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OUR LEADING POSITIONS Kier Group plc Annual Report and Accounts 2018
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.
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
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
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
Strategic Report
Infrastructure Services
The barrel-vaulted glass roof at King’s Cross, London, refurbished by 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
Strategic Report
Buildings
The Elekta building, Crawley, Sussex.
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
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 9Strategic 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 2018Strategic 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 11Strategic 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 2018Corporate 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 13Strategic 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 15Strategic 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 2018Strong 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 17Strategic 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 19Strategic 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 2018Strategic Report
Employees
s ted
e inve
l r
ita d
ate
a p
l cre
ita Ca
C
p p
Governance
a ices
Serv
Sup
C
re
ita
tors
c tu
l
ru
em
ply C
st
Inves
p
ra
loye
De
Inf
hain
y
vel
Pe
et
d
Saf
op
opme
Capital Creating le
nts & Ho
invested customer
value
Financial Statements
u
ed
sin
loy
S yste m s
g
p
Bu
em
ild
ing
s
l
ita
pi
Ca
p
ta
l cre Ca
ap ate
C
ita d
l re
inv
om est
ed
C
mu s
nit ient
ies Cl
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 21Strategic 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 2018The 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 23Strategic 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
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