Trading Statement

RNS Number : 8037X

Carillion PLC

30 June 2008

 

30 JUNE 2008         

CARILLION PLC

PRE-CLOSE TRADING UPDATE 

STRONG GROWTH IN UNDERLYING EARNINGS PER SHARE

Carillion, one of the UK's leading support services, Public Private Partnership project and construction companies, is providing this update on trading in the first six months of 2008 ahead of announcing its interim results on 28 August 2008.

Trading highlights

• Carillion has continued to perform strongly in the first half of 2008 with overall trading in line with our expectations. The outlook for the Group remains positive and we expect to achieve strong double digit growth in underlying earnings(1) per share against the comparable period in 2007.

• Our support services activities continue to be a major driver of growth.  

• Our Middle East business continues to deliver strong growth at very good margins of some 6 per cent.

• In construction services (excluding the Middle East) we continue to benefit from our strong order book and expect to make progress towards our objective of improving margins to 3 per cent over the next three years.  

• Equity investments in four Public Private Partnership projects have been sold generating proceeds of £35.9 million, reflecting an average discount rate of under 5.5 per cent.

• The Group's balance sheet remains robust with strong cash flow. Net borrowing at the half year is expected to be approximately £325 million, putting us on track to reduce net borrowing by the year end to below our original target of £300 million. 

• The Group's order book at the half year is expected to be in the region of £20 billion (2007: £15.8 billion). In addition, we expect to have a pipeline of probable new orders worth approximately £3.5 billion (2007: £2 billion).  

• The Group continues to expect to make strong progress in 2008 and deliver materially enhanced earnings in 2009.

Alfred McAlpine integration update 

• Following the acquisition of Alfred McAlpine in February 2008, we have made very good progress with integrating this business.   

• We have now firmly identified integration cost savings that will reach a run rate of £40 million a year by the end of 2009, a 33 per cent increase on the previously announced run rate of £30 million, with the one-off cost of delivering these savings increasing from £30 million to £40 million. 

(1)  Continuing operations before intangible amortisation, impairment, restructuring costs and non-operating items. 

• We expect the overall benefits of this acquisition to exceed our original expectations.

• A rigorous assessment of the fair value of assets acquired with Alfred McAlpine has been undertaken in accordance with International Financial Reporting Standards (see page 3).  

• As previously announced, overall these adjustments are in line with our expectations at the time of the acquisition and will have no impact on the Group's total net assets, profits or cash flow. We do not expect to make any significant further adjustments in relation to the acquisition of Alfred McAlpine. However, in the event that adjustments are required, these will be made transparent in accordance with the relevant accounting standards and will have no impact on underlying profit or earnings.  

Financial reporting segments

FTSE re-classification

The FTSE/Dow Jones Indices changed Carillion's Industry Classification Benchmark from sub-sector Heavy Construction to Business Support Services after close of business on 20 June and Carillion shares have been trading in the Business Support Services sector from 23 June 2008. This move reflects the material change in composition of Carillion's business activities in line with the Group's strategy for growth, which, following the acquisition of Alfred McAlpine earlier this year, has created a leading UK support services business.  

Support services

We have continued to make good progress and expect to achieve strong first half revenue growth at margins slightly above the 2.9 per cent achieved in the first half of the previous year. We continue to expect to achieve strong revenue growth at margins of between four and five per cent for the full year, in line with our objective for this segment.  

The outlook in our target market sectors remains positive and the intake of new orders in support services continues to be strong, with a number of notable contract wins in the first half that reflect the Group's ability to provide customers with fully integrated solutions for large, complex property estates. These included a £500 million contract for BT, a £350 million contract for Philips and a £40 million contract for AXA. At the half year, we expect our forward order book to be in the region of £11.5 billion (2007: £8.6 billion) and to have a pipeline of probable new orders in this segment worth approximately £0.5 billion (2007: £0.6 billion).

Public Private Partnership (PPP) projects

Carillion's ability to win and successfully deliver PPP projects, by integrating our skills in Private Finance, design, construction, maintenance and lifetime facilities and asset management, continues to generate substantial value for the Group.  

Equity investments in four PPP projects - Lewisham Hospital, James Cooke Hospital, Barnsley Schools and Redcar and Cleveland Schools - have been sold generating total proceeds of £35.9 million. The proceeds generated in respect of these sales reflected a net present value for the cash flows from these investments based on a discount rate of below 5.5 per cent.  

At the half year, we expect to have investments or commitments to invest amounting to approximately £176 million in 22 financially closed projects. The Directors' valuation of these investments, based on discounting the cash flows at eight per cent, is expected to be approximately £235 million (December 2007: £266 million).

