Half year results to 30 June 2014 - morgansindall.com · Regeneration and development pipeline 14 £m 322 322 322 Affordable Housing Urban Regeneration H2 2014 2015 2016+ & Investments

Half year results to 30 June 2014

Morgan Sindall Group plc Constructing & Regenerating

4 August 2014

Disclaimer

2

Certain statements included or incorporated by reference in this presentation are forward-looking statements in respect of Morgan Sindall Group plc’s operations, performance, prospects and/or financial condition. These forward-looking statements speak only as at the date of this presentation. These statements concern, or may affect, future matters and include matters that are not facts. Such statements are based on current expectations and beliefs concerning future events and, by their nature, are subject to a number of known and unknown risks and uncertainties that could cause actual events, results or outcomes to differ materially from any expected future results or performance expressed or implied by the forward-looking statements. Such statements are also based on numerous assumptions regarding Morgan Sindall Group plc’s present and future strategy and the environment in which it operates, which may not be accurate. You are cautioned not to place undue reliance on these forward-looking statements. The information and opinions expressed in this presentation are subject to change without notice and neither the Company nor any other person assumes any responsibility or obligation to update publicly or review any of the forward-looking statements contained within this presentation, regardless of whether those statements are affected as a result of new information, future events or otherwise.

Highlights

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• First half results in line with expectations

PBTA1 of £14.2m

• Order book improved

Committed order book up 14% from year end, with regeneration & development pipeline up 5%

Higher quality through more favourable procurement routes

• Shift in balance of profits, with significant contribution from Urban Regeneration

Reinforces Group strategy of focusing on Construction and Regeneration activities

• General construction margins still under significant pressure

• Interim dividend of 12p per share - level with last year

1 Profit before tax and intangible amortisation

Steve Crummett Finance Director

4

Financial Review

Headline income statement1

5

£m HY 2014 HY 2013 % change

Revenue 998 1,019 -2%

Gross profit1

Gross margin1

83.6 8.4%

82.6 8.1%

+1% +30bps

Operating profit1

Operating margin1

15.2 1.5%

16.2 1.6%

-6% -10bps

Net interest (1.0) (0.8)

Profit before tax1 14.2 15.4 -8%

Tax

Effective adjusted tax rate

(2.1) 15%

(2.1) 14%

Profit after tax1 12.1 13.3 -9%

Adjusted earnings per share1 28.6p 31.5p -9%

Dividend per share 12.0p 12.0p -

1 Before intangible amortisation (£1.2m) (HY 2013: intangible amortisation (£1.4m) and exceptional operating items (£13.0m))

Segmental analysis1

6

£m Revenue Operating Profit1

Operating Margin

HY14 % change

HY14 % change

HY14 change

Construction & Infrastructure

567 -4% 5.9 -8% 1.0% -10bps

Fit Out 195 -8% 5.5 +10% 2.8% +50bps

Affordable Housing 193 +4% 2.7 - 1.4% -10bps

Urban Regeneration 42 +24% 3.5 +775% 8.3% n/a

Investments 9 n/a 1.3 n/a 14.4% n/a

Central/Elims (8) (3.7)

Total 998 -2% 15.2 -6% 1.5% -10bps

1 Before intangible amortisation £1.2m (HY 2013: intangible amortisation (£1.4m) and exceptional operating items (£13.0m))

16.2 (4.2)

2.1 2.7

(1.7) 0.1 15.2

1.6

£m

Operating profit1 – key movements

1 Before intangible amortisation (£1.2m) (HY 2013: intangible amortisation (£1.4m) and exceptional operating items (£13.0m))

7

£m

0.6

1.6

Cash flow

15.2 (7.8)

(4.3)

(39.8)

(0.9) (1.8)

(37.1)

(41.2)

1.0

1 Before intangible amortisation (£1.2m) 2 ‘Other’ includes JV dividends and interest income, receipts from disposals of investment properties and shared equity loan receivables, less additional pension payments

