Chief Executive s review of operations

Transcription

1 Chief Executive s review of operations I am pleased to present my first review since joining the Group as Chief Executive in October We are in good shape, having made demonstrable progress in returning to profitable growth. Our markets are healthy and our continued focus on cost management and targeted turnover growth is delivering improved margins. Prospects for the future are good. The outlook for our core markets is robust, underpinned by the commitment of the UK Government to continued investment in upgrading and maintaining the public infrastructure. Best value procurement methods represent an increasing opportunity for organisations which can deliver consistently high levels of quality, while increasing barriers to entry for competitors without our impressive record in these areas. Our markets are healthy and our continued focus on cost management and targeted turnover growth is delivering improved margins. As reported at the half year, the Group s reporting segments have been consolidated into Transport, Design and Engineering Solutions and Management and Project Services, supported by Equity Investments. The trading operating result is reconciled to operating profit in Note 1 to the accounts. Transport Turnover 410.3m 337.3m Trading operating profit 23.5m 10.1m Margin 5.7% 3.0% Transport is one of the largest providers of design and technical support to the UK s road and rail sector. Our significant technical capabilities are underpinned by extensive experience and expert project and safety management. We can, where required, enable critical transport infrastructure to remain in use while upgrading and maintenance is carried out. We have a strong reputation for quality. Our transport businesses have both attained international standards for quality and environmental management (ISO and ISO14001), and our Highways and Transportation (H&T) business achieved the highest sector score in a recent capability assessment by the Highways Agency (HA). We are well placed to respond to the increasingly sophisticated procurement models which are targeting best value for major new contracts under the Government s long term plans to improve the transport infrastructure. 16

2 The recently concluded review by the UK Rail Regulator has set the industry agenda for the next five years, including a 23bn funding plan to upgrade the rail infrastructure. We expect the medium term future of the highways market to focus on demand management and continued investment in asset maintenance. Turnover in Transport was 21.6% higher than last year at 410.3m primarily due to work generated from the Metronet PPP companies and growth of existing contracts. Trading operating profit increased by 13.4m to 23.5m as the Group benefited from an increase in workload from Network Rail and the elimination of loss-making contracts. This increase in profits resulted in a trading operating margin of 5.7% (2003: 3.0%). The segment contributed 43.2% of the Group s turnover from continuing operations and 50.6% of trading operating profit from continuing operations. In system integration, we assisted Network Rail in demonstrating the safety case for two new Computer Based Interlockings (CBIs). These are the next generation of signalling technology and offer our client enhanced performance and reduced maintenance costs. We prepared the Engineering System Safety Case for the CBIs installed by Network Rail at Stockport and Dorset Coast. Successful starts were made on a number of new long-term projects, including the first year of our 10-year Structures Examination Contracts for Network Rail in the South of England and Scotland. In addition more than 300 Atkins Rail staff were mobilised to begin work on upgrading the London Underground. By the end of March, our teams had carried out approximately 8,000 civil structure inspections and completed initial designs for the refurbishment of several stations, with work on a further 30 underway. Rail We provide a range of rail engineering consultancy services from multifunctional rail design, asset management and bridge inspection to vehicle acceptance testing. Our role as a major design engineer for signalling, civil engineering and overhead line works enables us to make significant contributions to important rail projects such as Network Rail s ongoing upgrade of the West Coast Main Line (WCML), the largest rail investment project in Europe. Our team includes leading industry experts in signalling, systems integration, electrification, civil engineering and telecommunications. They are engaged on most of the UK s major rail enhancement projects and on numerous projects overseas. We completed a number of significant projects during the year, enhancing our reputation for reliable delivery of well-engineered infrastructure schemes on time and to budget. The extended blockade of the WCML in North Staffordshire was a key element in the upgrade to the UK s busiest mixed traffic railway line. The Strategic Rail Authority s strategy of closing key stretches of the railway for longer periods, rather than the traditional overnight and week-end working, has shown real benefits in reducing costs and co-ordinating alternative transport for passengers. However it places a very clear requirement on the engineers to plan and execute the project to the highest standards of efficiency and quality. During the blockade we were responsible for the disconnection, reconnection and testing of all the signalling equipment and overhead power lines along 56 miles of track. We also upgraded the power signal box at Stoke, automated level crossings and upgraded the digital axle counters, a new technology designed to improve safety. In Scandinavia, we are the largest privately operated rail consultancy. Here, our operations had another successful year, winning a commission to develop a new relay interlocking system at Flintholm station in Copenhagen and bringing their specialist skills in acoustics and control rooms to the station design work on the London Underground. Highways and Transportation We are Managing Agent for three of the HA s 15 Areas, and Managing Agent Contractor for a fourth in the Optima partnership. Under these contracts we have responsibilities for network and maintenance management, including planning, design and supervision of network improvements, safety inspections and operational management of abnormal loads and network incidents. As Managing Agent, we co-ordinate routine and winter maintenance; as Managing Agent Contractor, we also undertake this work. We also support the development of new roads and road improvement programmes such as the widening of the M25 near Heathrow Airport and the provision of spur road access to the new fifth terminal. During the year, our designers won an award for civil engineering excellence and innovation for the new Medway Bridge, which forms part of the A2/M2 widening project. The opening of the UK s first toll road, the M6 Toll, marked the end of many years of planning during which we co-designed the new motorway, helped develop the business case and presented traffic evidence at the Public Inquiry. 17

