LEADING POSITIONS OUR - Kier

 
LEADING POSITIONS OUR - Kier
OUR

LEADING
POSITIONS
Kier Group plc Annual Report and Accounts 2018
LEADING POSITIONS OUR - Kier
CONTRIBUTING TO
                                                             THE UK’S
                                                             GROWTH
Contents
Strategic Report                                             Kier invests in, builds and maintains the UK’s
2      At a glance                                           essential assets. We operate across a wide range
4​     Market positions
10     Investment case​                                      of sectors including bioscience, education, health,
12​
14
       Chairman’s statement
       Chief Executive’s strategic review
                                                             highways, housing, power and energy, property,
20​    Business model                                        transport and utilities.
22     Our markets
28     Strategy dashboard
30     Key performance indicators                            Our market-leading positions in Infrastructure
32
36
       Corporate responsibility
       Risk management framework
                                                             Services, Buildings and Developments & Housing
38     Principal risks and uncertainties                     allow us to capitalise on a number of opportunities
44     Divisional review: Property
45     Divisional review: Residential                        in these growing markets.
46     Divisional review: Construction
48     Divisional review: Services
50     Financial review
Governance
                                                              Infrastructure          WE PROVIDE
57
57
       Corporate Governance Statement
       Chairman’s introduction                                Services                ESSENTIAL
59
60​
       Governance in action
       Board statements
                                                              Turn to pages 4 to 5
                                                              for more information.   INFRASTRUCTURE
                                                                                      SERVICES
62     Leadership
64     Board of Directors
66     Effectiveness
69     Nomination Committee report​
71     Accountability​
73     Risk Management and Audit Committee report​
81
83
       Safety, Health and Environment Committee report​
       Relations with shareholders and other stakeholders​    Buildings               WE ARE THE
86
86
       Directors’ Remuneration Report​
       Annual statement of the Chair of the                   Turn to pages 6 to 7    UK’S LARGEST
89
92
       Remuneration Committee
       Remuneration at a glance
       Annual report on remuneration​
                                                              for more information.
                                                                                      REGIONAL BUILDER
102    Directors’ remuneration policy – summary
108    Directors’ Report
110    Statements of Directors’ responsibilities
Financial Statements
111​
118​
       Independent auditor’s report
       Consolidated income statement                          Developments            WE ARE A LEADING
119​
120​
       Consolidated statement of comprehensive income
       Consolidated statement of changes in equity
                                                              & Housing               PROVIDER OF
121​
122​
123​
       Consolidated balance sheet
       Consolidated cash flow statement
       Notes to the consolidated financial statements
                                                              Turn to pages 8 to 9
                                                              for more information.   AFFORDABLE HOUSING
176    Principal operating subsidiaries and business units
183    Company balance sheet
184    Company statement of changes in equity
185    Notes to the Company financial statements
Other Information
189    Financial record
190    Corporate information

Top left image: Sensor City, Liverpool.
LEADING POSITIONS OUR - Kier
Financial highlights

                                                                                                                                                                      Strategic Report
Strong market-leading positions and record order books of
£10.2bn providing confidence for the future.
Group revenue1, 2 (£bn)                                        Underlying profit before tax1, 2 (£m)            Underlying earnings per share (p)

£4.5bn                                                         £136.9m                                          116.7p

                                                                                                                                                                      Governance
    18                                                   4.5   18                                       136.9   18                                            116.7

    17                                              4.3        17                                126.1          17                                      106.8

    16                                            4.1          16                              116.4            16                                     99.5

    15                               3.3                       15                       89.8                    15                                 101.6

    14                         2.9                             14                74.1                           14                              88.1

Dividend per share (p)                                         Order book (£bn)                                 Net debt balances (£m)

69.0p                                                          £10.2bn                                          £(185.7)m

                                                                                                                                                                      Financial Statements
    18                                              69.0       18                                        10.2   (185.7)                                         18

    17                                             67.5        17                                 8.9                               (110.1)                     17

    16                                            64.5         16                               8.5                                    (98.9)                   16

    15                                55.2                     15                                  9.1                    (140.8)                               15

    14                                     57.6                14                      6.2                                     (122.8)                          14

Average net debt (£m)                                          Reported profit/(loss) before tax1, 3            Reported basic earnings/(loss)
                                                               (£m)                                             per share1, 3 (p)

£375m                                                          £106.2m                                          90.8p
    18                                                  375                18                           106.2             18                                   90.8

    17                                      320                 (14.2)     17                                   (27.2)    17

    16                               280                        (34.9)     16                                    (25.7)   16

    15                         243                                         15    19.9                                     15   12.6

    14          140                                                        14   15.2                                      14    15.3

1
     Continuing operations. Group and share of joint ventures.
2
     Continuing operations. Stated before non-underlying items.
     See note 4 to the consolidated financial statements.
3
     Restated to reclassify the profit on disposal of Mouchel Consulting
     within discontinued operations.

                                                                                                         Kier Group plc | Report and Accounts 2018                1
LEADING POSITIONS OUR - Kier
Strategic Report
At a glance

WE ARE
KIER GROUP
We offer our clients access to specialist expertise supported by a
breadth of capabilities.

Our vision                                                                Our values

Our vision is to be a world-class, customer-                              Collaborative
focused company that invests in, builds,                                  We work together: we consult to reach the
maintains and renews the places where                                     right solution and achieve more as a team.
we live, work and play.
                                                                          Enthusiastic
What we do                                                                We make things happen: we are resourceful
                                                                          problem-solvers, who enjoy what we do and
We create spaces and places that generate                                 get the job done.
opportunity and prosperity.
                                                                          Forward-thinking
How we deliver
                                                                          We look ahead: we positively challenge the
                                                                          way we do things to excel, and we care about
We bring specialist knowledge, sector-leading
                                                                          our clients and customers and the service
experience and fresh thinking to create
                                                                          we provide.
workable solutions.

Go online to find out more at www.kier.co.uk
Our corporate website has key information covering our sector
capabilities, markets, corporate responsibility and investor relations.

2     Kier Group plc | Report and Accounts 2018
LEADING POSITIONS OUR - Kier
Our business today

                                                                                                                                               Strategic Report
       Our four operating divisions are transitioning to a new reporting format focused on three
          market positions. This change supports the way the Group works with clients and
                                 underpins complementary capabilities.

      PROPERTY                            RESIDENTIAL                     CONSTRUCTION                          SERVICES
    Revenue £218m                         Revenue £374m                       Revenue £2.0bn                  Revenue £1.8bn

                                                                                                                                               Governance
 Operating profit £34.0m               Operating profit £25.9m          Operating profit £41.9m          Operating profit £93.0m

Our focus tomorrow

              From 1 July 2018, financial reporting will be under three key market positions.

