our support services and PPP investmentbusinesses at a compound annual growth rate of over 12 per cent, which hasmaintained Group turnover at around £2 billion per annum. These activities nowaccount for around half our turnover and over two thirds of our profit. Acquisition of Planned Maintenance Group (PMG) In line with our strategy for growing our Support Services activities, weannounced today the acquisition of Planned Maintenance Group for a cashconsideration of £40 million. This acquisition will immediately enhance theGroup's earnings. PMG, operating through its principal subsidiary, Planned Maintenance Engineering(PME), is one of the UK's foremost independent building services and maintenancecompanies with a strong reputation for high quality services and customer care.PMG employs over 2,300 people and provides a range of services, includingmechanical and electrical engineering (M&E) maintenance, building fabricmaintenance and repair, facilities management and environmental services. It hasover 400 customers, including a number of "blue chip" companies, centralGovernment and Local Authorities, and provides services to some 40,000properties throughout the UK and in Eire. In 2004, PMG's turnover and profit before tax were £162 million and £4.15million, after non-recurring management fees, respectively. Earnings beforeinterest, tax, depreciation and goodwill amortisation were £4.85 million. Thevalue of net assets acquired was £10.6 million. The PMG pension fund has a netdeficit of approximately £10 million, which Carillion will eliminate by making aone-off cash contribution to the fund. This will be in addition to the £40million consideration and will produce a commensurate reduction in PMG's futurecontribution to its pension scheme. PMG is an excellent strategic fit and will add good quality earnings to theGroup. It will significantly strengthen our support services offering in ourHealth and Business Services markets. In particular, having a strong in-house M&E maintenance capability will bring considerable benefits to new and existingCarillion customers, as this is a major element in providing fully integratedservice solutions for buildings. PMG has a strong order book with good forward visibility and well-establishedpositions in growing markets. This, together with the significant synergybenefits we expect to generate, will enhance our prospects for growth. PMG'slong and successful track record is based on its customer-focused strategy,which fits well with Carillion's values and culture. Business performance Profit before tax, goodwill and exceptional items increased by around eight percent to £54.7 million, with earnings per share up by 18 per cent to 19.9 pence. This was achieved despite the impact of Network Rail's decision to take railmaintenance in-house during 2004. Underlying growth has therefore been encouraging. Our continuing focus on strong cash management again resulted in a substantialcash inflow during the year of around £78 million and we had net cash at 31December 2004 of £153.6 million, before finance lease liabilities of £24.2million. Average weekly net cash was £66 million. After a net exceptional charge of £57.2 million and goodwill amortisation of£3.9 million, the Group made a loss of £6.4 million before tax and a loss pershare of 8.5 pence. Details of exceptional items are given on page 11 of thisstatement. The largest of these was a non-cash goodwill write back of £69.9million associated with the sale of Crown House and Carillion BTP, of which£68.7 million had previously been written off to reserves. Order book The radical change we have made to our business mix is reflected in the size,quality and length of our order book. In 2004, we continued to win significant work in all our chosen markets. Wemaintained the value of our year-end order book and framework contracts at £5billion, despite the effects of selling Crown House, Carillion BTP and two PPPequity investments, which together had an order book of approximately £800million. Our order book for continuing businesses has therefore increasedsubstantially. We have also maintained our healthy pipeline of probable neworders at around £2.2 billion. Support Services and PPP concession contracts account for 78 per cent of ourtotal order book. These long-term contracts have greatly increased the qualityand length of our order book with 75 per cent for 2006 and beyond. We have alsoimproved the quality of our construction order book through our selectiveapproach and focus on developing long-term relationships with key customers.Consequently, our UK Building business now generates around 80 per cent of itsturnover from 20 key customers. Risk management Risk is inherent in any business. Success depends on understanding the risks wetake and our ability to manage them effectively. Changing our business mix hassignificantly improved the risk profile of our activities. Alongside this wehave also developed rigorous, ongoing management processes, which address bothour strategic and business specific risks, including social, environmental