3 1 In Scandinavia, we are the largest privately owned rail consultancy. 2 We have made a significant contribution to the upgrade of the West Coast Main Line. 3 Atkins co-designed the UK s first toll road, the M6 Toll. Chief Executive s review of operations continued Consistent delivery of a high quality service continues to form the foundation for strong and enduring relationships with our major clients. In this respect we had a particularly successful year. In December 2003, we were assessed by the HA using a new vendorrating system, the Capability Assessment Toolkit (CAT). The CAT system reviews in depth the quality of supplier capabilities to determine who can bid for new HA contracts. We were proud to achieve the highest CAT score of all consultants in the sector, a tribute to the capability of our people and the quality of our market offering. Strong relationships with existing clients enabled us to expand and extend the scope of a number of contracts in the year. These included the extension of our Northamptonshire Highways Partnership to include Northampton Borough Council and the renewal and extension of our Stirling Consultancy Services Term Commission to include Clackmannanshire and Falkirk marked the successful completion of the first year of our 5-year partnership renewal for integrated highways and transport services with Somerset County Council. We continue to work closely with our partners in Optima to deliver best practice network management and maintenance on behalf of the Highways Agency. The mid-term of the Government s 10-year Transport Plan has seen a marked shift in focus from planning to delivery of transport improvements. During the year, we continued to work closely with national, regional and local agencies to deliver key elements of their strategic and local transport plans to reduce congestion through improved transport integration, better traffic management and improved travel information. Our work on developing the software for a new National Journey Planner is nearing completion. The Planner, covering all modes of transport, will enable people to understand all the travel options available to them before embarking on their journeys. The strength of our position in intelligent transport systems was reflected in the award of a multi-million pound contract from the Welsh Assembly to develop, implement and operate telecommunications and intelligent transport services on motorways and trunk roads throughout Wales. In total, we are currently designing and implementing six national, regional and local authority control centres throughout the UK to collect, analyse and disseminate real time data on aspects of traffic flow. These will all be operational within the next year. 18

