The group has delivered an excellent set of results in 2020.
Chief executive officer
The Group has delivered an excellent set of results in 2020. This reflects a combination of revenue and profit growth in the UK and Europe, good operational and strategic progress, good cash generation and a significantly improved performance from our Indian joint venture.
In 2020, we have increased our revenue by 19 per cent to £327.4m (2019: £274.9m) and are pleased with our profit performance with underlying profit before tax up 16 per cent to £28.6m (2019: £24.7m), exceeding our 2016 strategic profit target of doubling underlying profit before tax to £26m. This improved profit performance has been achieved despite a softer market backdrop in the UK, particularly in the run-up to the General Election in December 2019.
The 2020 results include the acquisition of Harry Peers, a leading structural steelwork business within the highly regulated nuclear, process industries and power generation sectors, which is broadening the Group's market exposure and enhancing its areas of expertise. Harry Peers is integrating well into the Group's operations and has contributed revenue of £14.4m and underlying operating profit of £1.3m for the six months since its date of acquisition.
Balance sheet strength and cash generation have remained a high priority for the Group in 2020. Another year of positive cash generation has provided us with the flexibility to invest in our UK businesses whilst further strengthening our balance sheet which provides us with a competitive benefit with both clients and our supply chain. Year-end net funds (excluding IFRS 16 lease liabilities) were £16.4m (2019: £25.1m) – this includes the outstanding term loan of £13.1m for the Harry Peers acquisition.
The Indian joint venture ('JSSL') has also performed very well in 2020. JSSL's strong performance was reflective of the step change in the Indian market position in 2020, and its results have benefitted from significant revenue growth, margin improvements and good operational performance.
We continue to exceed our return on capital employed ('ROCE') target of 10 per cent and have achieved a return of 17.2 per cent in the year (2019: 15.7 per cent), maintaining the Group's alignment with its construction and engineering clients and peers.
Unfortunately, after such an encouraging year in 2020, since the year-end we have been focussing on the challenges which have resulted from the spread of COVID-19. In managing our response to the pandemic, the primary focus has been on the health, safety and wellbeing of all employees, clients and the wider public, together with protecting the financial strength of the Group.To date we have coped well with the challenges presented by COVID-19. The Group's factories are operational and, after some temporary interruptions, all of our construction sites in the UK and Europe remain open. Strict precautions are in place for both the factories and the sites including enhanced levels of cleaning, additional hygiene facilities and social distancing.
At this early point in our financial year it is impossible to predict the full extent of the financial impact of COVID-19 on the 2021 outturn. Despite this, we have a strong balance sheet and are confident that we have sufficient cash and committed funding in place during this unprecedented period of uncertainty.
Notwithstanding our current strong balance sheet position, in order to mitigate the financial impact of COVID-19, and protect our cash position during the current period of uncertainty in a manner that does not compromise our future plans for the Group, a number of precautionary actions have been implemented. These include the deferral of all non-essential and uncommitted capital expenditure, together with restrictions on discretionary operating expenditure, tight management of working capital and the deferral of tax payments (PAYE, NIC and VAT) and quarterly term loan repayments (due in March and June). Furthermore, prior to the year-end, we fully drew down all available amounts under our Revolving Credit Facility (£15m) to provide control over our own cash resources.
Following a successful 2020, the board would ordinarily expect to propose a final dividend in line with our progressive dividend policy. However, the board believes it is prudent to defer any dividend payment decisions until there is greater visibility on the impact of COVID-19.
UK and Europe
Revenue was up 19 per cent over the prior year predominantly reflecting an increase in order flow and higher production activity, particularly in the second half of the year, together with the second half impact on revenue of the Harry Peers acquisition. During the year, we continued to work on the new Google Headquarters at King's Cross, together with other commercial office developments in London and the regions. Other significant revenue contributing projects include large industrial and distribution projects in the UK and Republic of Ireland, large data centres in Finland and the Republic of Ireland, ongoing projects at Heathrow and Manchester airports, and a scientific research facility in Sweden, which was the first significant order won by our European business.
The underlying operating margin (before JVs and associates) was 8.2 per cent (2019: 8.5 per cent), resulting in an underlying operating profit (before JVs and associates) of £27.0m (2019: £23.3m). The 2020 margin remains within our strategic margin range of 8 to 10 per cent and the slight reduction in the margin compared to the prior year reflects the mix of work undertaken during the year and the slightly softer market conditions in the UK, particularly toward the end of the 2019 calendar year.