andethical risks. They apply to every stage of all our activities, from inceptionto completion. Our choice of markets, the projects or services we bid for andhow we deliver them, are all based on identifying and evaluating the attendantrisks and our ability to manage them. These processes are supported by regularreports to managers at all levels up to and including our main board. Decisionson all major projects are taken by a sub-committee of the main board, which alsomonitors their performance and progress. Our people Many factors are important to our success, but the quality of our people isparamount. Therefore, we are totally committed to achieving our prime objectiveof attracting, developing and retaining excellent people by becoming an employerof choice. We continually strive to improve communication with all our peopleand to listen to what they tell us. We do this through individual performancedevelopment reviews, team talks and regular surveys, in which we encourageeveryone to live our core value of "Openness" across all our businesses. Our determination to make the Carillion brand synonymous not only with theservices we provide, but also with the way in which we provide them, is helpingus create a customer focused culture. This is vital to our strategy of providingintegrated solutions tailored to the needs of our customers. Therefore, I amgreatly encouraged by research that shows our core values and reputation as asocially responsible business are increasingly important factors in makingCarillion an employer of choice. A more sustainable business Our core value of focusing on sustainable profitable growth means we arecommitted to improving our impacts on the environment, the communities in whichwe operate and society generally. In 2004, we continued to develop the strategymodel we first published in 2001 to help us understand how improving theseimpacts can assist us in delivering our business objectives. We still have along way to go to integrate sustainability into everything we do, but ourachievements have made Carillion a recognised leader in developing and adoptingsocially responsible business practices. Detailed information will be publishedin our 2004 Sustainability Report in April 2005. Health and safety In 2004, Carillion's Accident Frequency Rate (AFR) increased to 0.37 compared to0.34 in 2003, its lowest ever level after a number of years of successiveimprovements. Even though our 2004 AFR compares favourably with those of ourpeers, it was nevertheless disappointing. Consequently, we have reviewed ourapproach to improving Health and Safety and launched a radical new initiative,Target Zero, aimed at eliminating reportable accidents. This is an ambitioustarget, but as there is no such thing as an acceptable accident, we aredetermined to reduce them to zero. For Target Zero to be successful, we need thesupport and participation of all our stakeholders, including our customers,suppliers and partners, as well as our own people. We are therefore activelyengaging them in Target Zero and their response has been very encouraging. Moredetailed information on Health and Safety will be published in our 2004Sustainability Report in April 2005. Markets and business outlook Transport In 2004, Carillion Transport won new orders and framework contracts in the heavyrail and road infrastructure markets, worth £1.0 billion. The value of its orderbook and framework contracts at 31 December 2004 was £888 million. We made good progress in our UK and Scandinavian rail markets towards our goalof replacing within three years the turnover we have lost as a result oftransferring rail maintenance work to Network Rail. In the UK, we won afive-year framework contract for renewing track and switches and crossings andcontracts for rail enhancement projects together worth a total of £763 million.These included the UK's first privately financed rail enhancement project, forChiltern Railways, worth £50 million. Our UK roads business had a particularlysuccessful year, winning new long-term maintenance contracts for WarwickshireCounty Council and Wolverhampton City Council, worth up to £94 million, andreaching financial close on the A249 PPP road project in Kent, worth in totalsome £120 million to Carillion, including construction, maintenance andconcession company turnover. In 2005, we expect continuing opportunities to grow our rail business and makefurther progress with rebuilding turnover in this area. UK investment in railenhancement projects and renewals is expected to be £3.3 billion in 2005 and weexpect growing opportunities to increase our share of this market from itscurrent level of around 10 per cent. In Scandinavia, we are well placed tobenefit from the outsourcing of rail infrastructure work, which is expected togrow at 10 per cent per annum over the next three years. The outlook for our roads business is positive, particularly in the LocalAuthority road maintenance market. Annual expenditure on local road maintenanceis some £2 billion and the proportion that is currently outsourced to the publicsector