4 Design and Engineering Solutions Turnover 264.3m 241.7m Trading operating profit 13.4m 3.2m Margin 5.1% 1.3% Design and Engineering Solutions provides clever design and engineering. Our multi-discipline teams draw on the expertise of architects, planners and engineers, as well as environmental consultants and specialists in other key related disciplines. Conditions in our key markets were good in the year, with ongoing public sector investment providing a steady stream of work. Looking ahead, public sector initiatives such as the 8bn education programme announced by the Chancellor in the recent budget are expected to present ongoing opportunities in areas of proven strength. Regeneration and environmental improvement schemes are also likely to present opportunities for us in the coming year. Turnover in Design and Engineering Solutions was 9.4% higher than last year at 264.3m reflecting better market penetration and work on the Colchester Garrison design contract. Continued progress on reducing costs, combined with concentration on core activities, helped lift trading operating profit to 13.4m (2003: 3.2m) and trading operating margin to 5.1% (2003: 1.3%). The segment contributed 27.8% of the Group s turnover from continuing operations and 28.9% of the Group s trading operating profit from continuing operations. Design, Environment & Engineering Our 3,100 architects, planners and engineers design buildings, provide town planning and urban design services and act as consulting engineers for a wide range of infrastructure projects. UK construction continued to be driven by public sector investment during 2004, enabling us to consolidate our position in education and health. We have designed over 50 new schools in the last three years and prepared refurbishment plans for over 1,000. In health we work for all of the 15 NHS Boards in Scotland. Important new contracts during the year demonstrated the scale and scope of our activities. Alongside specialists from Atkins Rail, we began work on designs for the refurbishment of stations on the London Underground under the Metronet Public Private Partnership. The Private Finance Initiative project to re-develop the army facilities at Colchester Garrison reached financial close in February Our design team had been working on the project pre-closure, but has since been fully mobilised to support this project. In Lytham St Annes we won the competition to design a major integrated leisure and residential development. In Glasgow we worked in partnership with architects Richard Rogers on a competition-winning design for a new pedestrian bridge over the Clyde. In London our widely acclaimed pedestrianisation and landscaping of Trafalgar Square won a Civic Trust award. August saw the successful completion of the rebuilding of Hornsea town promenade as part of a pilot scheme under the Market Towns Initiative for regeneration in Yorkshire. We prepared the designs for the new seafront facilities, which won an award from the Landscape Institute, and managed delivery of the project. The trend for the public sector to procure services through framework contracts continued during the year. We benefited from such agreements with key clients such as the Environment Agency where work included design of new flood defences in the Severn Valley and the Department for Work and Pensions where we designed and project managed the re-branding of over 120 JobCentre+ offices throughout the UK. Internationally our operations in the Middle East continued to benefit from high levels of investment in the region. In Bahrain we were appointed masterplanners and engineers for the $1bn Durrat Island resort development saw completion of the world s tallest residential tower in Dubai, which we designed, and we are currently working on a number of other similar towers in the region. In Libya we have completed the concept design for a new tourist resort at Sidi Benure. The strongly performing Chinese economy presented significant opportunities. During the year, our review of the Shanghai masterplan led to several follow up commissions including masterplanning for a new town in Jiading and the urban regeneration planning of the South Station area with links to the Shanghai 2010 Expo site. 19

5 1 We are working on six traffic control centres throughout the UK. 2 The Welsh Assembly has appointed Atkins to develop intelligent transport systems. 3 We worked on the award-winning design for a new pedestrian footbridge in Glasgow. Chief Executive s review of operations continued 1 2 Industry Atkins Industry is one of the largest engineering consultants in the UK utility, defence and oil & gas markets. Our services include engineering, planning, design, analysis and project management. We re-focused our operations during 2004 to concentrate on defined segments within each of our target markets, and we have a strong presence in each of these. Regulatory requirements and UK Government targets drove increased investment in utility infrastructure. We continued to undertake work for the majority of the water and wastewater companies in the UK as well as for the Environment Agency with whom we have a significant framework contract. Work on our water technology products also bore fruit with the receipt of the IWEX innovation award for the SONIX technology, which we developed to enhance traditional wastewater treatment process. In the power sector, demand was healthy for design and project management services in transmission and distribution. Support of nuclear generation assets provided a healthy workload. Renewable energy is a specific growth area and we are working with both established and emerging technologies. Demand for our project services in Telecoms also strengthened over the year. In the defence sector, opportunities exist in high-end technical equipment and systems development. We are involved in significant projects supporting Rolls-Royce in designing the lift fan and F136 engine for the Joint Strike Fighter, and Airbus in designing the wing for the A400M, the Hercules replacement. While the civil aerospace market is generally challenging there is significant demand for our services from Airbus and Rolls-Royce on the A380 super-jumbo and Trent 1000 engine respectively. Improved extraction techniques are extending the life of oil fields, while the need to find new sources of hydrocarbons is driving exploration and development into deeper waters offshore. Both these factors are creating a growing demand for the safety, process and structural services that we provide to the sector. We focus on performance efficiency, reducing costs and extending the life of key assets. Recognising the increasingly global nature of the sector, in 2004 we expanded our presence in Houston and opened a new office in Paris, strengthening key relationships with clients such as BP, Total and Exxon Mobil. 3 20