0

8

(41.2) • Expected c£20m inventory increase in Urban Regeneration and Affordable Housing since FY13

• Payable and receivable days in line with prior year

Net cash and debt reconciliation

4.5

Net

cas

h £

m

69.7 (39.8)

(6.4) 34.1

5.9

0

• Period end net cash £34m

• Average daily net debt of £6m

Includes £14m of non-recourse third party debt in Urban Regeneration

• Expected increase in average debt through H2 and 2015

Investment in Urban Regeneration and Affordable Housing (mixed-tenure)

1 Disposal of Hull BSF investment 2 ‘Other’ includes net loan repayments from JVs £4.6m and proceeds from issue of shares £0.1m

9

4.7

Bank facilities

4.5

1.6

10

• Main bank facilities renewed and increased during July 2014

• New £140m facility agreed, expiring in September 2018

Single “club” facility

Four banks, including two new lending banks

• Additionally still retain £30m of facilities maturing in 2016 and £20m facility maturing in 2015.

Excludes the non-recourse facilities in Urban Regeneration

• Facilities provide the headroom and flexibility for future investments in Urban Regeneration and Affordable Housing (mixed-tenure)

Summary balance sheet

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£m HY 2014 FY 2013 HY 2013

Intangibles 219.3 220.5 221.8

PP&E 19.8 18.3 19.2

Investments (incl JVs) 57.4 64.4 64.4

Shared equity loan receivables 20.1 19.7 19.2

Net working capital (26.0) (67.0) (45.8)

Current and deferred tax (21.3) (21.3) (22.1)

Pension scheme 0.3 - (1.4)

Net cash 34.1 69.7 39.7

Other 1 (41.2) (47.3) (47.7)

Net assets - reported 262.5 257.0 247.3

1 ‘Other’ includes provisions, finance lease liabilities, deferred consideration and assets held for sale

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Construction Regeneration

• Cash generative • Measured by margin and working

capital/revenue ratios

• Long term investment • Measured by return on capital

(ROCE)

Working capital and capital employed

Cons 60%

As at 30 June 2014

Working Capital1

£m

Construction & Infrastructure

(117)

Fit Out (21)

Affordable Housing - construction & services

(11)

As at 30 June 2014

Capital Employed2

£m

Affordable Housing3

- mixed-tenure 104

Urban Regeneration4 59

Investments 15

1 Defined as: Inventories plus trade and other receivables, less trade and other payables (excl deferred consideration, accrued interest and capitalised arrangement fees) 2 Defined as: Total assets (excl goodwill, intangible assets and cash) less trade and other payables (excl deferred consideration, accrued interest and capitalised arrangement fees) 3 Includes £20m of shared equity loan receivables, £10m of investment/rental properties and £18m of ’legacy’ land 4 After deducting non-recourse bank debt of £18.3m