The UK margin performance continues to reflect improvements to our operational execution. This includes the benefits from our programme of projects categorised under the banner of 'Smarter, Safer, more Sustainable' ('SSS'). These initiatives continue to focus on improving many aspects of our internal operations, including the application of Lean manufacturing techniques, optimisation of factory processes, quality control and cost reduction programmes.
Building from a strong foundation
Delivering on our promises
Exceeded our 2020 strategic profit target
'Smarter, Safer, more Sustainable'
'SSS' is an enduring process for the Group and forms part of a continuous cycle of improvement, with an increased focus on manufacturing efficiency, rather than a one-off programme. We also believe that the successful development and adoption of new technologies across the whole of the Group will be fundamental to our long-term strategic objectives.
During the year, we have overseen further enhancements to our Group-wide production management system (StruMIS), which will help drive productivity improvements, and our contract management system (Workspace), including the use of the system on mobile devices. We have also rolled out a new Group-wide supply chain accreditation process to ensure that our supply chain partners continue to match our expectations of quality, sustainability and commitment to client service.
We continue to devote skilled resource to reviewing and responding to developing technologies (including virtual reality and digital technologies). We have a centralised IT team dedicated to ensuring our IT environment is secure, giving us the confidence to invest in new technology and respond to IT risks. In 2020, we have continued the roll-out of new software including data analytics, workflow management and project-specific commercial and operational tools to better inform decision-making and improve efficiencies both in our factories and on our construction sites. We are also continuing to take steps to improve the integration of key systems, better automate workflows and, as part of our digital transformation initiative, reduce our reliance on paper-based information to facilitate more efficient ways of working. In addition, through our engineering forum, we have improved our approach to design, looking at new and innovative ways of working, including the use of enhanced BIM (3D) modelling.
We continue to invest in and streamline our factories, particularly at Dalton, which is increasingly operating as a fulfilment centre for the benefit of the Group as a whole. Actions taken to improve manufacturing cost efficiency include waste elimination initiatives and the upgrade, reconfiguration and ongoing expansion of certain of our fabrication lines to improve the speed and efficiency of these operations, together with further investment in our in-house painting facilities at Ballinamallard. The majority of these improvements form part of the Group's capital investment programme, which has seen an investment in 2020 of £6.5m, taking our capital investment in the Group to nearly £40m over a six-year period. We will continue to invest in our businesses in the future to make them more competitive and operationally efficient and to support the development of our client service offering.
Underpinning our culture of continuous improvement is the ongoing focus on human resources and attracting and retaining the highest calibre of workforce remains fundamental to the Group's strategy. During the year, we have continued to invest in our workforce and have increased our headcount to around 1,400 employees, which includes 61 employees who joined us with the Harry Peers acquisition. Throughout the year we have strengthened a range of disciplines across the Group, including within our manufacturing operations team at Dalton. We continue promote our graduate and apprenticeship schemes, and have successfully on-boarded our first wave of apprentices following our work with the Institute for Apprenticeships through which we collaboratively developed a metal fabricator apprenticeship programme.
Our leadership and talent programmes are now well established at various levels within the business, including the Severfield Development Programme, which brings together talent with the potential for future senior roles. Below this level we have launched an 'early careers' initiative which builds readiness for more senior positions. We have also continued to develop and support our people to apply Lean manufacturing techniques, achieve new qualifications, increase their skills and knowledge, and develop their careers with the Group.
Order book, pipeline and market conditions
The UK and Europe order book at 1 June 2020 stands at £271m (1 November 2019: £323m), of which £243m is for delivery over the next 12 months, providing the Group with a strong future workload during the current period of uncertainty caused by COVID-19. The reduction in the June order book represents the anticipated decrease from the record position of £323m at the time of announcing the half year results, mainly reflecting the higher revenue recorded in the second half of the 2020 financial year.
The order book contains a healthy mix of projects across a diverse range of sectors including industrial and distribution, data centres, commercial offices, and stadia and leisure. Significant orders include a large industrial facility, which includes a bespoke paint package, and a large data centre, both in the Republic of Ireland, a large data centre in Finland, a large distribution facility in the UK, the new stadium works at Fulham F.C. and the redevelopment of Lord's Cricket Ground (Compton and Edrich stands). From a commercial office perspective, the order book also contains the remaining works for the Google Headquarters at King's Cross, together with a number of mid-sized office developments, both in London and the UK regions, successfully secured by our commercial teams during the year. In terms of geographical spread, of the order book of £271m, 54 per cent represents projects in the UK, with the remaining 46 per cent representing projects for delivery in Europe and the Republic of Ireland (1 November: 53 per cent in the UK, 47 per cent in Europe and the Republic of Ireland).