6 Management and Project Services Turnover 209.0m 188.1m Trading operating profit 3.6m 2.1m Margin 1.7% 1.1% Management and Project Services supports the development and Our US operation continued to build on key relationships with Intel, ongoing operation of our clients assets, providing a variety of services BP, American Airlines and DHL. We provided cost management on including cost planning, IT implementation and facilities management Amgen s bio plant development on Rhode Island, and to the Lower (FM). We are well placed to support forthcoming public sector Manhattan Development Corporation s redevelopment of the initiatives in urban regeneration and IT infrastructure development. World Trade Centre. In the Far East we are supporting investment In FM the range of services covered by outsourcing arrangements is into Singapore and China by pharmaceutical and petrochemical expanding, encompassing service delivery and increasingly providing companies including Merck, Schering Plough, Novartis, BASF routes to market for professional and project services. and Huntsman. Turnover in Management and Project Services was 11.1% higher than last year at 209.0m, mainly as a result of the inclusion of a full year s turnover from Hanscomb (acquired in June 2002). The sector contributed 22.0% of the Group s turnover from continuing operations in the year. Trading operating profit from continuing operations was 3.6m compared to 2.1m in 2003, after provisions in respect of under-performing FM contracts. Trading operating margins increased to 1.7% (2003: 1.1%). Faithful & Gould Faithful & Gould (F&G) provides cost and project management services, playing an integral part in many of the Group s complex projects as well as supporting external clients in the UK, USA and Far East. We continued to support the Government s investment agenda, providing project management and planning supervision services to HM Prisons and cost management services to Derbyshire County Council under framework contracts. We provided PFI technical advice on nine separate Local Authority school developments, and project and cost managed a number of regeneration initiatives for the Sunderland Area Regeneration project and in the Lea Valley for the London Development Agency. In the transport sector, we worked on the transfer of maintenance works contracts back to Network Rail. We also secured appointments to provide cost planning on the major Kings Cross redevelopment and cost estimating on the multi-modal transport infrastructure for the Olympic bid masterplan. In the retail sector, we act for Selfridges in their UK capital works programme. During the year, we provided lease negotiation, project management, contract administration and planning supervision services for the base build and fit out of their iconic Birmingham store, as well as supporting development work at Manchester and Oxford Street. Asset Management We provide a range of FM services, including strategy development, service delivery, helpdesk provision, operational asset management and maintenance and procurement support. Our ability to draw on the expertise of other parts of Atkins is key to our market offering. Following last year s review of operations we have focused on margins and cash generation during We also secured a 35-year contract to provide estate management and maintenance services to the redeveloped Colchester Garrison, and new contracts with Bexley Council and the newly restructured Littlewoods Group. Management Consultants We support complex programmes of business change. We are a significant supplier of management consultancy services to central Government, with particular strengths in project and programme management saw a near doubling in the market for public sector work. Programme and project governance is emerging as an important area of growth and we worked closely with the Office for National Statistics, Office of the Deputy Prime Minister and the Department for International Development to help them achieve aspects of the Office of Government Commerce s initiative to improve process for managing major projects. We also grew our IT Managed Services practice, negotiating longer and broader contracts with, amongst others, Swindon Borough Council where we have successfully delivered technology refresh and implementation projects, amongst other services. We divested ourselves of some low margin local Government business process work, improving our focus on high value consultancy. 21

7 1 Our designs for the pedestrianisation of Trafalgar Square won a Civic Trust award. 2 We designed new seafront facilities for Hornsea, Yorkshire. 3 We are supporting Rolls-Royce in designing key elements of the new Joint Strike Fighter. Chief Executive s review of operations continued Equity Investments Turnover 66.8m 66.6m Trading operating profit 5.9m 4.7m Margin 8.8% 7.1% Joint Venture turnover 152.8m 17.1m Joint Venture profit before tax 12.8m 0.8m 1 Equity Investments represents the Group s interest in Joint Ventures, PFI and PPP initiatives and Lambert Smith Hampton (LSH), a wholly owned subsidiary company run as a stand alone brand in the commercial property market. Turnover in Equity Investments, which primarily relates to LSH, was in line with last year at 66.8m and accounted for 7.0% of the Group s turnover from continuing operations. Trading operating profit from continuing operations increased to 5.9m (2003: 4.7m) due to the inclusion of fees and other income generated from the Metronet PPP companies. The Group s share of the profit before tax of its Joint Ventures rose substantially from 6.7m last year to 20.6m this year, primarily due to the inclusion of the first year s trading in Metronet. The results for the year included profit before tax of 6.1m from Joint Ventures that were sold in the year. 2 3 Metronet In April 2003 the Metronet consortium, in which we have a 20% share, achieved financial close on two contracts with London Underground. These represent the Group s most significant PPP project to date. Metronet runs the London Underground infrastructure companies Metronet Rail BCV Limited, incorporating the Bakerloo, Central, Victoria and Waterloo & City lines, and Metronet Rail SSL Limited, incorporating the Metropolitan, District, Circle, Hammersmith & City and East London lines. Together these account for over two thirds of the London Underground network. Metronet is now beginning a programme of repair and refurbishment that will in time deliver substantial improvements to the infrastructure and enable London Underground to operate a more frequent and reliable service. London Underground will remain responsible for the management of the network, including drivers, signalling and station staff and the Safety Case. It will also be responsible for ticketing and fares. 22

