13th Dec 2006 07:02
AMEC PLC13 December 2006 13 December 2006 AMEC plc strategy and trading update NEW CEO SAMIR BRIKHO UNVEILS STRATEGY MAJOR COST REDUCTION PROGRAMME UNDERWAY TARGET 6% MARGIN IN 2008 New strategy and vision: • AMEC's vision is to be a leading provider of engineering and consultancy services to energy, mining and selected industrial customers • Up to £100m return of capital to shareholders proposed • Major performance improvement initiatives underway; target margin* 6% in 2008 • Built Environment businesses to be sold Exceptional items: • Provisions relating to disputes of up to £70m; impairment provisions and separation costs of £20m • Aggregate post-tax exceptional gain** in 2006 not less than £160m Trading update: • Good performance in Natural Resources, Earth and Environmental and Investments • 2006 profits expected to be £15m below the board's previous expectations, reflecting restructuring and legal costs in UK Construction and weaker than expected performance in Pipelines and Nuclear capital projects • Average*** net cash approximately £200m, ahead of expectations * Profit for continuing operations before net financing costs, exceptionalitems, intangible amortisation and joint venture tax, but including jointventure profit before tax, as a percentage of revenues.** Post tax gain on sale of AMEC SPIE £305m, less post-tax exceptional chargesJune 2006 £65m and December 2006 up to £80m.*** 1 August - 31 December 2006 Chief executive Samir Brikho said: "In my first two months I have discovered that AMEC has both a sound base ofquality businesses and a great deal of untapped potential. The business suffersfrom complexity and an excessive cost base, but we now have a clear anddeliverable plan to turn it around and transform financial performance.AMEC will be a fitter organisation and more clearly focussed on client needs inattractive markets. The strong balance sheet will enable AMEC to both fundgrowth and return capital to shareholders. "As AMEC's new chief executive, I will bring to an end the uncertainty that hasbeen hanging over this company for too long. AMEC will focus on high-endengineering and consultancy services in selected energy and industrial markets,where it has a good track record. I have already put in train plans forsignificant cost savings and operational improvements that will deliver to thebottom line in 2008 and beyond. Over the longer term, I will build on AMEC'sstrong market positions, using my experience in this field to build a leadingbusiness that will deliver value to our shareholders." Forward looking statements Certain statements in this presentation are forward looking statements. By theirnature, forward looking statements involve a number of risks, uncertainties orassumptions that could cause actual results or events to differ materially fromthose expressed or implied by the forward looking statements. These risks,uncertainties or assumptions could adversely affect the outcome and financialeffects of the plans and events described herein. Forward looking statementscontained in this document regarding past trends or activities should not betaken as representation that such trends or activities will continue in thefuture. You should not place undue reliance on forward looking statements, whichapply only as of the date of this document. A presentation for analysts and investors will be held at 0900 this morning inthe Gaumont Suite, Dresdner Kleinwort, 30 Gresham Street, London EC2P 2XY.Slides and a video recording of the presentation will be made available onAMEC's web site www.amec.com. Enquiries to:AMEC plc: + 44 (0)20 7634 0000 Analysts and investors:Samir Brikho, Chief ExecutiveStuart Siddall, Finance DirectorNeil Jamieson, Director of Investor Relations Media:Juliet Sychrava, Director of Corporate CommunicationsCharles Reynolds, Head of Media Relations Brunswick Group LLP +44 (0) 207 404 5959James Bradley STRATEGY A review of AMEC's businesses has been completed under the leadership of SamirBrikho, who joined AMEC as chief executive on 1 October 2006. The review hasbeen focussed on reasons for AMEC's underperformance in recent years whichinclude a complex organisational structure, high overhead costs, a lack ofbusiness focus and ongoing litigation. The objective of this review is the maximisation of shareholder value. This willbe achieved through the creation of a fitter, more focussed business built onstrong positions in markets which the directors consider offer the greatestopportunity. New strategy and vision AMEC's vision is to be a leading supplier of high value consultancy, engineeringand project