Carillion Plc Regulatory News (CLLN)

7 December 2016

Full year trading update

MEETING EXPECTATIONS LED BY A STRONG PERFORMANCE IN SUPPORT SERVICES

Carillion plc is providing this update on trading in 2016 ahead of announcing its preliminary results on 1 March 2017.

Highlights

· Performance meeting expectations

· Expect strong growth in total revenue and increased operating profit

· Performance continues to be led by revenue growth and a strong margin in support services

· Expect net borrowing to reduce from the half year level

· New orders plus probable orders in 2016 expected to reach £4.5 billion, with total orders plus probable orders of approximately £16 billion (December 2015: £17.4 billion) by the year end

· Visibility of revenue from framework contracts expected to be approximately £1.5 billion

· Revenue visibility(1) for 2017 of around 70% (December 2015: 84%)

· Pipeline of specific contract opportunities broadly unchanged at over £41 billion

Summary Group performance

Our performance in 2016 continues to reflect the Group's strategy for sustainable profitable growth through investing in our people, building long-term trusted partnerships, transferring knowledge and skills to new and existing markets in order to expand our support services and infrastructure activities and providing a selective, high-quality construction capability.

We expect total operating profit to increase as a result of strong revenue growth at a slightly lower operating margin. Our performance continues to be led by revenue growth and a strong margin in our support services business segment, which is expected to contribute around two thirds of the Group's total operating profit (2015: 57 per cent), with this increase more than offsetting the expected reductions in the contributions to underlying operating profit from the sale of equity in Public Private Partnership (PPP) projects and from Middle East construction services. The contribution from construction services (excluding the Middle East) is expected to be broadly similar to that in 2015.

We do not expect the first-half working capital outflow to be repeated in the second half. Consequently, we expect net borrowing at the year end to be below the £290 million level at 30 June 2016, despite the impact of the adverse movement in the GB pound US dollar exchange rate on our

(1) Based on expected revenue and secure and probable orders, which excludes framework contracts, variable work and re-bids.

Private Placement borrowing that is denominated in US dollars. This impact is non-cash because this US dollar borrowing is hedged, both in terms of interest costs and the cost of repayment at maturity. Average net borrowing is expected to increase from the £540 million level in 2015, again driven by the adverse movement in the US dollar exchange rate.

Following a strong work winning performance in the first half of the year, with £2.5 billion of new orders and probable orders, the pace of new order intake has slowed in the second half. We believe this is due in part to the changes within UK Government Departments following the EU referendum result, as they reassessed their spending priorities ahead of the Autumn Statement, and to the slower pace of contract awards in the Middle East, particularly in Oman, as a result of the prolonged low oil price. Consequently, we expect the total value of orders and probable orders won in the second half to be lower than the £2.5 billion won in the first half, with the total value of new orders won in the year reaching some £4.5 billion by the year end. However, the Group's total order book plus probable orders at the year end is still expected to be strong at around £16 billion (31 December 2015: £17.4 billion), with revenue visibility for 2017 of around 70 per cent (31 December 2015: 84 per cent for 2016). However, there is an increasing trend among some customers to engage suppliers like Carillion on framework contracts and we do not include the total value of these in our order book or probable orders. Currently, we already have good visibility of some £1.5 billion of revenue from these contracts over the next five years, in addition to that included in orders and probable orders.

The Group's pipeline of contract opportunities, which comprises specific contracts that we are either currently bidding or that we expect to bid, is expected to remain at a similar level to the £41.4 billion we reported at 31 December 2015. Furthermore, as one of the largest providers of infrastructure services in the UK, from which we generate upwards of £1 billion of annual revenue, we welcome the UK Government's recent Autumn Statement in which it increased its commitment to investing in economic infrastructure, particularly in sectors where Carillion is a market leader, notably highways, digital infrastructure and railways.

Business segments

Support services

We expect an increase in underlying operating profit, driven by revenue growth and a strong operating margin, as we benefit from full-year contributions from the major new contracts mobilised in 2015, from new contracts secured in 2016 and from the investment we have made in our systems. In 2016, we extended the duration and scope of the arrangements we have with our partner to whom we have outsourced certain back office activities and this will include the development of a new technology platform to support our facilities management business. In addition, we signed an agreement enabling our partner to use elements of our existing platform in certain territories where Carillion does not operate and we expect this to generate some £20 million of profit in 2016. Excluding this contribution to profit, the margin in 2016 is expected to be similar to that in 2015. As mentioned above, we also expect the proportion of the Group's total underlying operating profit that comes from support services in 2016 to increase to around two thirds, in line with our strategy of expanding our support services activities. The order book in support services is expected to be around £12 billion at the year end (2015: £12.7 billion) with the pipeline remaining at a similar level to that at the end of 2015, namely £12.1 billion, including good opportunities in the UK and Canada to support our ambitions for further growth in 2017.