                                                                                                                                               Financial Statements
  INFRASTRUCTURE                                        BUILDINGS                                DEVELOPMENTS
      SERVICES                                                                                     & HOUSING
         Top three infrastructure                The UK’s leading regional builder with               A top three provider of
   player in the UK with a number one            key positions in education, health and           affordable housing and related
    position in UK strategic highways                  on numerous frameworks                   maintenance services. A top property
                                                                                                       trader and developer

              Revenue                                         Revenue                                        Revenue

          c.£2bn                                          c.£2bn                                        c.£1bn
               Turn to pages 4 to 5                          Turn to pages 6 to 7                           Turn to pages 8 to 9
               for more information.                         for more information.                          for more information.

                                                     Our key market sectors

                                                                                 Power &
Bioscience    Education            Health      Highways        Housing                       Property      Transport           Utilities
                                                                                  Energy

                                                                                      Kier Group plc | Report and Accounts 2018            3
LEADING POSITIONS OUR - Kier
Strategic Report
Infrastructure Services

                          The barrel-vaulted glass roof at King’s Cross, London, refurbished by Kier.
LEADING POSITIONS OUR - Kier
WE PROVIDE
   ESSENTIAL
INFRASTRUCTURE
    SERVICES
         We are leveraging our skills to deliver for the
       end-user – be they road users, water consumers,
                 residents or rail passengers.
 The heritage of Kier rests in its track record         Kier is the number one provider of strategic
 of construction. However, today the Group’s            maintenance and management of highways
 capabilities are weighted more to services             services. Key clients include Highways
 with an increasing footprint in infrastructure         England, Transport for London and a number
 services. These services underpin the social           of local authorities across the country.
 and economic growth of the UK. Key                     In the utilities sector, the Group has
 infrastructure projects include Crossrail, the         specialist capabilities in the power and
 Mersey Gateway bridge, Hinkley Point C and             energy, water, telecommunications and
 currently the roll-out of one of the UK’s largest      rail sectors.
 rail infrastructure projects, HS2.
                                                        In power and energy, clients include UK
 Approximately 38% of the Group’s revenue is            Power Networks and Western Power
 in infrastructure services with a significant          Distribution and in the water sector clients
 presence across the UK in the highways and             include Anglian Water and Thames Water.
 utilities services sectors.                            In telecommunications, the Group is now
 The provision of both capital projects as well         the largest provider of domestic fibre
 as the maintenance of those assets enables             installation services for Virgin Media
 the Group to offer clients an end-to-end               following the acquisition of McNicholas,
 solution and enhanced value.                           and in rail provides electrical and
                                                        mechanical services to Network Rail.

      c.£2bn                                         38%                                 7%
           Revenue                                % of Group                       share of a £29bn
                                                   revenue                            UK market

       Turn to pages 22 to 23
       for more information.

                                                                    Kier Group plc | Report and Accounts 2018   5
LEADING POSITIONS OUR - Kier
Strategic Report
Buildings

                   The Elekta building, Crawley, Sussex.
LEADING POSITIONS OUR - Kier
WE ARE
THE UK’S LARGEST
REGIONAL BUILDER
      With growth in the UK’s population, more public
    facilities including hospitals and schools are needed
            as well as places to work, rest and play.

  Kier is a national builder with a network of         such as museums and hotels, and
  regional offices which ensures that every            developing commercial sites. Over 400
  project contributes to the local economy,            projects are undertaken each year.
  utilising local skills and drawing on the            With a focus on new building methods, Kier
  local supply chain.                                  has delivered over the last five years more
  Our portfolio covers local and regional projects     than £2bn of projects that have included
  as well as major projects. We have the               using off-site construction and modern
  flexibility and expertise to build across a range    methods of construction.
  of projects from a £250k extension to a              Kier is a leader in the education and health
  strategic asset costing hundreds of millions         sectors and has an established position on
  of pounds.                                           public frameworks and growing positions in
  Our activities support local economies with          the private sector.
  work including town centre regenerations,
  refurbishing transport hubs and interchanges,
  building schools, civic and leisure facilities

      c.£2bn                                       40%                                 3%
           Revenue                               % of Group                    share of a c.£67bn
                                                  revenue                            market

       Turn to pages 24 to 25
       for more information.

                                                                   Kier Group plc | Report and Accounts 2018   7
LEADING POSITIONS OUR - Kier
Strategic Report
Developments & Housing

                         A Kier affordable home.
WE ARE
     A LEADING
    PROVIDER OF
    AFFORDABLE
      HOUSING
    We work collaboratively to regenerate communities
    and to accelerate the delivery of houses to areas of
            the country with the greatest need.

Kier has a strong track record in regenerating      The increased use of technology within
areas through its property development and          the home has seen a change in the
housing activities. These capabilities, along       building of new homes. The inclusion of
with strong local knowledge and supply chain        smart design and technology within the
relationships, also allow us to provide             home is driving innovation. Kier Living has
maintenance services to local authorities and       invested £3m in upgrading its customer
private landlords with large housing portfolios.    relations software platform to help improve
With demand outstripping supply, Kier works         communications with its customers pre
closely with Homes England and other housing        and post sales completion.
providers to accelerate the development of          In the housing maintenance market, Kier
new affordable homes which help address the         is pioneering an entirely new predictive
national shortage in the UK market where over       approach to property asset management
300,000 homes are needed every year.                to pre-empt maintenance issues and so
                                                    prevent the need for costly and disruptive
                                                    reactive repairs.

    c.£1bn                                     22%                            £3.5bn
         Revenue                              % of Group                      Developments &
                                               revenue                        Housing pipeline

     Turn to pages 26 to 27
     for more information.

                                                                Kier Group plc | Report and Accounts 2018   9
Strategic Report
Our investment case

A COMPELLING PROPOSITION FOR
FUTURE GROWTH
The Kier business model generates a sustainable
dividend supported by a strengthening asset-backed
balance sheet.

A unique investment proposition

Our market-leading positions and long-term
customer relationships, combined with our
breadth of capabilities across a wide range                            Double-digit
of contracting projects and development                                profit growth
schemes, offer investors earnings growth
                                                                         to 2020
underpinned by the UK Government
imperative for improved and greater
economic and social infrastructure.