management services to defined market segments within the world'senergy and industrial process industries. AMEC will advise, design, manage the delivery of and support strategic andcomplex assets such as offshore oil and gas production facilities, metals ormineral mines, or power infrastructure. This will leverage AMEC's skills in high-end engineering and complex projectmanagement, its environmental consulting services and its establishedrelationships with customers such as the world's major oil and gas, power andmining companies. An important goal for AMEC is a long-term operating margin* target of around 8%in 2010. Initiatives are already in place as part of AMEC's plans to reducecosts, improve efficiency and accountability. * Profit for continuing operations before net financing costs, exceptionalitems, intangible amortisation and joint venture tax, but including jointventure profit before tax, as a percentage of revenues. Core businesses Consistent with AMEC's stated vision, a comprehensive review of the company'sactivities has been undertaken considering market position, existing clientrelationships, profitability and growth potential. The review has resulted inthe decision to retain the following businesses as core: •Oil and Gas •Oil sands •Minerals and Metals Mining •Nuclear •Industrial •Earth and Environmental •Wind Energy These businesses accounted for aggregate revenues in 2005 of £1.8bn andgenerated profit* of £83m. Significant potential opportunities for investmenthave been identified to grow and develop the core businesses. Non-core businesses The review has resulted in the decision to sell the following Built Environmentbusinesses: •Building and Civil Engineering •Building and Facilities Services •Property Developments •PPP together with some peripheral activities. These businesses accounted for aggregate revenues in 2005 of £1.3bn andgenerated profit* of £14m. The businesses are to be sold as quickly as possible,consistent with achieving full value. * Profit for continuing operations before net financing costs, exceptionalitems, intangible amortisation and joint venture tax, but including jointventure profit before tax. CAPITAL STRUCTURE The board has reviewed the group's capital requirements in the light of the saleof AMEC SPIE and the proposed sale of the non-core businesses. The balance sheet has been transformed following the sale of AMEC SPIE. Averagenet cash is expected to be approximately £200m for the period 1 August 2006 to31 December 2006. The effective level of net cash is reduced by up to £100m fornormal cash commitments and by up to a further £90m in respect of provisionsheld in respect of future litigation. Despite this, the ability of AMEC to takeon new debt means that the board is pleased to be able to announce its intentionto use the group's existing authority, taken at the last annual general meeting,to return up to £100m via on-market share repurchases during 2007. This will besubject to the cessation of the offer period. The directors believe that a sharebuyback will be in the best interests of shareholders generally and can beexpected to result in an increase in earnings per share. The share buy backprogramme is not dependent upon receipt of the expected net proceeds from thegroup's disposal programme. Furthermore, the group will retain sufficientfinancial flexibility to be able to progress its strategic growth plans.Repurchased shares will be held in treasury. PERFORMANCE IMPROVEMENT AMEC sees opportunities for significant margin growth through reduced overheadcosts and increased operating efficiency. Overhead cost reduction In October 2006, AMEC launched Step Change, a programme of change in thestructure and culture of the company, which has a target of £100m in annualisedsavings. Of this approximately £80m relates to savings in the group's grossoverhead costs of about £450m with £20m coming from other measures. Theprogramme will be completed by the end of 2007. Approximately 80% of targetedoverhead savings are in the company's core businesses. Although not all savingswill be retained by AMEC, the company's market competitiveness will be increasedby these measures. Step Change is being achieved with reference to external benchmarking throughworkshops which have involved over 80 managers across the company. Over 250initiatives have been identified for implementation across AMEC and will becoordinated by a dedicated project team. The Step Change programme is in its early stages. Annualised savings of £24mhave already been identified. Of these, £20m relates to the group's corebusinesses, with the benefit arising from 2008 