In the first half of 2008, a Carillion joint venture achieved financial close on the Nottingham Building Schools for the Future (BSF) project in which Carillion expects to invest £1.4 million of equity. A Carillion joint venture was also appointed preferred bidder for the Tameside BSF project, in which we expect to invest £3.3 million of equity. These two projects are also expected to generate around £380 million of support services and construction services revenues for the Group.  

In addition, Carillion joint ventures are the preferred bidders for two Independent Sector Treatment Centres, in which Carillion expects to invest equity of approximately £6.5 million, and shortlisted for a further nine PPP projects in the UK and Canada in which Carillion could potentially invest up to £70 million. We are therefore well placed to continue adding new investments to our PPP portfolio.  

At the half year, we expect our forward order book in this segment to be in the region of £5 billion (2007: £4.8 billion) and to have a pipeline of probable new orders in this segment worth approximately £0.2 billion (2007: £0.3 billion).

Middle East construction services

Our markets in the Middle East remain very strong and our joint venture business has negotiated a number of new orders in Dubai and Abu Dhabi in the first half of the year worth approximately £1.1 billion, of which Carillion's share of revenue is expected to be some £550 million. In Dubai these orders include a partnering agreement for construction of the TimeZone Business Park for the Dubai Multi Commodities Centre and infrastructure works for the Motor City Development of Union properties and for the Burj development of Emaar Properties. In Abu Dhabi, we have been awarded construction contracts for the Race Track Hotel and for infrastructure works for new smelter facilities for Emirates Aluminium. 

At the half year, we expect our forward order book for Middle East construction services to be in the region of £0.7 billion (2007: £0.7 billion) and to have a pipeline of probable new orders in this segment worth approximately £1.7 billion (2007: £0.2 billion). 

The outlook for continuing long-term growth in this region remains very positive and we continue to expect our share of revenues to grow to over £600 million by the end of 2009 at margins of some six per cent. 

Construction services (excluding the Middle East)

Overall trading in our chosen sectors of the UK non-housing construction market continues to be positive and supports our focus on growing margins ahead of revenue. We have continued to win new orders in our principal market sectors, including education, airport developments, retail, leisure, mixed used developments, prisons and urban regeneration, in line with our strict selectivity criteria. Consequently, performance in this segment remains firmly in line with our expectations and the outlook for the full year also remains positive. 

At the half year, we expect our forward order book for construction services (excluding the Middle East) to be in the region of £2.7 billion (2007: £1.7 billion) and to have a pipeline of probable new orders in this segment worth approximately £1.1 billion (2007: £0.9 billion).  

New orders secured in the first half of 2008 included the Media Centre for the 2012 Olympic Games, worth £300 million, and a £330 million construction contract for the Terminal 5 satellite at Heathrow for BAA, following Carillion's selection as a framework contractor for BAA's £6.1 billion five-year airport investment programme.  

Our principal market sectors in Canada and the Caribbean also remain very healthy and we are making good progress with construction of the Sault Area Hospital, Ontario, our third major Public Private Partnership hospital in Canada.  

Acquisitions 

Alfred McAlpine integration update

Following the acquisition of Alfred McAlpine in February 2008, we have made very good progress with integrating this business. Customer facing business units have been established, supported by central shared services, and Carillion's selectivity and risk management policies have been fully implemented. 

Integration cost savings have been firmly identified that will deliver savings at a run rate of £40 million a year by the end of 2009, an increase of 33 per cent on our previously announced expectation of achieving a run rate of £30 million a year by the end of 2009. Absolute cost savings are expected to be some £15 million in the year ending 31 December 2008, rising to £30 million in 2009 and £40 million in 2010. The one-off cost of delivering higher integration cost savings will be £40 million, compared with the previously announced one-off cost of £30 million. Whilst it is difficult to predict the exact timing of these costs, we currently expect the majority of costs to fall in 2008 with the balance in 2009.  

The main areas in which integration cost savings are being achieved include eliminating duplication in management and business support functions, the rationalisation and consolidation of office and other properties, leveraging the enlarged supply chain and the rationalisation of IT systems and resources to the Carillion shared services platform. Contributions to the additional £10 million of savings have come from all of these areas, but particularly the elimination of duplication and property rationalisation.  

Therefore, the overall benefits of this acquisition are expected to exceed our original expectations.

Alfred McAlpine acquisition accounting

On 12 February 2008, Carillion acquired 100 per cent of the issued share capital of Alfred McAlpine for a total consideration of £554.5 million. The total consideration was satisfied by the issue of 112.9 million Carillion plc shares, valued at the quoted mid-market price at the close of business on the day preceding the effective date of acquisition of 337.75 pence, and £171.7 million in cash and £1.3 million of loan notes. In addition, the attributable costs of the transaction are estimated to be £10.4 million.