                                                     A balanced
                                                                          Target
                                                       capital
                                                                        15% ROCE
                                                       model

                                      Long-term    Efficient capital   A progressive
                                      order book   allocation model​     dividend​

10   Kier Group plc | Report and Accounts 2018
Strategic Report
Our three market-leading positions underpin our complementary capabilities

                                                                                                              Governance
 INFRASTRUCTURE                     BUILDINGS                           DEVELOPMENTS
     SERVICES                                                             & HOUSING
   Long-term contracts          Our regional network                       Our joint venture
   provide good future           supports local and                      strategy with clients
   order book visibility           regional client                           unlocks new

                                                                                                              Financial Statements
                                    relationships                            opportunities

          > 80%                       < £10m                                    > 2,000
     Focused on highways           Average project size​                      Residential units
         and utilities                                                       delivered per annum

            75%                         > 70%                                  c.£240k
     Maintenance services        On frameworks and use of                Average house price point
                                     two-stage bidding

      Lower risk                     12 month                                  > 50 live
     Cost plus/target cost       Average contract duration                  Property development
     infrastructure projects                                                schemes in progress

       Improving                        < 400                                   10-year
        Order book with            Contracts in progress                 Property development and
       long-term visibility                                               housing pipeline secured

                                                             Kier Group plc | Report and Accounts 2018   11
Strategic Report
Chairman’s statement

                                                                           A SOLID PERFORMANCE
                                                                           DEMONSTRATING
                                                                           RESILIENCE
Having completed my first year as Chairman of Kier, I am pleased
to announce that we have delivered a good set of results which are
in line with expectations.
Summary of results                                        The Board believes this programme will                  The Group’s net debt3 at 30 June 2018 was
We have delivered a good performance with                 further strengthen the business, and                    £186m (2017: £110m) following strong
both revenue and profit growth in line with               enhance our resilience in both the short                underlying operating cash conversion. This
our expectations. We remain focused on                    and long term.                                          performance has maintained a year-end net
delivering for our clients, reducing our net              During my first year with the Group, I have             debt to EBITDA ratio of 1x, in line with our
debt position and ensuring tight control                  seen at first hand the specialist capabilities          Vision 2020 target.
over the risk profile of our contracts and                that the Group provides and its attention to
                                                                                                                  Dividend
our balance sheet. All these areas remain                 client delivery, resulting in more than £3bn
key priorities for the Group.                             of repeat business flowing into the Group               The Board is recommending a full-year
                                                          each year. Our business makes a very                    dividend for the year of 69.0 pence per
More widely, our local authority clients                                                                          share (2017: 67.5 pence per share), up 2%
continue to face their own challenges                     significant contribution to the local
                                                          communities where we operate – through                  as cover continues to be built to 2x by
including spending constraints and                                                                                FY20. Subject to shareholder approval, the
demographic pressures which have led to                   building and maintaining key assets, by
                                                          providing employment and training,                      final dividend will be paid on 3 December
changes in their business models and                                                                              2018 to shareholders on the register at
reviews of what services they require from                delivering community initiatives and utilising
                                                          local skills and SMEs, where over 60% of                close of business on 28 September 2018.
their suppliers. These sector challenges                                                                          As an alternative to the cash dividend,
have all taken place against the broader                  Kier spend is invested. Our activities
                                                          provide opportunity and prosperity to local             shareholders will again be offered the
backdrop of ongoing Brexit concerns.                                                                              option to participate in a Dividend
                                                          communities and we are proud and
It is testimony to the Group’s resilience                 committed to that contribution.                         Reinvestment Plan (DRIP).
that it has continued to deliver improved
results and maintained a clear focus on                   Results                                                 Our people
delivering excellent services to its clients,             Group revenue1,2 for the year ended                     The success of Kier is testimony to the
whilst also keeping an eye on the future                  30 June 2018 increased by 5% to £4.5bn                  skills and dedication of our people and the
with the launch of the Future Proofing                    (2017: £4.3bn) and underlying operating                 relationships that they have with our clients
Kier programme.                                           profit1 increased by 10% to £160m                       and supply chain, delivering day in, day out.
This programme, which we launched in                      (2017: £146m), both solid performances.                 The safety of our people remains a priority
June, is focused on simplifying the Group,                                                                        and we are focused on their good health
                                                          The underlying basic earnings per share was             and wellbeing. On behalf of the Board,
making it more efficient and streamlined.                 116.7 pence1 (2017: 106.8 pence), up 9%.                I would like to thank our employees for
                                                                                                                  their ongoing contribution and commitment.

1
    Continuing operations. Stated before non-underlying items. See note 4 to the consolidated financial statements.
2
    Continuing operations. Group and share of joint ventures.
3
    Net debt is stated after the impact of hedging instruments.

12      Kier Group plc | Report and Accounts 2018
Corporate governance and the Board                    In light of this appointment, Nigel Brook          Outlook

                                                                                                                                                         Strategic Report
The Board spent a significant amount of               (Executive Director – Construction and             We have launched the Future Proofing Kier
time carefully reviewing the risk appetite            Infrastructure Services) and Nigel                 programme which will streamline the
and risk management of the Group. Given               Turner (Executive Director – Developments          business thereby enabling us to deliver a
the market developments, there has been               and Property Services) stood down from             more efficient service to clients, respond
a particular focus on contract risk profile           the Board and left the business on                 to changes in our markets and capitalise
and key contract controls.                            1 August 2018.                                     on growth opportunities, whilst, importantly,
                                                      I would like to take this opportunity to thank     also accelerating the reduction of the
I am pleased to report that our strong record
                                                      Nigel and Nigel for their contribution over        Group’s net debt position.
of repeat business, often within long-term
framework agreements and two-stage                    the years to the Group and on behalf of the        Our strong market-leading positions, our
bidding processes, and a growing order                Board, I wish them well for the future.            record c.£10.2bn Construction and
book helps to mitigate any material risk.             Having completed nine years on the Board,          Services order books, and our £3.5bn

                                                                                                                                                         Governance
With the launch of the Future Proofing Kier           Nick Winser has decided not to offer               property development and residential
programme, it was identified that the                 himself for re-election at the November            pipelines, will see the Group deliver on its
appointment of a Chief Operating Officer was          AGM. Nick has played an important role             Vision 2020 targets. In addition, the Future
key to delivering the programme’s objectives          on the Board, in particular as the Chair of        Proofing Kier programme positions the
and, on 1 August 2018, Claudio Veritiero              the SHE Committee. I would like to                 Group well for an improvement in operating
was appointed to the role of Chief Operating          express my thanks to Nick for his support          margins and higher cash generation,
Officer. Claudio was previously the Strategy          following my appointment as Chairman               culminating in a net cash position for FY21.
and Corporate Development Director, joining           and, on behalf of the Board, wish him well
Kier in 2011 as the Managing Director of the          for the future. Kirsty Bashforth will take
Services division. Prior to joining Kier, he was      over the role of Chair of the SHE Committee
the Chief Operating Officer of Speedy Hire            with effect from the conclusion of the AGM.

                                                                                                                                                         Financial Statements
plc, having spent his early career with the           I look forward to working with Kirsty in
investment banking business of Rothschild.            her new role.                                      Philip Cox CBE
I would like to congratulate Claudio on his                                                              Chairman
new role.
                                                                                                         19 September 2018

Governance highlights

   Nomination Committee                                                          Risk Management and
                                                                                 Audit Committee
   ›› Recommended the appointment of Claudio Veritiero as                        ›› Oversaw the appointment of Grant Thornton as the
      Chief Operating Officer;                                                      co-sourced internal auditor, succeeding KPMG;
   ›› Challenged management to increase diversity within the                     ›› Oversaw the continued development of the Group’s
      organisation and agree KPIs to monitor progress; and                          systems of risk management and internal control; and
   ›› Monitored progress of the Executive Director/senior                        ›› Worked with PwC to continue to ensure a rigorous and
      management succession plan.                                                   robust approach to the annual audit.