Whilst the conclusive outcome of the 2019 General Election and the UK's eventual exit from the European Union in early 2020 has reduced some of the earlier political uncertainty, elements remain as the nature of the UK's future trading relationship with the EU continues to be unresolved. We continue to monitor developments in this area and we have plans in place to mitigate, where possible, the impact of leaving the EU on the fulfilment of orders in the Republic of Ireland and continental Europe and on our supply chain.
Unfortunately, there is now also significant uncertainty over the extent of the impact and longevity of the COVID-19 pandemic and we are now seeing evidence of investment decisions being delayed in some of our sectors as clients and developers appear to be adopting a more cautious approach until greater market clarity returns. Pricing generally remains competitive. Despite this, we remain well placed to win work in the diverse range of market sectors and geographies in which we operate and across a wide client base, providing us with extra resilience and the ability to increase our market share.
Notwithstanding the current period of uncertainty, we are encouraged by the current level of tendering and pipeline activity across the Group. We continue to see a good number of opportunities in key market sectors, in particular the industrial and distribution and data centre sectors, which remain strong and these projects play to our strengths, requiring high-quality, rapid throughput, on-time performance and full co-ordination between stakeholders. Opportunities exist in these sectors in both in the UK and in Europe, where we have demonstrated our ability to win more work, supported by our European business.
We continue to pursue a number of significant infrastructure opportunities, particularly in the transport sector. The UK government's commitment to HS2 and its April announcement to proceed quickly with phase one construction work, which is worth an estimated £12 billion, has provided some much needed certainty to the construction industry. HS2, in combination with the ongoing Network Rail and Highways England investment programmes, the latter having a record budget of £25 billion for the 2020–2025 period, are expected to contribute significantly to the UK government's investment in infrastructure commitment over the coming years. We remain well positioned to win work from these projects, all of which have substantial steelwork content, given the Group's historical track record in transport infrastructure and our in-house bridge capability.
The sale of British Steel to Jingye Group ('Jingye'), China's third largest privately owned steel producer, was completed in March 2020, helping to provide stability to the steel supply market in the UK. Encouragingly, Jingye has announced its intention to invest over £1 billion in British Steel over the next decade. This investment is expected to include a number of furnace upgrades (including the development of an electric arc furnace in Teesside), steelworks improvements and some product range enhancements. Notwithstanding this, we continue to regularly review our steel supply arrangements and already have strong ongoing relationships with other supply chain partners, including those in continental Europe and local stockholders in the UK.
On 1 October 2019, the Group completed the acquisition of Harry Peers, a leading full service structural steelwork business focussing on the nuclear, process industries and power generation sectors. The net initial cash consideration for the acquisition of £18.9m was funded by a combination of a term loan and Group cash reserves. A performance-based contingent consideration of up to £7m is also payable if certain financial and operational targets are achieved for the period to 31 August 2020.
Harry Peers is integrating well into the Group's operations and we are seeing good opportunities to expand and extend the Group's current capabilities into attractive complementary market sectors, broaden our market exposure and enhance our areas of expertise. Looking further ahead, we believe that there are good opportunities to grow Harry Peers through a number of operational initiatives including business development, European contract opportunities, and investment in technology-driven enhancements. In particular, the nuclear sector, including both the defence and commercial sectors, in which Harry Peers commands a niche, well-established and trusted position with blue chip customers, is forecast to grow through the UK government's decommissioning investment programme. Harry Peers has also demonstrated capability in modular structural steel offerings, which the Group will look to develop across its wider product range. This acquisition is another step in the implementation of the Group's strategy and will enhance our position as the UK's broadest structural steel services group.
Our proven ability to work collaboratively and innovatively with clients is fundamental to our success and is critical to securing new work. This involves early contract engagement with clients, anticipating the issues they face, providing problem-solving solutions and delivering the best results to balance time, cost and quality objectives, whilst ensuring that risk and reward are appropriately shared.
Our unique capability to deliver complex design solutions, our capacity and speed of fabrication, the expert capabilities of the Group and its employees and our management and integration of the construction process is important to our clients and a key differentiator for the Group. In particular, engineering solutions are vital to our success, and our ability to deliver for our clients is dependent on us driving excellence throughout our engineering teams. This expertise has been recognised during the year through a number of national awards for our projects including at the 2019 Structural Steel Design Awards (for the new Tottenham Hotspur F.C. stadium, Coal Drops Yard at King's Cross, Wimbledon No.1 Court and Chiswick Park Footbridge) and also at the 2019 Institute of Structural Engineers' Structural Awards (for the new Tottenham Hotspur F.C. stadium and Coal Drops Yard).