onwards. Savings in 2007 will bemore than offset by costs of securing these benefits of some £7m. An update onadditional savings and the cost of securing these benefits will be provided atthe company's preliminary results announcement in March 2007. Operational Excellence Programme AMEC is launching an Operational Excellence Programme designed to strengthenprocess assurance and risk management, improve business focus and provide betterstaff training. As a result of the overhead cost reduction programme, exit from non-coreactivities and improvements in operational performance, AMEC is targeting thefollowing improvements in margin: Measures to improve margin Target margin* ------------Margin 2005 3.1%Exit from non-core activities** +2.2%Expected impact of Step Change +1.5-2.5% ------------Target margin 2008 6.0%Operational Excellence Programme and other measures +2-3% ------------Target margin 2010 8.0% * Profit for continuing operations before net financing costs, exceptionalitems, intangible amortisation and joint venture tax, but including jointventure profit before tax, as a percentage of revenues.** Including Oil and Gas lump-sum fabrication activities EXCEPTIONAL PROVISIONS The board is pleased to report that progress has been made in settlingsubstantially all the outstanding final accounts related to fabrication andother activities in the Oil and Gas sector. AMEC will receive approximately £45min settlement. Work in progress on the four remaining UK lump sum road projectswhere final accounts have not been agreed, and which are in the advanced stagesof negotiation, is approximately £5m. Over the past two months a review has been undertaken of projects where AMEC isinvolved in litigation and/or where material final account settlements have beenoutstanding. Following this review and reflecting recent negative developments on three majorNorth American disputes, the board expects to make additional exceptionalprovisions of up to £70m relating to completed projects in businesses or activities* which have been exited. These provisions reflect the board's view that AMEC should seek to settle the disputes. Where settlement cannot be secured on a realistic basis, AMEC will continue to defend its position vigorously. Aggregate losses in respect of the projects which are subject to materiallitigation** are, as a result of these additional provisions, expected toincrease by up to £50m to a maximum of £140m. Furthermore, full provision hasbeen made against all receivables and/or work in progress that may be due toAMEC in respect to these projects. Total contract provisions on projects subject to material litigation and otherprojects relating to future costs arising from disputes as at 31 December 2006are expected to be up to £90m. * This provision is expected to include costs of up to £15m relating to theconstruction (contract awarded in 1999) of an overseas process plant by a NorthAmerican subsidiary (acquired with AGRA in 2000) in joint venture.** Projects subject to material litigation: San Francisco Jail, US Courthouses,Thelwall Viaduct, Jordan Magnesium, Florida development project, World TradeCentre. Business disposal - Buchans AMEC's pre-cast concrete manufacturing business, Buchans, has been loss-makingfor some years and the decision has been taken to sell these activities. As aresult, impairment and other provisions amounting to £15m are expected to betaken in 2006. AMEC is in discussions with several interested buyers. Separation costs AMEC has incurred approximately £5m associated with the feasibility review, nowcomplete, relating to the potential separation of Built Environment businessesfrom AMEC's Energy and Process activities. These costs will be reported asexceptional costs in AMEC's 2006 results. Aggregate exceptional gain in 2006 not less than £160 million The post tax exceptional gain arising on the sale of AMEC SPIE is expected torise to £305m. The aggregate post tax exceptional gain in 2006 is now expectedto be not less than £160m after taking into account the expected exceptionalcosts of up to £80m (post tax), announced today, and of £65m (post tax)announced in June 2006. TRADING UPDATE 2006 The Natural Resources, Earth and Environmental and Investments businesses areexpected to report good performance in 2006. Restructuring costs in UK Construction have increased by £5m and otherprovisions for future litigation costs of £5m in UK Construction are nowrequired. Project delays in Pipelines and low activity in AMEC's UK nuclear capitalprojects business will result in profits in Power and Process falling short ofexpectations by £5m. Overall, the