         Turn to the Nomination Committee                                               Turn to the Risk Management and Audit
         report on pages 69 and 70.                                                     Committee report on pages 73 to 80 (inclusive).

   Safety, Health and                                                            Remuneration Committee
   Environment Committee
   ›› Reviewed the Group’s performance against safety,                           ›› Set the Executive Directors’ 2018/19 base salaries;
      health and environmental KPIs;                                             ›› Assessed performance against the 2018 bonus targets
   ›› Approved the launch of the Group’s health and wellbeing                       and set the 2019 bonus targets; and
      strategy; and                                                              ›› Discussed the latest trends in executive remuneration.
   ›› Monitored progress against the Group’s ’30 by 30’
      environmental strategy.

         Turn to the Safety, Health and Environment                                     Turn to the Directors’ Remuneration Report
         Committee report on pages 81 and 82.                                           on pages 86 to 107 (inclusive).

                                                                                                Kier Group plc | Report and Accounts 2018          13
Strategic Report
Chief Executive’s strategic review

                                                                           A STABLE PLATFORM FOR
                                                                           FUTURE
                                                                           PROGRESS
This year’s performance has been underpinned by our leading
market positions. We have delivered increased profits and our
order books are at record levels. With changing market conditions,
it is important we remain fit and healthy for future growth. We have
therefore launched the Future Proofing Kier programme which is
focused on improving our ways of working.
We have market-leading positions supported by
                                                                                                                      Record order book
specialist capabilities, enabling us to deliver for
our clients.
How would you summarise the                              It is anticipated that our decision to
                                                                                                                      £10.2bn
                                                                                                                      (2017: £8.9bn)
Group’s performance in 2018?                             stabilise investment in the Property
                                                         and Residential businesses and the
Overall it was a good year for Kier and I am
                                                         Future Proofing Kier programme will
pleased with our underlying performance.
                                                         significantly reduce net debt over the
This performance is particularly noteworthy
                                                         next two to three years.
given the challenges that the contracting
sector has had to address during the year.               Following the acquisition of McNicholas in
                                                         July 2017, we have successfully completed
We have made progress on our key financial
                                                         the integration of that business, making us
and non-financial targets and are on track to
                                                         one of the largest providers of services in
deliver on our Vision 2020 goals. We
                                                         utilities with specialisms in the energy and
increased profit by 10%, delivering full-year
                                                         power, telecoms and water sectors.
                                                                                                                      Revenue1,2

                                                                                                                      £4.5bn
underlying operating profit of £160m in line
with our expectations and market                         We have also performed well against our
consensus. We also maintained our market-                Vision 2020 non-financial targets covering
leading positions in the infrastructure                  safety, customer experience, employee
                                                         engagement and retention, and                                (2017: £4.3bn)
services and buildings markets, and our
top-three position in the affordable housing             sustainability. These targets are intrinsically
and maintenance market.                                  linked to our strategic priorities and
                                                         business model, creating value for our
With greater investor attention on debt
                                                         customers and other stakeholders.
following the demise of Carillion, our net
debt position remains under focus. Net debt
increased in the year, as expected, following
the acquisition of McNicholas in July 2017.

1
    Continuing operations. Group and share of joint ventures.
2
    Continuing operations. Stated before non-underlying items. See note 4 to the consolidated financial statements.

14      Kier Group plc | Report and Accounts 2018
“OUR CLIENTS’ PRIMARY

                                                                                                                                               Strategic Report
                                                 OBJECTIVES ARE TO SERVICE
                                                 THEIR END-USERS AND WE NEED
                                                 TO SUPPORT THAT GOAL”

                                                                                                                                               Governance
Turning to safety, which is at the heart        How will the new Future Proofing               What is your balance sheet strategy?
of our licence to operate and remains a         Kier programme help to drive                   Our debt position remains a key area of
priority for clients when procuring work,       efficiency across the Group?                   focus for us and our investors. Historically
I am delighted to say that our safety                                                          we have used our asset-backed debt
performance in 2018 was encouraging.            Following the launch in June of Future
                                                Proofing Kier, our efficiency and              strategy to fund our Property and
We achieved an accident incidence rate                                                         Residential activities. We have now taken
(AIR) of 96, which is UK-leading for the        streamlining programme, we are currently
                                                focused on improving our productivity,         action to accelerate the reduction of our
Group as a whole and reflected a 26%                                                           net debt position and stabilise the Group’s
improvement on the previous year.               removing duplication of processes and
                                                non-value activities, and disposing of         investment in our Property and Residential
I am pleased with our overall performance       non-core operations. It is anticipated that    divisions through the use of joint ventures
for the year.                                                                                  with our clients. Our current average net

                                                                                                                                               Financial Statements
                                                the actions taken during FY19 will deliver
                                                annual profit and cash flow improvements       debt position of £375m is backed by
Can you explain the rationale                   of 10% of profit from operations, c.£20m       assets at a cost of £500m, which provides
for the move to the three                       from July 2019, with targeted proceeds of      significant cover for our net debt position.
market positions?                               £30m-£50m from the disposal of non-core        The average net debt figure for this year
The transition to the three market positions    businesses. This programme will help the       increased on the previous year as a result
of Infrastructure Services, Buildings, and      Group achieve its target of year-end net       of the acquisition of McNicholas and the
Developments & Housing, reflects the            cash and average net debt of £250m for         reduced Construction revenues over the
increasing demand in these markets              FY21. The programme activity undertaken        winter due to bad weather, which have
from customers as well as our                   in the current financial year will be cash     since returned to levels in line with our
specialist capabilities.                        and earnings neutral and I expect the          expectations. I believe our efforts to reduce
                                                programme to deliver material                  net debt will yield results, and these will
In adopting this approach, we also aim to
                                                improvements in operating margins and          now be further strengthened by the results
address the main challenges facing the
                                                cash generation in the financial year ending   of the Future Proofing Kier programme.
UK today. All three of these markets have
                                                30 June 2020 and beyond.
robust long-term fundamentals which are                                                        Pension surplus
driven by changing demographics and             Our alignment to three market positions
                                                                                               Looking more broadly at the balance sheet,
the increasing use of technology. As part       and our significant investment in new
                                                                                               our pension schemes are now in surplus.
of Future Proofing Kier programme, a            systems provides the opportunity to
                                                                                               Our current pension scheme is fully funded
re-aligned business model focuses the           optimise how we operate. We want to be
                                                                                               and we therefore expect our tri-annual
efforts of our teams and makes it easier        resilient to accommodate changes in the
                                                                                               valuation discussions in March 2019 to be
for us to deliver for our clients.              marketplace; our markets continue to
                                                                                               positive. At the same time, our working
                                                evolve, which requires us to be flexible and
Whatever sector they operate in, our                                                           capital performance is strong, with
                                                front-footed to ensure we meet the
clients’ primary objectives are: to service                                                    operating cash conversion for 2018 at
                                                changing needs of our clients and the
their end-users – be they water consumers,                                                     more than 100%, which shows we continue
                                                markets in which they operate.
road users, housing tenants or rail                                                            to maintain very good financial discipline.
passengers – as best they can. Through          Streamlining and transforming the Group in     Having reached the end of our major
our three market positions, we aim to           this way will make us more agile and give      systems investment, we also expect our
leverage our skills, knowledge and              greater responsibility and accountability to   capital expenditure to return to normalised
innovation to provide solutions which make      our operations. In procurement, for            levels of around £30m per annum, having
this happen as efficiently and effectively as   example, we have created a powerful            been around £90m per annum for the last
possible. We also want to build closer          back-of-house shared services function.        few years.
relationships with clients, so we can better    The Future Proofing Kier programme will
understand the challenges they face and         ensure this and other similar back-of-office
find solutions with them.                       functions link seamlessly to the operations.
                                                Overall, the programme will improve the
                                                resilience of the Group in a changing market
                                                and help us to better leverage the system
                                                investments we have made while strongly
                                                positioning the Group for 2020 and beyond.