The Group worked on over 100 projects with our clients during the year including:
Major projects – over £20 million
|Google King's Cross, London|
Large industrial facility, Republic of Ireland
Large data centres, Republic of Ireland and Finland
Commercial offices – London and regional
|One Braham, London|
80 Fenchurch Street, London
Knightsbridge K1, London
King's Cross P2, London
Unity Square, Nottingham
Assembly Building, Bristol
103 Colmore Row, Birmingham
Industrial and distribution
|Large distribution centre, East Midlands|
Jaguar Land Rover, Logistics Operations Centre ('LOC') and car park
|M8 Footbridge, Glasgow|
Barking Riverside Bridge, London
T2B Apron, Heathrow Airport (baggage handling facility)
Multi-storey car park, Manchester Airport
Data centres and other projects
|Data centres, Republic of Ireland|
European Spallation Source, Lund, Sweden (scientific research facility)
Stadia and leisure
|Lord's Cricket Ground redevelopment (Compton and Edrich stands)|
Britannia Leisure Centre and Academy, London
JSSL has again performed strongly in the current year. The business has continued to expand and has almost doubled its profit from the previous year, of which the Group's after tax share was £2.2m (2019: £1.2m). This higher profitability reflects an increase in revenue of 30 per cent to £109.3m, compared with £84.1m in the previous year, and an increase in the operating margin to 8.5 per cent, compared with 6.4 per cent in the previous year. The improvement in the margin was anticipated and reflects an increased mix of commercial work compared to the higher levels of industrial work, which was delivered in 2019. The expansion of the Bellary facility, which has expanded factory capacity from c.60,000 tonnes to c.90,000 tonnes, is now complete.
The COVID-19 pandemic is impacting JSSL in 2021. In light of the slow easing of the nationwide lockdown announced by the Indian government in March 2020, and the developing impact of COVID-19 on the Indian economy, JSSL's operations have been disrupted in the first quarter of 2021, a situation which is likely to continue over a period of several months. Given the rapidly changing dynamics in the external environment, it is difficult to predict with any accuracy what the extent of this disruption will be on JSSL's profitability in 2021. JSSL's order book was £110m at 1 June 2020 (1 November 2019: £134m), and this contains a good mix of higher margin commercial work. JSSL's pipeline of potential orders continues to include a number of commercial projects for key developers and clients with whom it has established strong relationships.
Despite the current period of uncertainty, we remain positive about the long-term development of the Indian market and of the value creation potential of JSSL, especially considering the political, commercial, social and technological changes made in India over recent years, the government's ongoing focus on simplifying regulations and the 'ease of doing business', and the significant expansion of the business already evidenced to date.
Safety, health and the environment
'Safety first' remains a core value for the Group, being vital to our continued success and a key differentiator in the market, both to our clients and to our employees. This has been particularly important during the COVID-19 pandemic where we have continued to run our operations safely and in line with the guidelines issued by the Construction Leadership Council, Public Health England and by the UK and local governments.
Our executive committee continue to review safety performance monthly. Investigations are completed on all RIDDORs (a reportable accident that results in an employee's absence from work for more than seven consecutive days) and high potential near miss incidents, with input from the Group SHE director, chief operating officer and the relevant business unit managing director. Findings from investigations and 'lessons learned' are shared Group-wide in order to promote a collaborative approach to preventing accidents and incidents. Board members continue to attend safety-focussed site visits, encouraging employees to suggest improvements and share best practice.
We have, once again, achieved our Group safety targets for the year. The Group's accident frequency rate ('AFR'), including our Indian joint venture, was 0.15, which continues to outperform the industry average. This represents a slight increase from the prior year AFR of 0.11, but this was not wholly unexpected given both the significant improvement in the AFR in 2019 (the 2018 AFR was 0.22) and the increased Group activity levels in 2020. During the year, we have shifted our focus to the Group's injury frequency rate ('IFR'), rather than only on the AFR, which is a fairly narrow metric based on the level of RIDDORs only. Instead, IFR focusses on a variety of incidents, ranging from minor to potentially more serious, which allows us to learn lessons from each individual case and to identify process improvements and prevention measures. The Group's IFR has reduced over the course of the year, with targeted reductions in almost all areas of the business.
During the year, we extended our successful behavioural change programme to our subcontractors to ensure that everyone who works for and with us is committed to our safety culture. We are also planning to extend this programme into other areas of our supply chain. In November 2019, we held our inaugural safety awards to celebrate positive safety behaviours and initiatives by apprentices, other employees and teams within all of our businesses. Owing to the success of the event it will now become an annual occasion.