is expected to increase significantly from its current level of around 40per cent. We also continue to target road construction projects selectively,focusing primarily on projects being procured under the Government's EarlyContractor Involvement programme, in which planned investment is some £6billion. Health In 2004, Carillion Health won new contracts worth £161 million increasing thevalue of its year end order book and framework contracts to £592 million. New contracts in 2004 included the Birmingham and Solihull LIFT project and anextension to Darent Valley Hospital in Dartford, Kent. We are also building newfacilities at Rampton Hospital under the ProCure 21 programme, for which we area framework contractor to the NHS. Together with our clinical partner, we wereappointed as the preferred bidder for our first Independent Sector TreatmentCentre (ISTC), in Basildon, where we will provide a fully integrated serviceincluding the provision and management of the new centre and all clinicalservices, potentially worth around £60 million over five years. We alsosuccessfully renewed our contract to provide FM services to five hospitals inEssex worth £50 million over five years. The outlook for our Health business continues to be very positive. We expect toreach financial close on the Queen Alexandra Hospital, Portsmouth, worthapproximately £1.0 billion, in the first half of 2005. We are also bidding fortwo more major PPP hospitals, Pembury in Kent and Walsall, which together havean estimated capital value in the region of £400 million and form part of theGovernment's PPP hospital programme, for which planned capital expenditure overthe next three years is around £5 billion. In addition, we also expect furtheropportunities to bid for ISTCs in which the Government is investing some £2.5billion over the next five years, and for publicly funded infrastructure workunder the £8 billion ProCure 21 programme. Business Services In 2004, Carillion Business Services won new orders worth £640 million and itsorder book and framework contracts at 31 December 2004 were worth some £821million. Our UK Building business had a successful year winning new orders in its keysectors. These included contracts in the retail sector worth £170 million, inthe high-rise residential sector worth £180 million and in the offices and otherdevelopments sectors worth around £130 million. By December 2004 our UK Buildingorder book for 2005 was largely secure and we were firmly focused on winningwork for 2006 and beyond. We have also continued to concentrate on developinglong-term relationships with key customers. In 2005, we expect around 80 percent of the turnover in our UK Building business to be generated from 20 keycustomers. Our UK Building business has also been successful in the growing educationsector, winning construction contracts in 2004 worth around £134 million. Inaddition, we expect to reach financial close in the near future on the £150million PPP schools project for Renfrewshire. With further opportunitiesexpected for both PPP and non-PPP projects under the Government's £25 billion"Building Schools for the Future" programme, the outlook in the education sectorcontinues to be encouraging. The UK private sector facilities management market continued to be verycompetitive in 2004, with fewer opportunities for Carillion Services to bid forcontracts that met its selectivity criteria. In contrast, the outlook in thepublic sector facilities management market has become increasingly positiveduring 2004, with a number of Local Authorities seeking strategic partnershipsto deliver integrated asset and facilities management solutions. We arecurrently shortlisted for one such project in Bradford and we are targeting anumber of similar projects for other Local Authorities. These projects demandthe combination of a wide range of skills, including project finance, design,construction, maintenance, facilities management and property development. Givenour capabilities and experience in providing similar solutions for other publicsector customers, we believe we are well positioned in this emerging market. International Regions 2004 was a very successful year for our International Regional Businesses, whichwon new orders worth £1.0 billion, increasing their year-end order book to £1.1billion. This was despite the effect of selling Carillion BTP, which had anorder book of £150 million. A Carillion-led consortium reached financial close on two of the first three PPPhospital concession contracts to be let in Canada - the William Osler in Torontoand the Royal Ottawa - together worth over £650 million to Carillion. Ourhighways maintenance business in Canada won new contracts worth £180 million. Our businesses in the Middle East were awarded construction contracts worth £216million, including a £175 million contract for our joint venture business inDubai for a major phase of the multi-billion pound Festival City development,which is being developed by our partner in the UAE, the Al Futtaim Group. In 2005, our focus in Canada is on delivering our two PPP