Order book

13

£m

322

322 322

Construction & Infrastructure

Fit Out

Affordable Housing

Urban Regeneration & Investments

500

1,000

H2 2014 2015 2016+

£1.0bn

£0.85bn £0.85bn

• Committed order book of £2.7bn, up 14% from FY 2013

Fit Out up 57%, Affordable Housing up 27%

Generally higher quality – more negotiated, framework and two-stage work

• £1.0bn covered for H2 2014

Order book at 30 June 2014

Regeneration and development pipeline

14

£m

322

322 322

Affordable Housing

Urban Regeneration & Investments H2 2014 2015 2016+

£0.1bn

£0.3bn

£2.8bn

1 Includes the appropriate share of joint venture pipeline

• Regeneration & development pipeline1 of £3.2bn, up 5% from FY 2013

Includes development value of open market housing schemes in Affordable Housing

Longer term in nature

• Increase driven by new wins in Urban Regeneration

Combined Urban Regeneration order book and pipeline up 9% to £2.3bn

Regeneration & development pipeline at 30 June 2014

£0.6bn

£2.2bn

Urban Regeneration Order book, regeneration pipeline and preferred bidder

15

*Includes Muse share of GDV for projects carried out in joint venture

Remaining GDV £m* 2014 2015 2016 2017 2018 2019

Aberdeen Office 90

Basingstoke Office and retail 190

Blackpool Office and leisure 60

Chester CBQ Office and residential 130

Lewisham Gateway Residential 210

Leeds - Sovereign Street Offices - Pre-let to KPMG 20

Logic Leeds Distribution 100

Manchester Victoria Office and residential 120

Stockton Office and residential 110

Reading - Chatham Square Residential 40

Stockport Grand Central Offices and hotel 120

South Shields Car park, leisure and retail 100

Swindon Office and residential 270

Brixton/Lambeth Office and residential 140

Other Projects (10) Various 230

Joint Ventures (3) Various 42

Strategic Partnerships Various 320

Total Order Book & Pipeline 2,292

Preferred Bidder Various 120

John Morgan Chief Executive

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Operational Review

17

Construction Regeneration

Construction &

Infrastructure

Fit Out

Affordable

Housing Construction &

Services

Affordable

Housing Mixed-tenure

Urban

Regeneration

Investments

Group strategy

Cons 60%

• Continue to focus on the two distinct but complementary business activities of ‘Construction’ and ‘Regeneration’

• Maximising returns from existing schemes - regeneration developments and construction frameworks

• Complex construction and development schemes which benefit from an integrated ‘Group’ approach

Construction & Infrastructure

18

£m HY 2014 HY 2013 Change %

Revenue 567 593 -4%

Operating profit1 5.9 6.4 -8%

Margin % 1.0% 1.1% -10bps

1 Adjusted (HY 2013: before exceptional operating items)

• Overall trading conditions remain difficult

Dual challenge of inflation and competitively tendered work from previous years

Particularly relevant to construction activities

• Infrastructure revenue up 3%.

Transport – good progress in aviation, highways & rail

Energy, Water – AMP6 renewals

• Construction revenue down 10%

London and South regions where margin pressure is greatest

Lower activity from greater contract selectivity

Construction & Infrastructure

19

Outlook

• Strong order book growth, up 9% to £1.6bn

Higher proportion of negotiated, framework and two-stage tenders

Confidence in medium and longer term

• Short term challenges likely to remain

No improvement in performance and margin expected in H2

Manchester Rail Operating Centre

• £19.7m contract for Network Rail’s regional operation centre

• Completed and handed over in May 2014 • Rail capability - Manchester Victoria Railway

Station – new roof as part of overall investment in station

Fit Out

20

• Strong performance through the period as market recovers

Margin improvement driven by operating efficiency

Tender margins remain competitive

• London office market 75% of revenue

Refurbishment work 35%, new office fit out 65%

79% traditional fit-out, 21% ‘design & build’

• Strong order book growth, up 57% on year end to £223m

Higher proportion through more favourable procurement routes

Prospects & pending tenders up 13% (by value) on prior year

£m HY 2014 HY 2013 Change %

Revenue 195 2131 -8%

Operating profit 5.5 5.0 +10%

Margin % 2.8% 2.3% +50bps

1 Restated to include inter-company revenue

Fit Out

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Canadian High Commission, London

• £30m refurbishment of an iconic Grade II listed building situated on Trafalgar Square

• Creating the new permanent home of the Canadian High Commission in the UK

• Consolidation of two buildings; connecting Canada House with the adjacent building at 2-4 Cockspur Street

• A 45,000 sq ft refurbishment to be carried out in 38 weeks - appointed February 2014

Outlook

• Positive market recovery expected to continue

• Improving profitable pipeline of opportunities

• Revenue growth and continued margin enhancement expected in H2

Affordable Housing

22

£m HY 2014 HY 2013 Change %

Revenue 193 1862 +4%

Operating profit1 2.7 2.7 -

Margin % 1.4% 1.5% -10bps

1 Adjusted, before intangible amortisation 2 Restated to include inter-company revenue

• Regeneration mixed-tenure (25% of revenue)

c75% from open-market sales & c25% from social housing contracting

233 house completions, up 4% - supply constrained

Regeneration & Development pipeline up 7% to £765m

• Construction & Services (75% of revenue)