8 Trans4m Ltd, a Joint Venture company in which Atkins has a 25% stake, has contracted with the Metronet PPP companies to undertake the civil engineering work and the refurbishment and modernisation of the stations. Trans4m Ltd has signed a 7 1 /2 year contract with Atkins for premises and civils design, inspection and assessment work and the design and build of new communications systems. The year to 31 March 2004 was the first full year of operation, with the main focus on establishing the organisational structures and resources for the Joint Ventures and their supply chains, introducing new systems for financial and asset management and ensuring that safety standards were maintained and enhanced. Intensive maintenance activity including targeted removal of graffiti and litter and deep-cleaning of stations and rolling stock have resulted in noticeable improvements for passengers in the first year of the PPP. Operational performance was significantly impacted by the Chancery Lane accident which occurred in January 2003 prior to the transfer of responsibilities to the Metronet PPP companies. The inquiry into the accident recommended a number of actions which delayed planned maintenance activity. In spite of this, service reliability targets were being achieved by the end of the year. There have been delays to the capital works programmes for station and rolling stock refurbishment. This is not surprising in the context of the scale and complexity of the investment programme. Measures are in hand to compensate for the delays with the objective of mitigating any potential impact on delivery timetables. We are committing substantial senior management resource to ensuring delivery of the Metronet supply chain contracts and overseeing our investment. Lambert Smith Hampton Lambert Smith Hampton (LSH) provides a broad range of property consultancy and transactional services. Its activities include commercial agency and investment advice, valuation services, landlord and tenant advice, property management, building surveying and rating advice. With staff based at 29 offices across the UK and the Republic of Ireland, it offers the benefits of both in-depth local knowledge and consistently high service standards nationwide. Weakness in the London office market throughout the year was offset by relatively better conditions in the regions. The key city offices of Manchester, Birmingham and Bristol all had successful years, and in St Albans we entered a new contract to provide estates and valuation services for Hertfordshire County Council. Estates Gazette named LSH Most Active Agent in the UK for the third year in succession. The retail market remained robust, supported by consumer spending growth. The industrial sector continued to under-perform in the light of weak occupier demand and the difficulties faced by the manufacturing sector, although the distribution sector remained active. The investment market continued to be dominated by overseas and private investors with intense competition and the sheer weight of money resulting in hardening yields. The year saw strong growth in consultancy services, particularly professional and rating advice. Growth in the market for outsourced property advisory services provided opportunities, and new contracts were secured with Kwik-Fit, Land Securities Trillium and Mapeley on a nationwide basis. Equity Management Equity Management provides financial and technical support to the Group s participation in PFI/PPP initiatives. In May 2003, as part of the Connect Roads Joint Venture, we achieved financial close on the M77 Design Build Finance Operate (DBFO) PFI Road project. In February 2004, as part of the Holdfast consortium we achieved financial close on the Colchester Garrison PFI project. The maturing PFI/PPP market has led us to refine our PFI model. Third party equity is increasingly available at an earlier stage in the concession, allowing Atkins to focus on design, bidding and procurement rather than long term equity investment. During the year, we disposed of our interest in all but one of our Schools PFI projects and all of our Connect Roads projects for a total consideration of 17.2 million. We also disposed of our interest in Atkins Rebserve (Proprietary) Ltd, the company established to undertake the Telkom South Africa facilities management contract. Improving economic conditions are expected to revive the office and industrial sectors, although rising interest rates may curtail growth in the retail sector as consumer spending slows. Investor appetites appear to be undiminished, but activity levels may fall due to scarcity of product. The trend for companies to outsource non-core property services and award contracts on a national basis is expected to grow, meaning that agents with an extensive geographic reach will be well positioned to meet customer requirements. Outlook I am confident that the Group is well positioned. The outlook for our markets is robust. We will continue to focus on our core competencies, with margin improvement and cash generation remaining key. Keith Clarke Chief Executive 19 July