hospitals andextending our success in the Ontario road maintenance market to other Provinces.In the Middle East, we have already had further success in 2005. We have beenselected by the Al Futtaim Group to manage the design and construction of thewhole of its Festival City development and we have reached agreement on furtherconstruction contracts worth up to £400 million. Our joint venture supportservices business with Emaar Properties is expected to achieve significantgrowth in 2005 and beyond as it extends its portfolio of property undermanagement, including the first phases of Dubai Festival City. John McDonough Chief Executive FINANCIAL REVIEW Accounting policies The Group made one change to its accounting policies in 2004, with the adoptionof Urgent Issues Task Force (UITF) Abstract 38 'Accounting for ESOP trusts'. Asa result, we recognise the cumulative value of shares held by the Group's ESOPtrust as a deduction in shareholders' funds rather than as a fixed assetinvestment. This has reduced both fixed asset investments and equityshareholders funds by £6.2 million. We have restated the comparative balancesheet and cash flow statement accordingly. We also changed the method by which we allocate attributable profits onincomplete major construction contracts. Previously, profit was recognisedbroadly in proportion to turnover after taking into account the remaining risksand uncertainties. In addition, we now take no profit on the first 20 per centof turnover and this profit is deferred until contracts are completed. Thismethod, which better reflects the risk profile of our construction activities,reduced reported profit in Construction Services by £3.3 million in 2004. Interest and cash The Group net interest credit of £3.4 million (2003: a net charge of £0.5million) reflected our strong operating cash inflow of £92.8 million andproceeds of £34.6 million from the sale of businesses and PPP equityinvestments. Net cash at 31 December 2004 was £153.6 million (December 2003:£75.8 million), excluding finance lease liabilities of £24.2 million (2003:£15.6 million). Capital expenditure was £15.0 million. Corporate tax paid was £13.0 million.Dividend payments were £16.4 million. The Group's share of net interest payable arising in joint ventures reduced to£3.4 million in 2004 (2003: £4.9 million), largely as a result of the disposalof equity investments in PPP joint ventures in November 2003 and June 2004. Disposals The Group continued to dispose of non-core businesses during 2004. In May 2004,we sold Crown House, a mechanical and electrical engineering contractingbusiness. The sale of this business, which had net liabilities of £10.3 million,generated proceeds of £3.2 million and a net profit of £8.1 million, afterproviding for retained contract liabilities. Goodwill relating to Crown House of£55.2 million had previously been written off to reserves. In November 2004, the sale of Carillion BTP, a contracting business in France,generated proceeds of £10.9 million and net loss of £0.4 million before writingoff goodwill. The goodwill associated with Carillion BTP was £14.7 million, ofwhich £1.2 million was capitalised in the Group balance sheet and £13.5 millionhad previously been written off to reserves. The costs associated with the closure of a number of small non-core businessesamounted to £5.6 million. Exceptional items The net exceptional charge in 2004 of £57.2 million before tax comprised thefollowing items- £7.7 million net profit from the sale of Crown House and Carillion BTP- £69.9 million goodwill write back associated with the sale of Crown House and Carillion BTP of which £68.7m had previously been written off to reserves- £7.7 million profit on the sale of two PPP equity investments- £2.9 million profit on the sale of fixed assets to Network Rail- £5.6 million of costs associated with closure of a number of small non-core businesses. Goodwill amortisation Goodwill amortisation in 2004 was £3.9m (2003: £3.8m). Taxation The Group's effective rate of tax on profit before exceptional items andgoodwill amortisation fell to 21 per cent in 2004 from 28 per cent in 2003. Thiswas due to a number of one-off tax settlements relating to prior years. We have£61 million of corporate tax losses in the UK, only some of which are recognisedas deferred a tax asset, that are potentially available to reduce future taxliabilities. In 2005, we expect our tax rate to move closer to its 2003 leveland remain there for the next few years. Pensions The pensions charge to the profit and loss account, calculated on the basis ofSSAP 24, amounted to £29.5m in 2004, compared with £22.1m in 2003. However, the2004 charge included the cost of writing off a £7.2 million prepayment relatingto the Railway Pension Scheme, following the transfer of rail maintenancecontracts and our rail maintenance employees to Network Rail. On an FRS 17 basis, the Group's pensions schemes had a net deficit of £59.6million at the end of 2004, compared with a net deficit of £76.6m in December2003. Subsequent to the closure of a number of our pension schemes to newentrants, the trustees revised their investment policy in 2004 to increaseprogressively the proportion of our pension fund assets that is invested inbonds with a corresponding reduction in the proportion invested in equities. FINANCIAL REPORTING SEGMENTS INVESTMENTS In this segment we report the equity returns on our investments in PublicPrivate Partnership (PPP) projects. 