                                                                                        Kier Group plc | Report and Accounts 2018        15
Strategic Report
Chief Executive’s strategic review continued

“WE WANT TO USE OUR POSITIONING TO
 BUILD CLOSER RELATIONSHIPS WITH
 CLIENTS, SO WE CAN BETTER UNDERSTAND
 THE CHALLENGES THEY FACE”
How did market developments                       Collaboration                                   In health, the Government has recently
impact Kier in 2018?                              We are known for our strong relationships       announced an increase in NHS funding of
                                                  with clients, working collaboratively with      3.4% pa. Whilst it is expected that much of
There has been a significant level of
                                                  them, anticipating issues they face,            this investment will go into front-line
turbulence in our markets over the past
                                                  providing problem-solving solutions             services, we expect this will create an
12 months. Unsurprisingly, this has led
                                                  and innovation.                                 additional pipeline of opportunities in
to increased scrutiny of the performance
                                                                                                  related sectors such as bioscience where
and financials of companies in our                A good example of working collaboratively       we have also successfully established a
sectors and the ways in which we operate          is our work with Highways England, who          strong presence over the last few years.
– for example, how we work with the supply        have long-term, stable budgets and visible
chain and SMEs with particular reference          future investment plans. As a key supplier      In addition, the UK’s investment in aviation,
to payment terms.                                 to Highways England, we work with them as       with the approval for expansion at
                                                  they develop solutions such as their Routes     Heathrow airport, will provide a major,
We are confident that Kier has always had
                                                  to Market strategy and are helping them         multi-year boost to a sector which is seeing
and will continue to have strong financial
                                                  with the transition to this model. Closer       growth across in the UK. Meanwhile, public
and operational disciplines particularly in its
                                                  working with our clients provides the best      policy is increasingly supporting modern
commercial and risk processes.
                                                  outcomes and is critical to securing new        methods of construction (MMC) and we
For example, in Construction our focus is                                                         have already delivered over £2bn of
                                                  work, such as the recently announced
on high-volume, modest-value contracts,                                                           projects that include MMC over the past
                                                  extensions to Highways England Areas 3,
primarily pursuing new work under                                                                 five years.
                                                  6, 8 and 9 contracts.
frameworks or lower risk contract models.
                                                                                                  In our Residential division, we are set to
We operate over 400 projects at any one           Sector opportunities                            benefit from the UK Government’s Help to
time, with an average value of about              More generally in transport, a market           Buy scheme that has been extended to
£7-8m. This helps us spread our                   sector where Kier has established               2021, supporting the increase in the
operational risk and means we are more            credentials, there are considerable             building of affordable housing. With a
agile to respond to market developments.          opportunities arising in local authority        national shortfall of a least one million
We are a key supplier to government in the        roads, and in the rail sector with the launch   homes, this is a market with significant
markets in which it is investing in e.g.          of its next investment period, CP6. Our         growth potential and one we are actively
affordable housing, social and economic           credentials in rail have been significantly     targeting. Our innovative approach to using
infrastructure. Many of our businesses            enhanced following the acquisition of           joint ventures, such as the Homes England
operate through government frameworks             McNicholas and we expect to play an active      joint venture launched in May, is enabling
and five-year funding periods, which gives        role in the next review period, CP6.            us to accelerate the development of our
us access to more visible pipelines of work.      In infrastructure we anticipate the increase    residential land bank through a capital
More specifically, as a result of market          in demand for UK power generation will          efficient model. The creation of the Homes
developments in the year including the            present opportunities in the nuclear,           England joint venture has created an
liquidation of Carillion, Kier acquired a         renewables and gas sectors over the next        opportunity for Kier to increase the scale of
greater share of the HS2 project and the          five-to-ten years. We will continue to          its affordable house building activities by
Highways England’s Smart Motorways                monitor these markets closely and we are        c.500 units per annum from 2020.
portfolio. We transferred over 150 people         also in discussion with many of our water
into the company to help deliver these            company clients as the water cycle, AMP7,
increased project requirements and worked         starts its procurement phase.
closely and collaboratively with our clients      In Buildings, we remain the UK market
during these challenging periods.                 leader with a focus on key sectors such as
                                                  education and health. In education,
                                                  expenditure is driven by a growing
                                                  population and the need to continually
                                                  invest in the existing estate.

16    Kier Group plc | Report and Accounts 2018
Strong progress against Vision 2020

                                                                                                                                             Strategic Report
Since 2014 we have made good progress on our Vision 2020 targets.
Key metrics                                                  2020 target                                                        June 2018

  Annual average operating
  profit growth
                                                             > 10%                                                        On target

  Property – ROCE
                                                             > 15%                                                             Ahead

                                                                                                                                             Governance
  Residential – ROCE
                                                             to 15%                                On track and improving

  Construction – EBITA
                                                             to 2.5%                                                       On track

  Services – EBITA
                                                             to 5.0%                                                       On track

                                                                                                                                             Financial Statements
  Net debt: EBITDA
                                                             1:1                                                          Achieved

  Dividend cover
                                                             2x                                    On track and improving​