A preliminary assessment of the fair value of assets acquired with the Alfred McAlpine business has been completed in accordance with International Financial Reporting Standards. The fair value adjustments, which have no impact on the Group's total net assets, profit or cash flow, are in line with our original expectations and are illustrated below.  

	Carrying value at  12 February 2008  £m	Fair value adjustments £m	Accounting policy adjustments  £m	Acquired intangibles £m	Recognised values   £m
Property, plant and equipment	26.4	(0.7)	-	-	25.7
Goodwill	184.5	(184.5)	-	-	-
Acquired intangibles	-	-	-	125.4	125.4
Investments in jointly controlled entities	13.4	0.9	-	-	14.3
Deferred tax assets	30.9	-	-	-	30.9
Assets held for sale	16.7	2.3	-	-	19.0
Inventories and receivables	224.0	-	(15.5)	-	208.5
Net borrowing	(96.4)	-	-	-	(96.4)
Trade and other payables	(293.6)	0.3	-	-	(293.3)
Retirements benefit liabilities (net of tax)	(42.3)	(2.3)	-	-	(44.6)
Deferred tax liabilities	(2.9)	2.9	-	(35.1)	(35.1)
Provisions	(4.5)	-	-	-	(4.5)
Net identifiable assets and liabilities	56.2	(181.1)	(15.5)	90.3	(50.1)
Goodwill recognised on acquisition					615.0
Consideration (including attributable costs)					564.9

• The principal fair value adjustment relates to £184.5 million of goodwill on the Alfred McAlpine balance sheet at the date of acquisition which will be reclassified at the same value as goodwill on Carillion's balance sheet under the requirements of International Financial Reporting Standards.
  

• The £15.5 million accounting policy adjustment results from applying Carillion's policy in respect of expensing rather than capitalising certain mobilisation costs associated with the commencement of new contracts. 
  

• The £90.3 million of acquired intangibles relates to the value ascribed to acquired customer lists and contracts.

Consistent with International Financial Reporting Standards, the £56.2 million carrying value of the net assets acquired at 12 February 2008 incorporates a number of adjustments made to the pre-acquisition Alfred McAlpine financial statements. These adjustments follow a rigorous review of all balance sheet categories, including over 400 contracts, and include the following items, which are stated net of deferred tax where appropriate

• a £45.8 million reduction in the carrying value of completed contracts, with a view to facilitating a swift resolution of   all outstanding matters, including cash settlements, pertaining to these contracts
  
• a reduction in the capitalised value of IT assets of £45.3 million
  
• a £30.4 million reduction in the carrying value of ongoing contracts, consistent with Carillion's prudent profit recognition practices and  
  
• an increase in retirement benefit liabilities of £30.2 million, calculated using Carillion's more conservative valuation assumptions in respect of the rate of increase in salaries, the rate of increase in pensions, the inflation rate and the discount rate.

We do not expect to make any significant further adjustments in relation to the acquisition of Alfred McAlpine. However, in the event that adjustments are required, these will be made transparent in accordance with the relevant accounting standards and will have no impact on underlying profit or earnings.  

Based on this assessment of fair value, goodwill arising from the acquisition is expected to be £615 million and is the sum of the adjusted value of the acquired Alfred McAlpine net liabilities of £50.1 million and the consideration for the acquisition, including equity shares issued, cash, loan notes and transaction costs of £564.9 million.  

Presentation on support services and this update on trading

Carillion will be hosting a presentation for analysts and investors on this statement and on Carillion's support services business today. A copy of the presentation will be placed on the Carillion plc website. 

For further information contact:

Richard Adam, Group Finance Director                               tel: [phone]

John Denning, Group Corporate Affairs Director                    tel: [phone]

30 June 2008

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Notes to Editors

Carillion is one of the UK's leading support services, Public Private Partnership project and construction companies. The Group has annual revenue of around £5 billion, employs some 50,000 people and operates across the UK, in the Middle East, Canada and the Caribbean. 

In the UK, Carillion's principal market sectors are Defence, Education, Health, Facilities Management and Services, Rail, Roads, Building, Civil Engineering and Utilities Services. 

In the Middle East, Carillion's principal market sectors are Construction and Facilities Management and Services. 

In Canada and the Caribbean, the Group's main sectors are Health, Roads Maintenance and Construction.

Carillion has a substantial portfolio of equity investments in Public Private Partnership projects, particularly in the Defence, Education, Health and Transport sectors.

This and other Carillion news releases can be found at www.carillionplc.com

 

END

 

 

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