2004 2003Turnover £62.5m £67.5mOperating profit* £6.3m £8.6mPre-tax profit** £3.7m £3.5m * Before goodwill amortisation of £0.3m (2003: £0.1m)** Before exceptional profit of £7.7m (2003: £11.2m) Operating profit in this segment reduced as a result of our planned programme ofequity sales. However, this was offset by a reduction in the interest charge ondebt in our joint venture PPP concession companies, to leave pre-tax profit somesix percent higher than in 2003. In our first equity sale in November 2003, wedisposed of our £4.1 million investment in the Darent Valley Hospitalconcession, generating a net exceptional profit of £11.2 million. In 2004, wesold a further £13 million of equity investments - our holding in the M40motorway concession and 50 per cent of our holding in the A249 road concession -generating a net exceptional profit of £7.7 million. The proceeds generated byall these sales have consistently supported the directors' valuation of ourportfolio of equity investments. The directors' valuation is currently £83million, based on discounting the cash flows expected from our remaining £29million of equity investments over their respective concession periods, at 10per cent. In 2004, we continued to build a strong pipeline of future investments. Wereached financial close on four projects in 2004 - the William Osler and RoyalOttawa Hospitals in Canada, the Birmingham and Solihull LIFT (Local ImprovementFinance Trust) project and the A249 road project in Kent - increasing the numberof financially closed projects in our portfolio to 18. We are also the preferredbidder for another four projects, which includes our first Independent SectorTreatment Centre in Basildon for which we were appointed preferred bidder inSeptember 2004. As a result, we now have commitments to invest a further £18 million in projectsalready financially closed. In addition, we plan to invest around another £20million in projects for which we are preferred bidder. These committed andplanned equity investments will increase the equity invested in our portfoliofrom £29 million to some £67 million over the next three or four years. We arealso shortlisted for a further three PPP projects with a total potential equityrequirement of up to £30 million. SUPPORT SERVICES In this segment we report the results of our activities in rail infrastructure,roads maintenance and facilities management and other support services. 2004 2003Turnover £944.9m £933.5mOperating profit* £45.6m £51.1mMargin % 4.8 5.5 * Before exceptional operating charges of £nil (2003: £33.1m) andgoodwill amortisation of £3.5 m (2003: £3.6m). Turnover in this segment remained broadly unchanged despite the loss of around£100 million of turnover in 2004 as a result of transferring rail maintenancecontracts to Network Rail during the year. This loss has been offset largely bygrowth in other rail infrastructure activities and road maintenance. Also, some£20 million of turnover from our consultancy business, TPS, that was previouslyreported in Construction Services, is now included in this segment. The overall margin in Support Services returned to a more normal level after anincrease in 2003 due to favourable settlements on a number of old Railtrackcontracts. The progress made by our rail business in 2004, which included new contracts forenhancement projects and for the renewal of track and switches and crossings,enabled it to contribute nearly £550 million of turnover to this segment (2003:£567 million). It also continued to perform well on existing contracts,including West Coast Route Modernisation projects, a wide range of regionalprojects and the construction and maintenance of the Channel Tunnel Rail Link. As we transferred our rail maintenance contracts to Network Rail in stages overthe first seven months of 2004, the full effect of this will be felt in 2005. Aspreviously indicated, total turnover from the contracts transferred was around£250 million. However, we expect to continue rebuilding turnover in rail throughfurther opportunities to increase our share of the UK and Scandinavian railinfrastructure markets. Our roads maintenance business also made good progress in 2004, increasing itsturnover to some £141 million (2003: £115 million). This increase reflects afull year contribution from the contract won in 2003 to maintain approximatelyhalf of Surrey County Council's road network, worth up to £160 million over 10years, and two new long-term maintenance contracts won in 2004 - one forWarwickshire County Council and one for Wolverhampton City Council, with anestimated total value of up to £94 million. We believe we can continue thisprogress in 2005, as we expect more opportunities