New Build Housing Contracting

margin impacted by inflation, but signs of levelling off

Planned Maintenance

margin held level against volume decline

Response Maintenance

Affordable Housing – Response Maintenance

23

• Underperformance from a combination of operational delivery inefficiencies, insufficient volume and ageing business systems

Full year loss expected to be c£3m-£3.5m

• Significant addressable market in response maintenance plus opportunity to widen service offering

eg Property and other FM services across Group divisions

• New management team recruited externally

highly experienced in response services and wider FM sector

• Investment of c£2m in business systems over 18 months

£m HY 2014 HY 2013

Revenue 33.5 34.3

Operating loss (1.7) (1.5)

Affordable Housing

24

The Tynings and Old Common, Michinhampton

Outlook

• Increase in investment in Regeneration through H2 and 2015

• Newer and more profitable mixed-tenure schemes

• Focus on turning “sticky” legacy assets into cash

• H2 performance impacted by Response Maintenance and timing of construction completions in Regeneration activities

• Turnaround plan in Response Maintenance

• A £9.3m contract for Stroud District Council for completion at the end of 2015

• Mixed tenure – 31 new council homes and 35 open market sale properties over two sites

• Selected by Stroud District Council via the HCA Delivery Partner Panel (DPP)

• Building the first Council homes in Stroud district for over 30 years

Urban Regeneration

25

£m HY 2014 HY 2013 Change %

Average capital employed 71 54 +31%

Revenue 42 34 +24%

Operating profit1 3.5 0.4 +775%

• Significant increase in profit in H1

Driven by completion of scheme phases in Blackpool, Brentford, Stockport

Progress towards target ROCE of 15%

1 Adjusted, before intangible amortisation 2 Includes £364m being the appropriate share of joint venture pipeline

• Combined order book and regeneration & development pipeline up 9%, to £2.3bn

• Pipeline remains well-spread across all sectors and regions

Residential 42% - 4,200 plot units. Commercial 37%

London 15%, South East 19%, North West 27%

Commercial 37%

Retail 8%

Leisure 4%

Industrial 8%

Residential 42%

Other 1%

Regeneration & Development pipeline by sector2

Urban Regeneration

26

Stockport Exchange: £145m mixed-use ‘gateway’ scheme

• Phase 1 completed Feb 2014: 1,000 space MSCP adjacent to the station

• Planning secured for Phase 2 May 2014: 115 bed hotel plus 43,000 sq ft BREEAM Excellent office building with ground floor retail space

Salford Central: £560m area-wide scheme through English Cities Fund JV

• £60m L&G funding and planning permission for Phase 1 office scheme secured May 2014

• Premier Inn hotel topped out June 2014. ‘Vimto Gardens’ residential element launched July 2014

Outlook

• Increase in capital employed throughout H2 and 2015

• Good visibility of future profits and returns

Market drivers remain positive - residential, PRS, commercial

Timing of profits dependent upon construction completions and programmes

Investments

27

£m HY 2014 HY 2013

Average capital employed 19 23

Operating profit 1.3 4.6

• Profit includes £1.7m from sale of investments

No material disposals expected in H2

Carrying value of remaining ‘PFI-type’ investments is £4.1m

Other capital employed includes interests in other schemes, LABVs etc

• Recurring revenue and profit from management service agreements through its Community Solutions business

• Focus is to maximise construction opportunities for Group from existing frameworks and new schemes

HY 2014 Summary and Outlook

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HY 2014

Outlook

• Significant contribution from Urban Regeneration, in line with Group strategy

• General construction margins still under severe pressure

• No easing of pressure on construction margins expected in H2. Likely to remain difficult

• Continued positive momentum in Fit Out and Urban Regeneration

• Investment in Regeneration activities to increase in H2 and 2015

• Higher quality order book supports delivery of future growth beyond 2014

Questions

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