In 2020, a sustainability policy was published by our sustainability committee in line with our commitments to health and safety, environment, the economy and our people. Meeting quarterly, the committee discusses new initiatives and innovations that can minimise the impact of our activities on the environment. The Group has made progress during the year in managing its energy, fuel consumption and emissions, including the switch to 100 per cent green electricity at our two largest production facilities and a reduction in our scope 1 and scope 2 greenhouse gas ('GHG') emissions to 29.8 tonnes of CO2e/£m revenue compared to 33.5 in 2019. In 2020, we maintained our 'B' rating in the CDP index, also receiving an 'A-' in their new supplier engagement rating, considerably outperforming the industry average of 'D'. We have a new sustainability strategy in development for 2021, as we aim to further reduce our environmental impact and carbon emissions, working collaboratively with customers, industry and the supply chain.
We are continuing to deliver on our strategic objectives and, in achieving an underlying profit before tax of £28.6m, we have surpassed our 2020 strategic profit target. As part of the ongoing 'SSS' initiatives, we have implemented a number of factory and technological improvements and have improved our supply chain processes, as well as entering new UK markets through our acquisition of Harry Peers.
Our Netherlands-based European business, which is now fully integrated into the main operations of the Group, has continued to deliver its first significant contract, a research facility for the European Spallation Source ('ESS') situated in Lund, Sweden. The steel fabrication for this large contract is mainly being provided from our Dalton facility, together with certain approved subcontractors. The business continues to build on its first two contract wins and is tendering for a number of projects, predominantly in Northern Europe and Scandinavia. It is developing a growing pipeline in a range of sectors, which includes many potentially interesting and high-profile opportunities, although the timing of some of these remains uncertain as a result of COVID-19. The European team's market knowledge and experience continues to be of benefit to our UK business when tendering for and executing projects in Europe, providing us with a commercial advantage and the ability to enhance our reputation through the delivery of excellent client service.
Severfield (Products & Processing) ('SPP'), which is based at our Sherburn facility, allows us to address smaller scale projects and provides a one-stop shop for smaller fabricators to source high quality processed steel and ancillary products, albeit at lower margins. Notwithstanding the softer UK market conditions experienced during 2020, the business has secured and successfully delivered a number of orders to its expanding customer base, together with providing subcontract fabrication packages (including general fabrication, trusses, bracing and stairs) to other Group companies to assist them in the delivery of larger projects. During the year, we have continued to gain better competitor and customer intelligence and have improved factory efficiencies, quality assurance and health and safety processes. We have also maintained our focus on opportunities to grow the business and increase our market share, with a particular emphasis on new customer and product range development. This includes our new 'Severstor' and 'Seversilo' product ranges, which we are developing organically following the closure of the similar operations within the Portakabin group. 'Severstor', for which we have already secured our first orders, is the manufacture of secure, steel storage units and 'Seversilo' is the manufacture and installation of storage and handling systems for dry bulk materials. The development of both of these product ranges plays to our strengths in general fabrication and our previous record in modular construction.
In recent periods, we have also been targeting potential organic opportunities in medium to high-rise residential construction, where we have developed a steel solution in what has traditionally been a concrete-dominated sector. Despite this being more of a 'slow burn' than originally anticipated due to longer than expected client gestation periods, discussions with a number of interested parties remain ongoing and this opportunity continues to be progressed in the background.
Summary and outlook
In 2020, we have increased our profitability, both in the UK and in India, and have exceeded our 2020 strategic profit target of £26m. Our cash position remains strong, we have continued to drive our 'SSS' initiatives with an increased focus on manufacturing efficiency, and we have entered new UK markets through the acquisition of Harry Peers.
The overall impact of COVID-19 remains uncertain. Whilst all of our factories are operational and all of our construction sites in the UK and Europe remain open, it is inevitable that the virus will have an impact on profitability in 2021. However, at this early point in our financial year it is impossible to predict the full extent of this financial impact. Despite the uncertainty caused by COVID-19, we remain well placed to win work in the diverse range of market sectors and geographies in which we operate and across a wide client base, allowing us to target a good pipeline of opportunities and providing us with extra resilience and the ability to increase our market share.
Finally, I would like to thank all of our employees for their hard work, support and determination in these exceptionally difficult times. From our construction teams to those working in our factories and from home, they have all played a key role in ensuring we can keep our business operating as smoothly as possible at this unprecedented time. As always, their health and wellbeing remains our number one priority.
Chief executive officer
17 June 2020