to bid for local authorityroad maintenance contracts during the year. Overall, turnover from facilities management and support services in 2004 wasbroadly flat at £257 million (2003: £252 million). This reflects theincreasingly competitive private sector market, which offered feweropportunities to bid for contracts consistent with our selectivity criteria.However, the outlook in public sector facilities management market is much morepositive, particularly as Local Authorities are increasingly seeking tooutsource activities for which Carillion is well placed to provide integratedservice solutions. The acquisition of Planned Maintenance Group will add substantially to turnoverand profit in this segment. It will also considerably strengthen the breadth andquality of our service offering and create new opportunities to cross sell ourservices in both the public and private sector markets. CONSTRUCTION SERVICES In this segment we report the results of our UK building and civil engineeringactivities and the construction activities of our International Regionalbusinesses. 2004 2003Turnover £1,010.8m £1,001.8mOperating profit* £11.6m £5.6mMargin % 1.1 0.6 * Before goodwill amortisation of £0.1m (2003: £0.1m) Turnover in Construction Services was broadly unchanged, with increasedcontributions to turnover from our UK Building and our International Regionalbusinesses offsetting reductions in UK civil engineering and in mechanical andelectrical contracting due to the sale of Crown House. The sale of CarillionBTP, our contracting business in France, late in 2004 had little impact on our2004 results. Reported operating profit in this segment was reduced by some £3.3 million as aresult of changing the method by which we allocate profit on major constructioncontracts (see Accounting Policies on page 10), under which profit on the first20 per cent of turnover is deferred until contract completion. Therefore,operating profit would have been approximately £15 million if it had beenreported on the same basis as profit in 2003. Overall performance in thissegment has returned to a satisfactory level. The sound performance we reported for our UK Building business in the first halfof the year continued in the second half. This business, which accounted forsome £507 million of 2004 turnover in this segment (2003: £444 million), hasremained focused on its three main market sectors of retail, office andhigh-rise residential developments. By the end of 2004 its order book for 2005was largely secure and around half its order book for 2006 was secure orprobable. We therefore expect turnover in our UK Building business to grow in2005, including an increased contribution from PPP construction. Turnover from UK civil engineering was some £25 million in 2004 (2003: £68million). This declined as expected, in line with our selective approach to thismarket. Turnover in 2005 is likely to remain at broadly the same level as in2004. We will continue to focus on the UK road construction sector andparticularly on Highways Agency contracts procured under the Early ContractorInvolvement programme, which offers acceptable levels of risk and reward. The contribution to turnover from our International Regional businessesincreased to £355 million in 2004 (2003: £324 million), reflecting our successesin the highways maintenance market in Canada and in our Middle East constructionmarket. In 2005, we expect further opportunities for growth in these markets andalso in the facilities management market in the Middle East. Construction workon our two PPP hospitals in Canada, on which we reached financial close late in2004, will also contribute to growth in 2005. Our Building Developments business continues to perform well, pursuing itsstrategy of specialising in the regeneration of brown field sites anddevelopments where risk is minimised through pre-letting or sale to occupiers insectors where there is continuing demand. International Financial Reporting Standards (IFRS) In accordance with the requirement for all listed European companies, theGroup's financial statements for 2005 will be prepared under EU endorsedInternational Financial Reporting Standards (IFRS). The adoption of IFRS will have no impact upon the underlying cash flows ortrading activities of the Group. In addition the ability of the Group to paydividends to shareholders will be unaffected by IFRS. Had IFRS been adopted forreporting the Group's 2004 financial results, our best estimates of the maineffects are set out in the table below and described in the notes that followit. These estimates and comments are based on published standards andinterpretations issued by the IASB to date and may therefore change as theimplementation of IFRS evolves. £m (unaudited) Profit before Profit before Net Assets tax tax*2004 Actuals UK GAAP (6) 55 187IAS 19 Pensions 3 3 (71)IFRS 2 Share options - - -IFRS 3 Goodwillamortisation 73 - 4IAS 1 Presentation of JVtax (2) (2) -IAS 12 Deferred tax - - (3)IAS 10 Dividends - - 10Revised under IFRS GAAP 68 56 127 EPS UK GAAP basis (8)p 20pEPS IFRS GAAP basis 28p 21p *Before goodwill amortisation and exceptional items IAS 19 This standard replaces SSAP 24 with an FRS 17 approach, under which pension scheme deficits are included on the balance sheet. Going forward, the annual charge to our profit and loss account under IAS 19 is expected to be similar to that under SSAP 24. The positive impact on profit in 2004 reflects the reversal of the £7.2 million charge under SSAP 24 for writing off the pension prepayment relating to the Railway Pension Scheme, as a result of transferring our rail maintenance employees to Network Rail. The impact on net assets includes the elimination of existing SSAP 24 prepayments and is net of a deferred tax asset of £26 million on our pension deficit. IFRS 2 This standard requires the fair value cost of providing share option schemes to employees to be expensed. It applies only to schemes that started after 7 November 2002 and the effect in 2004 is less than £0.5 million. In 2005, the cost of providing such schemes is expected to be up to £1 million. IFRS 3 This standard will reverse goodwill amortisation in 2004 and replaces amortisation with annual impairment testing. Goodwill previously written off to reserves as at 1 January 2004 will no longer be included in the profit and loss account when the businesses to which it relates are sold. IAS 1 This standard requires the Group's share of joint venture profits to be reported on an after tax basis, but within pre-tax profit. However, as the Group's tax charge will no longer include tax on joint venture profits, there is no affect on earnings per share. IAS 12 The effect of this standard reflects an additional deferred tax provision required for un-remitted profits of overseas entities. IAS 10 This standard requires the Group to account for dividends to shareholders in the period in which they are approved rather than accruing for them in the period to which they relate. Carillion has decided to take the available exemption from applying IAS 39(Financial instruments) to its 2004 comparative information. At present, theapplication of IAS 39 from 1 January 2005 could potentially reduce the Group'snet assets at that date by approximately £22 million, net of deferred tax. Thisreflects the Group's share of the fair value liability of interest ratederivatives within a number of joint venture PPP concession companies. On 3March 2005, the International Financial Reporting Interpretations Committee(IFRIC) issued draft guidance on accounting for service concession arrangements.The Group is in the process of determining the implications of this draftguidance and consequently the impact of IFRS on PPP concession companies remainsuncertain at this time. In addition to the effects on financial reporting outlined above, there are anumber of other areas where presentation and disclosures in financial statementswill change under IFRS. The significant areas are as follows. • The Group's share of turnover in joint ventures will be excluded from total Group turnover and its share of profits from joint ventures will be excluded from the segmentation of profit from operations.• Acquisitions may give rise both to goodwill and intangible assets, such as customer contracts or customer lists, which must be disclosed separately on the balance sheet. Unlike goodwill, intangible assets with a finite life will be amortised.• The cash flow statement will contain three main categories compared with nine under UK GAAP. The definition of cash and cash equivalents is wider under IFRS and includes cash on deposit.• Other specific areas requiring increased disclosure include segmental results, leases, construction contracts, financial instruments and related parties. The International Accounting Standards Board is still in the process ofreviewing existing standards and some have yet to be endorsed by the EuropeanUnion. Carillion's IFRS project team will continue to monitor developments andtheir potential effects on the Group. Overall, we do not expect these to have asignificant effect on the Group's annual earnings. The Group's interim results for the period ending 30 June 2005 will be the firstperiod for which the Group will report its results under IFRS. Prior toreporting those results, the Group will publish fully restated comparativeinformation for its 2004 interim and full-year results. Chris GirlingFinance Director Consolidated Profit and Loss Accountfor the year ended 31 December 2004 2004 2003 Note Before Exceptional Total Before Exceptional Total exceptional items items Items £m exceptional (see Note 3) £m items £m (see Note 3) £m £m £m Total turnover 2 1,991.8 - 1,991.8 1,977.6 - 1,977.6Less: shareof jointventures'turnover 2 (121.8) - (121.8) (116.7) - (116.7) ------- ------ ------ ------- ------- ------Group turnover 1,870.0 - 1,870.0 1,860.9 - 1,860.9Cost of (1,709.1) - (1,709.1) (1,693.2) - (1,693.2)sales ------- ------ ------ ------- ------- ------Gross profit 160.9 - 160.9 167.7 - 167.7Administrativeexpenses (127.0) - (127.0) (129.6) (33.1) (162.7) ------- ------ ------ ------- ------- ------Groupoperatingprofit 