How is Brexit affecting your                  Our regional presence will therefore            During the year, we maintained our focus
markets and business?                         significantly mitigate any Brexit labour        on promoting a good safety culture. As the
                                              mobility risk that arises, as will our sector   majority of our safety incidents are slips,
We have seen no material impact of
                                              diversification. Our property development       trips and minor falls, our priority is to
Brexit to date. However, the Kier internal
                                              business has experienced limited change in      improve behaviour rather than overhaul
Brexit Taskforce team monitors our
                                              occupier demand and investment, but it          working policies and practices.
supply chain-labour mobility and materials
                                              continues to closely monitor the market         To this end, in 2018 we engaged and
availability. With continued uncertainty,
                                              and the phasing of property transactions.       partnered with external safety consultants
we are scenario-planning and working
with our clients and others in the industry                                                   to address the issue of minor incidents,
                                              How did Kier perform from a non-
to ensure we are able to respond to                                                           particularly in our Highways and Buildings
                                              financial perspective this year?                businesses. Looking ahead, we will
future developments.
                                              Safety                                          continue to progress with our current
We are particularly focused on monitoring
                                              Our safety performance in 2018 was              efforts, focus more on every day
the issue of labour mobility. The strength
                                              encouraging, although improvements can          behaviours, and drive improvements in
of many of our supply chain partners is
                                              always continue to be made. Our safety          areas such as health and wellbeing.
directly linked to the flow of people and
skills into the UK, particularly in London    focus is a key element of how we operate
                                              as a business. We achieved an accident
                                                                                              Health and wellbeing
and the South East, where a larger                                                            The health and wellbeing of our teams,
proportion of our supply chain workforce      incidence rate (AIR) of 96, reflecting a 26%
                                                                                              both Kier employees and the supply chain,
is made up of non-domestic individuals.       improvement on the previous year. As a
                                                                                              is key as it directly impacts on operational
                                              recognised measure of safety performance,
                                                                                              safety. We have approximately 100 health
                                              our AIR not only reflects how we do
                                                                                              champions across the Group who are
                                              business but is a key differentiator in
                                                                                              trained to monitor and assess employees’
                                              the market. Indeed, safety is becoming
                                                                                              mental and physical wellbeing. They are
                                              increasingly important for our clients at
                                                                                              supported by a team of qualified on-site
                                              the selection stage.
                                                                                              healthcare professionals. We provide
                                                                                              fitness-for-work health screening for Kier
                                                                                              employees as well as ongoing care
                                                                                              through the occupational health team.

                                                                                      Kier Group plc | Report and Accounts 2018         17
Strategic Report
Chief Executive’s strategic review continued

Diversity                                       We also continued our strong focus on our       The breadth of our Services business also
Diversity and inclusion is a key priority and   graduate and apprenticeship programme,          provides both job interest and career
one where we are taking meaningful action       where we have maintained more than 5%           opportunities for our employees, and stable
as a business. Our business and industry        of our workforce on approved training           financial performance. We have chosen to
already employs people with very diverse        schemes. As a member of the UK’s 5%             work in markets where we provide critical
socio-economic backgrounds, but we              Club, we have approximately 1,200               services, such as repairing roads or fixing
acknowledge we have considerable scope for      graduates and apprentices currently             leaks in water networks – essential
improvement in the areas relating to ethnic     engaged in training across the business.        everyday maintenance that has to be
and gender diversity. We have established       As a responsible business, it is vital we are   undertaken, and where future investment
several internal forums, such as our            in a position to develop the necessary UK       is more certain.
Balanced Business Network and the LGBT+         skills and expertise to support industry
                                                                                                We are increasingly using joint ventures
and Allies Network. In addition, we have        growth in the future. We are actively
                                                                                                across our Property and Residential
created a Gender Strategy Steering Group        seeking to encourage the Government and
                                                                                                operations to make more efficient use of
which is responsible for driving leadership     the public sector to make this level of
                                                                                                our capital. This is evidenced through the
action on gender. We have a particular focus    commitment a pre-requisite for tenders.
                                                                                                Cross Keys and Homes England joint
on gender pay, where our median pay gap         We are continuing to promote our Shaping
                                                                                                ventures announced over the last year, and
reported this year was 20.2%, higher than       Your World campaign, launched in
                                                                                                the use of joint ventures on many of our
the national average. We have fewer women       September 2017, which encourages
                                                                                                property development schemes, such as
in senior roles which means we have             11-15 year olds to consider careers in
                                                                                                those with Network Rail and Watford
proportionately more men earning higher         construction and the built environment.
                                                                                                Borough Council.
salaries. We are focused on tackling this gap   We are proud to report that we have
to increase the number of women coming          exceeded the targets we put in place for        We provide specialist services to a broad
into Kier and progressing to senior roles.      the first year of the campaign with over 350    range of sectors, and we have a track
                                                Shaping Your World ambassadors across           record of problem-solving and providing
In addition to Group initiatives, our                                                           fresh thinking to our clients. For example,
                                                the Company who regularly visit schools to
operational businesses support a number                                                         we regularly use off-site construction
                                                explain the industry and to talk about the
of key topics which are of particular                                                           and modern methods of construction
                                                many and varied career opportunities
importance to their clients. For example,                                                       on projects. As part of this process,
                                                available. This campaign reached more
in our Highways business, we have made                                                          we offer our clients a unique breadth of
                                                than 15,000 students in its first year.
good progress around disability, and in                                                         complementary capabilities to help meet
2018 we achieved the Disability Confident       Environment                                     their project requirements.
accreditation for our work, supporting          In 2018 we launched the first three
Highways England’s focus on this topic.         environmental initiatives as part of our 30     Supply chain
                                                by 30 strategy, which aims to reduce our        Our focus is truly local, using local
                                                energy usage by 30% by 2030. The strategy       resources and talent to benefit the local
     Shaping Your                               covers a broad range of activities, from the    community. It’s what I call a national
                                                reduction of construction waste to water        footprint with a local flavour. Our regional
     World campaign                             consumption and use of plastics. It should      network of over 80 offices enables us to

     350+
                                                begin to deliver financial savings over the     deliver projects and services anywhere in
                                                next 12 to 18 months, and over time will        the UK. Another key differentiator is the fact
                                                enable us to make a greater contribution to     that, as a result of our average project size
     Kier ambassadors                           environmental protection and sustainability.    and the every day services we provide, we
                                                                                                use very local SME supply chains. Around
                                                What sets Kier apart from

     15,000+
                                                                                                the business, we have a strong regional
                                                the competition?                                focus, unique among our peers, having
                                                                                                developed robust supplier relationships built
                                                The Kier business model is at the heart of
                                                                                                on local knowledge and trust over many
     Students engaged                           our competitive differentiation. Through our
                                                                                                years. These relationships have helped us
                                                three market positions, we aim to leverage
                                                                                                establish powerful market positions outside
                                                our skills, knowledge and innovation to
                                                                                                of London and the South East.
                                                provide solutions which make this happen
                                                as efficiently and effectively as possible.     Collaboration with our supply chain is also
     Safety: Group                              Our business model provides stability and       critical, and each year our businesses
     Accident Incidence                         certainty when individual markets fluctuate.    spend time with our suppliers, working to
                                                                                                understand how we can better partner and
     Rate (AIR)                                 In Construction, our high-volume, low-value
                                                                                                innovate alongside them. Keen to deepen

     96
                                                approach offers a lower risk model which
                                                                                                these relationships and ensure continuity
                                                protects us from profit and cash flow
                                                                                                of supply, we offer a variety of contract
                                                volatility. It provides us with long-term
                                                                                                types and payment mechanisms, including
                                                visibility, with projects often delivered in
     Improved by 26%                            framework arrangements, many with
                                                                                                early payments schemes for the supply
     (2017: 130)                                                                                chain. These are popular, often helping
                                                five-year terms.
                                                                                                them with their working capital challenges,
                                                                                                a typical feature of the sector.