board expects pre-tax profits* in 2006 to be £15m below itsprevious expectations. * Before exceptional items and intangible amortisation but including jointventure tax. Natural Resources Natural Resources has seen good growth in oil sands, brownfield developments andfrontier regions such as the Caspian and activity in Mining and Metals has beenat higher levels than expected at the beginning of 2006. Whilst the boardexpects Natural Resources to make progress in 2006, margin* is expected to belower than in 2005. The Natural Resources order book at the end October 2006 was£1.2bn, up 14% on the position at 30 June 2006. * Excluding lump-sum fabrication activity, now discontinued Power and Process In Power and Process, activity levels are higher than in the first half of 2006,reflecting the expected high levels of activity in AMEC's industrial markets onboth sides of the Atlantic. Net margins have reduced, in part due to lowerlevels of higher margin activity in Iraq. The Nuclear Services business acquiredin July 2005 is performing well, particularly in Canada, and its results areahead of the business plan at the time of the acquisition. The order book inPower and Process at the end October 2006 remained strong, at £1.4bn. In addition, an AMEC joint venture has been appointed preferred partner byNational Grid for the West Overhead Lines and Cable Alliance. This contract willhave a value to AMEC of over £200m and involves the upgrade of overhead powerlines and underground cables across the western half of England and all of Walesover the next five years. Earth and Environmental The Earth and Environmental business is expected to report good performance in2006, in line with the board's expectations. Construction Performance in the Building and Facilities Services business was good, asexpected. UK Building and Civil Engineering has remained weak. Significant stepshave been taken to strengthen the management team, introduce and reinforcemanagement control disciplines and focus the business on a lower level ofactivity and reliable delivery. With the planned downsizing of Construction activities, the order book of £1.2bnat the end October 2006 was down 22% on the position at 30 June 2006, asexpected. Investments The Investments business is expected to report another good year, with resultsin 2006 benefiting from significant profits on the sale of PPP assets, as in2005. In Wind Energy, performance in 2006 will reflect the absence of planningapprovals during 2006 and the £3-4m cost of progressing developments during theyear. Average net cash Following the disposal of AMEC SPIE, average net cash for the period 1 August2006 - 31 December 2006 is expected to be approximately £200 million, well abovethe board's earlier expectations of £150 million. ADDITIONAL INFORMATION Reconciliation of pro forma results of continuing operations for 2005 Year ended 31 December 2005 £m --------Revenue 3,110.9 Profit before net financing costs,exceptional items and intangibleamortisation, 81.5 Share of post - tax results of jointventures and associates 10.7 Add back Joint venture tax 4.7 -------- 96.9 --------Analysed:Core (stated after deducting corporatecosts of £19.9m) 82.6Non core 14.3 96.9 Margin 3.1% EDITORS' NOTES Samir Brikho is chief executive of AMEC plc. Prior to joining AMEC in October 2006, Samir, a member of the ABB ExecutiveCommittee, headed the Power Systems Division of ABB, the Swedish-Swissengineering group. He was also Chairman of ABB Lummus Global, ABB'sinternational projects and services business. Mr Brikho (48), a Swedish citizen, born in Lebanon, joined ABB in 1983, and for10 years led sales in a range of world markets, rising to Senior Vice Presidentand MD of ABB Kraftwerke in 1995. In 1999, he became CEO of ABB AlstomKraftwerke, moving to head the international operations of Alstom Power in 2000. He rejoined ABB in 2003 as Chief Executive of ABB Lummus Global in Switzerland,an international business focussed on the oil and gas, petroleum refinery andpetrochemical process industries. While in this post he returned thispreviously loss-making business to profit. Samir Brikho holds an engineering degree, Master of Science in ThermalTechnology from the Royal High School of Technology in Stockholm, Sweden, andcompleted the YMP Program at Insead in France in 1991. He completed a SeniorExecutive Programme, Stanford, USA in 2000. He speaks Swedish, Arabic, English,German and French fluently. Samir has two children and his interests include sport and music. ENDS This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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