33.9 - 33.9 38.1 (33.1) 5.0Share ofoperatingprofit injoint ventures 2 16.9 - 16.9 14.3 - 14.3 ------- ------ ------ ------- ------- ------Totaloperatingprofit 50.8 - 50.8 52.4 (33.1) 19.3Profit on saleof tangiblefixed assets 3 - 2.9 2.9 - - -Profit on saleof fixed assetinvestments 3 - 7.7 7.7 - 11.8 11.8Profit/(loss)on sale of ------- ------ ------ ------- ------- ------businessesGroup 3 - (69.3) (69.3) - (1.5) (1.5)Joint ventures 3 - 1.5 1.5 - 0.2 0.2 ------- ------ ------ ------- ------- ------ - (67.8) (67.8) - (1.3) (1.3) ------- ------ ------ ------- ------- ------(Loss)/profiton ordinaryactivitiesbeforeinterest 2 50.8 (57.2) (6.4) 52.4 (22.6) 29.8Net interestreceivable/ ------- ------ ------ ------- ------- ------(payable)Group 3.4 - 3.4 (0.5) - (0.5)Joint ventures (3.4) - (3.4) (4.9) (0.6) (5.5) ------- ------ ------ ------- ------- ------ - - - (5.4) (0.6) (6.0) ------- ------ ------ ------- ------- ------(Loss)/profiton ordinaryactivitiesbeforetaxation 50.8 (57.2) (6.4) 47.0 (23.2) 23.8Taxation (11.0) 1.4 (9.6) (13.8) - (13.8) ------- ------ ------ ------- ------- ------(Loss)/profiton ordinaryactivitiesafter taxation 39.8 (55.8) (16.0) 33.2 (23.2) 10.0Equityminorityinterests (1.8) - (1.8) (1.7) - (1.7) ------- ------ ------ ------- ------- ------(Loss)/profitfor thefinancial year 38.0 (55.8) (17.8) 31.5 (23.2) 8.3Equitydividends 4 (15.7) - (15.7) (14.1) - (14.1) ------- ------ ------ ------- ------- ------Retained lossfor the Groupand its shareof jointventures 22.3 (55.8) (33.5) 17.4 (23.2) (5.8) ======= ====== ====== ======= ======= ====== Earnings perordinary share 5Basic 18.2p (26.7p) (8.5p) 15.2p (11.2p) 4.0p ------- ------ ------ ------- ------- ------Diluted 18.0p (26.4p) (8.4p) 15.1p (11.1p) 4.0p ------- ------ ------ ------- ------- ------Basic beforeallexceptionalitems andgoodwillamortisation 19.9p 16.8p ------- -------Dividends perordinary share 4 7.5p 6.75p ------ ------ The above results are wholly derived from continuing operations. Consolidated Balance Sheet At At 31 December 31 December 2004 2003 £m restated £mFixed assetsIntangible assets 16.2 21.3Tangible assets 71.2 68.1Investments in joint ventures: ---------- ----------Share of gross assets 620.6 639.7Share of gross liabilities (580.6) (599.7) ---------- ---------- 40.0 40.0Loan advances 24.1 33.1 ---------- ---------- 64.1 73.1Other investments 3.2 0.1 ---------- ----------Total investments 67.3 73.2 ---------- ---------- 154.7 162.6 ---------- ---------- Current assetsStocks 54.8 46.3Debtors 371.0 511.3Investments 3.6 4.7Cash at bank and in hand 203.3 128.1 ---------- ---------- 632.7 690.4Creditors: amounts falling due within one yearBorrowings (17.4) (14.0)Other creditors (514.8) (621.2) ---------- ---------- (532.2) (635.2)Net current assets ---------- ----------Due within one year 74.4 26.1Debtors due after more than one year 26.1 29.1 ---------- ---------- 100.5 55.2 ---------- ----------Total assets less current liabilities 255.2 217.8Creditors: amounts falling due after more than oneyearBorrowings (56.5) (53.9)Other creditors (9.6) (7.6) ---------- ---------- (66.1) (61.5)Provisions for liabilities and charges (2.2) (4.7) ---------- ----------Net assets 186.9 151.6 ========== ==========Financed by:Capital and reservesCalled up share capital 107.1 107.0Share premium account 6.8 6.5Merger reserve 8.2 8.2Profit and loss account 62.7 27.6 ---------- ----------Equity shareholders' funds 184.8 149.3Equity minority interests 2.1 2.3 ---------- ---------- 186.9 151.6 ========== ========== Consolidated Cash Flow Statement Note Year ended Year ended 31 December 31 December 2004 2003 £m restated £mNet cash inflow from operatingactivities 6(a) 92.8 84.2Distributions received from jointventures 6.7 14.7 Returns on investments and servicing offinance ---------- ----------Dividend paid to minority interests (2.0) (1.6)Interest paid (2.5) (5.6)Finance lease charges (1.0) (0.4)Interest received 7.2 5.5 ---------- ----------Net cash inflow / (outflow) fromreturns on investments and servicing of finance 1.7 (2.1)Corporate taxation (paid) / received (13.0) 0.5Capital expenditure and financial investment ---------- ----------Payments to acquire tangible fixedassets (15.0) (15.6)Sale of current asset investments 0.9 3.5Sale of tangible fixed assets 6.9 1.5 ---------- ----------Net cash outflow from capitalexpenditure and financial investment (7.2) (10.6)Acquisitions and disposals ---------- ----------Sale of businesses 7(b) (4.3) 4.6Purchase of equity investments injoint ventures 7(a) (1.1) (0.4) ---------- ----------Sale of equity investment in jointventures 7(b) 20.2 5.1Loan repayments from / (advances to)joint ventures 0.1 (14.9) ---------- ----------Net cash inflow / (outflow) fromacquisitions and disposals 14.9 (5.6)Equity dividends paid (16.4) (10.1) ---------- ----------Net cash inflow before management ofliquid 79.5 71.0resources and financingManagement of liquid resources ---------- ----------Increase in short term deposits (91.4) (25.4) ---------- ----------Net cash outflow from management ofRelated Shares:
Carillion Plc