18     Kier Group plc | Report and Accounts 2018
“THROUGH OUR THREE MARKET

                                                                                                                                         Strategic Report
 POSITIONS, WE AIM TO LEVERAGE
 OUR SKILLS, KNOWLEDGE AND
 INNOVATION TO PROVIDE
 SOLUTIONS WHICH

                                                                                                                                         Governance
 ARE EFFICIENT
 AND EFFECTIVE”
Watch Haydn Mursell’s interview
online – www.kier.co.uk

                                                                                                                                         Financial Statements
These activities are clear recognition of the   We are on track to deliver on our Vision
importance of our suppliers to our long-term    2020 goals. We have a record order book
business success and sustainability.            of c.£10.2bn, and our Construction and
                                                Services divisions are 90% secured, with
In our Highways business, we have brought
                                                improved visibility of the work they need to
new technology into the sector. For
                                                undertake in the 2019 financial year. We
example, the Kier Highways team has
                                                also have a pipeline of work of £3.5bn in
transferred the concept of Roadrake, which
                                                our property and residential businesses.
is used to clean beaches in Australia, to
                                                These developments will provide the Group
the UK to clear litter on the Highways
                                                with greater resilience as we progress to
England network. This technology is now
                                                2020 and beyond.
being rolled out on to other parts of the
Highways England network. Working in            I believe our core businesses are
collaboration with our supply chain, we are     performing well and we have leading
responsible for introducing a range of new      positions in our chosen markets. Kier is
technology into the highways market which       very well placed for the future.
Highways England and other members of
their supply chain have adopted. We are
proud of our track record in this field.

What are your future priorities?
The UK’s demographic trends support our         Haydn Mursell
three market positions while our balance        Chief Executive
sheet will continue to strengthen and
                                                19 September 2018
benefit further from the implementation of
our Future Proofing Kier programme.
We are focused on reducing our net debt,
which will also benefit further from the
Future Proofing Kier programme. We will
continue to pursue growth in our core
operations, streamlining the Group’s
portfolio of businesses as necessary, and
we will increase the operational efficiency
of the business, ensuring we continue to
deliver for our clients and be their trusted
partner. In light of market challenges, we
will continue to closely monitor the risk
profile of the Group.

                                                                                        Kier Group plc | Report and Accounts 2018   19
Strategic Report
Business model

BUILT TO DELIVER
SUSTAINABLE VALUE
Our vision and strategy                                             Delivering value to stakeholders
The Kier vision is to be a world-class, customer-focused
company that invests in, builds, maintains and renews the             Employees
places where we live, work and play.
                                                                      Engaged people
Our Vision 2020 strategy has been consistent since its
                                                                      ›› 60% engagement
creation in 2014 and is as follows:
                                                                      ›› 89% retention rate
›› Never compromise anyone’s safety, health or wellbeing.
›› Increase the visibility of our income streams by increasing
   the proportion of revenues from services and framework
   contracts. This strengthens our order book and gives the
   Group resilience.                                                  Supply chain
›› Provide built environment assets for clients in public and
                                                                      Kier is a reliable partner to its supply chain
   regulated sectors, and selectively for private sector clients.
›› Aim to deliver exceptional customer experience, so that            ›› Over 60% of spend with small and medium
   clients choose to give us repeat business and buy                     enterprises (SMEs), exceeding the Government
   additional services.                                                  target of 33%
›› Focus on investing in, building and maintaining assets for         ›› 80% of supply chain are local SMEs
   which there are fundamental demand drivers, such as
   demographics and technological developments.
›› Aim to be top 3 in our chosen markets; this being an
   outcome of providing reliable, good quality, customer-             Clients
   focused service delivery.                                          Delivering for clients and their customers
›› Improve long-term profitability by investing in the                ›› More than 70% of revenue from repeat and
   effectiveness of systems and processes and
                                                                        multi-service clients
   developing our people.
This strategy is delivered through a focus on our six strategic
priorities (see pages 28 and 29 for more information).

                                                                      Communities
                                                                      Kier adds value to the community and society
                                                                      ›› Our network of regional offices supports projects
                                                                        with benefit for local communities and economies

                                                                      Investors
                                                                      Creating sustainable earnings
                                                                      ›› 16% average annual growth in underlying
                                                                        operating profit since 2014

20    Kier Group plc | Report and Accounts 2018
Strategic Report
                                                                         Employees

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Capital allocation model                                                           The Kier stakeholder ecosystem
Kier has an efficient capital allocation model in which we                         Our success depends upon each of these stakeholders
generate cash from our contracting business and invest                             playing a role in the Kier business model and benefiting
that cash for an additional return in the Property and                             from that participation beyond just transactional payments.
Residential businesses, predominantly through leveraged                            This ecosystem includes both those with whom we contract,
joint ventures. During the year, investment in these                               such as clients and subcontractors, and others, such as
businesses has been stabilised.                                                    our clients’ customers, who are directly affected by how
                                                                                   our services are delivered.

                                                                                                                      Turn to pages 84 to 85 for more information
                                                                                                                      on how the Board takes stakeholders into
                                                                                                                      consideration during its decision-making.

                                                                                                    Kier Group plc | Report and Accounts 2018                   21
Strategic Report
Our markets: Infrastructure Services

PROVIDING
SUSTAINABLE OPPORTUNITIES

                                            The market for UK infrastructure construction and
     Investment in                          maintenance is £29bn. This is forecast to grow
     infrastructure
                                            on average at 6% pa from 2018 to 2020.
     £600bn
     2017-2027                              Infrastructure services is a robust and                The Group’s long-term infrastructure
                                            sustainable market, in which Kier has a 7%             contracts, whether maintenance or capital
                                            market share. Demographic changes and                  frameworks, provide sustainable income,
                                            technological developments combine to                  the opportunity to build long-term client
                                            provide conditions for the sustained need for          and supply chain relationships and provide
                                            new and maintained infrastructure, regardless          a stable environment in which to invest.
                                            of economic or political cycles. Long-term
                                            investment is further supported by the political       Market dynamics
                                            consensus that infrastructure supports                 Roads
     Planned broadband                      economic growth, nationally and regionally.            The Government’s Roads Investment
                                                                                                   Strategy was introduced to provide visibility
     investment                             This political consensus has, over years,
                                                                                                   on capital and maintenance spend on the
                                            translated into a series of investment

     £9bn                                   programmes which provide visibility of                 English and Welsh motorway and trunk
                                            spend over regulatory cycles of at least               roads network. The first investment period
                                            five years. Examples of these include the              known as RIS1, between 2015 and 2020,
     2017-2021                              Roads Investment Strategy (RIS), covering              and worth £17bn. Statements from
                                            the strategic road network, the rail sector            Highways England suggest that spend in
                                            Control Periods (CP) and the water sector              the RIS2 period, between 2020 and 2025,
                                            Asset Management Periods. There is also                could almost double to £30bn.
                                            £9bn of planned investment in broadband                Technological changes, such as electric
                                            infrastructure. Overall the Projects &                 vehicles (EVs) and connected and
                                            Infrastructure Authority forecasts £600bn in           autonomous vehicles (CAVs) will
                                            infrastructure spend in the ten years to 2027.         necessitate a change in the road
                                                                                                   infrastructure over the next 10-15 years.

                                            Regulatory periods ensure steady stream of work to 2028

                                            Rail                          CP5                          CP6

                                            Strategic highways                 RIS1                           RIS2

                                            Gas distribution                      RIIO GD1                            RIIO GD2

                                            Power distribution                             RIIO ED1                                    RIIO ED2

                                            Power/gas transmission                    RIIO T1                         RIIO T2

                                            Water                              AMP6                                  AMP7
                                                                        2018    2019    2020    2021   2022    2023    2024     2025    2026      2027   2028

22    Kier Group plc | Report and Accounts 2018
The Group is working with Highways

                                                                                                                                          Strategic Report
England on their planning for these
future developments. EVs are powered
by electricity and need charging
infrastructure; connected vehicles will be
able to communicate with other vehicles
and external highways systems, such as
safety systems; and autonomous vehicles,
at their highest level, are driven without
human intervention. These developments
are all the result of innovation in the
automotive sector, and the UK’s use of
EVs and CAVs is forecast to grow strongly

                                                                                                                                          Governance
in the coming years.                            Technological developments​
Utilities                                       Kier recognises the importance that connected and autonomous
Preparations are underway for the AMP7          vehicles (CAVs) will play in the future design of highways and their
(2020-2025) water regulatory period. It is      use by travellers. Vehicles that can communicate with each other,
expected that spend will be broadly at          read the physical environment and, in time, automate driving
a similar level to the £44bn spend in           functions, provide opportunities for increasing safely the volumes
AMP6 and that the regulator will continue       of vehicles on the road network, whilst also improving road users’
to put an emphasis on customer service,         journeys. Kier is collaborating with Highways England on how best
leakage detection, and value for money          to adapt the strategic road network to anticipate the introduction
for the water customer. Kier has a track        of CAVs in the years ahead.
record of focusing on customer (end user)

                                                                                                                                          Financial Statements
service and we are working with water
companies on innovative approaches
to leakage detection.

Rail
The rail sector pipeline is made up broadly
                                                                                                                 0
of two parts: the maintenance of, and
improvements to, the current network; and
significant additions to the UK’s rail
infrastructure. The former is predominantly
through Network Rail. Based on Government
statements, it is expected that the CP6
(2019-2024) programme will be higher than
CP5 (£38bn). The latter includes some of
the largest rail projects for generations and
includes HS2 and major rail investments in
the north of England. Both provide
significant opportunities for growth for our
Infrastructure Services business.

Travel by UK rail passengers (km)               Transport electricity demand

                                                2017=100
80                                              300
                                                250
60
                                                200
40                                              150
                                                100
20
                                                50
0                                               0
       2000          2008               2017         2017               2023            2030

Source: ORR                                     Source: BEIS Reference Scenario

                                                                                         Kier Group plc | Report and Accounts 2018   23
Strategic Report
Our markets: Buildings

BRINGING SOCIAL
OPPORTUNITY AND PROSPERITY
TO LOCAL COMMUNITIES
                                            The UK market for the construction,
     Growth in the number                   maintenance and refurbishment of buildings
     of school age children
                                            is valued at £67bn.
     8%
     2017-2027                              The strategy for the Buildings business is       Market dynamics
                                            to maintain revenues in our core sectors
                                                                                             Health
                                            while materially increasing the contribution
                                                                                             To meet the increasing demand on the NHS
                                            from new sectors. A good example is
                                                                                             from changing demographics, as well as
                                            increasing the contribution from contracts
                                                                                             from medical advances, the Government has
                                            in the bioscience sector, from 2% of
                                                                                             announced an increase in NHS funding of
                                            building revenues in FY16 to 14% in FY18.
                                                                                             3.4% pa, adding an extra £20bn by 2023.
                                            Overall, Kier has a 3% market share.
                                                                                             Whilst it is expected much of this extra
                                            Our core markets have strong visibility          funding will go on staff and other operational
     Growth in the number                   through sector-specific frameworks, such         costs, the increase in the overall level of
     of air passengers                      as in health and education, that provide         NHS funding will drive growth in the pipeline
                                            sustainable revenue streams.                     of opportunities for our health business.

     11%
     2017-2027
                                            Demand in the Group’s core building
                                            markets is driven by demographics and
                                            technology. This includes increases in
                                                                                             Education
                                                                                             The education sector continues to be active.
                                                                                             Demographic trends underpin the long-term
                                            specific population groups for whom we           sustainability of the sector. The sector is
                                            already build assets. For example, there is      forecast to grow positively over the next two
                                            forecast to be a 20% increase in the             years, with school building and further
                                            numbers of people aged 65 and over               investment by universities, as they seek to
                                            between 2017 and 2027, and an 8%                 attract more overseas students and
                                            increase in school children over the same        research funding, the urgency for which
                                            period. In addition, university student          has been heightened by the anticipated
                                            numbers are forecast to grow 7% to 2020          loss of funds following Brexit.
                                            with further growth expected thereafter.
                                            Digital technology is already driving demand
                                                                                             UK population projections (million)
                                            for logistics centres, supporting online
                                            shopping, and long-term trends in travel
                                            and freight are supporting significant airport
                                            development. The UK’s status as a global
                                            centre in research is adding to demand for
                                            university faculties and in bioscience.
                                            Brexit is currently the main market risk
                                            and has the potential, depending on the          11.5 12.0          12.1 13.0      12.4 14.4
                                            outcome of the negotiations, to affect              2017               2022           2027
                                            the pace of pipeline conversion and to             5-19 years old     65 years old and over
                                            impact labour supply and the availability
                                            of materials.                                    Source: ONS

24    Kier Group plc | Report and Accounts 2018
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