Public Private Partnership (PPP) projects

We expect strong revenue growth in PPP projects, following our good work winning performance in 2015, when we achieved financial close on four new PPP projects and were selected as the preferred bidder for a fifth, which financially closed in July 2016. All five projects are now in the construction phase. Overall, our portfolio of investments in PPP projects continues to perform well. However, as previously indicated, we expect underlying operating profit in this segment to reduce, because profit from equity sales will be lower than that in 2015. Looking forward, we continue to have a modest, but steady flow of pipeline opportunities in the UK and Canada, notably in the health and transport sectors. We also continue to work on the development of a major PPP hospital project in Oman, for which we signed a Memorandum of Understanding with the Oman Investment Fund in 2016.

Middle East construction services

We continue to expect revenue to be close to that in 2015, with a lower operating margin. However, this is still a satisfactory performance, given the challenging trading environment and the fact that the contribution to profit in 2015 from reorganising our staff accommodation facilities in Oman of some £14 million was not repeated in 2016. To mitigate the effects of the current trading environment, notably the impact of the prolonged low oil price on the pace of customer investment programmes, we have remained very selective and focused on winning contracts with the support of UK Export Finance (UKEF). In 2017, we expect to focus increasingly on markets where demand from customers for this form of project finance remains high, notably in the UAE and Oman, using our experience and success in working with UKEF to help differentiate our offering and support our objective of returning to modest growth in 2017. We also continue to pursue PPP opportunities in the Middle East, notably the major hospital project in Oman mentioned above, from which we expect to benefit over the medium term. The value of our order book plus probable orders is expected to be approximately £0.5 billion at the year end (2015: £0.8 billion), with our pipeline of contract opportunities remaining stable at around £16.0 billion, which continues to support our ambition for growth in 2017.

Construction services (excluding the Middle East)

We expect a solid revenue performance in this segment, with the operating margin remaining within our target range of 2.5 per cent to 3.0 per cent. This result once again reflects our selective approach to choosing the contracts for which we bid in order to focus on maintaining a healthy operating margin. In Canada, we have continued to reduce our exposure to the general construction market by focusing only on construction work we deliver in joint ventures for PPP projects. Furthermore, we have begun closing our operations in the Caribbean, having decided to withdraw from this market. Consequently, we expect a further reduction in the revenue contribution from Canada and the Caribbean to this segment from around £100 million in 2015 to around £50 million in 2016. The values of the order book plus probable orders and of our pipeline of contract opportunities are expected to be largely unchanged from those at the end of 2015, at approximately £2.6 billion and £10.9 billion, respectively, and support our ambition of maintaining the revenue and operating margin in 2017 at similar levels to those we expect to achieve in 2016, as a result of maintaining our selective approach to the contracts for which we bid.

Outlook

Given the strength of our order book, framework contracts and pipeline of contract opportunities, we believe we are well positioned to make further progress in 2017. We will continue to be selective in terms of the contracts for which we bid and adapt to trends in our geographies and key markets, in order to focus on new or growing opportunities, such as those we expect in our infrastructure services markets, both in the UK, and in Canada. Consequently, we expect the proportion of our total revenue and operating profit from our support services activities to continue increasing, and for this to more than offset a further reduction in operating profit in PPP projects, because the contribution from selling equity investments will again be lower in 2017. Delivering strong cash flow remains a key objective and our ambition over the medium term is to reduce net borrowing, while continuing to invest to support the development of the business.

Conference call 

Carillion Group Chief Executive, Richard Howson, Group Finance Director, Richard Adam, and Group Finance Director designate, Zafar Khan, will host a conference call on this trading update for analysts and investors at 08.30 on 7 December 2016. The telephone number to join this call is UK: 0800 678 1161 or overseas: +44(0)1296 311600 - passcode: 704288. A replay facility is also available following the call on UK: 0800 032 9687 or Overseas: +44(0)207 136 9233 - passcode: 58308420, which will be available for 14 days. 

For further information contact

Richard Adam, Group Finance Director tel: +44 (0) 1902 422431

John Denning, Group Corporate Affairs Director tel: +44 (0) 1902 906333

Finsbury

James Murgatroyd or Gordon Simpson tel: +44 (0) 2072513801

Notes to Editors

Carillion is a leading integrated support services company with a substantial portfolio of Public Private Partnership projects and extensive construction capabilities. The Group had annual revenue in 2015 of some £4.6 billion, employs around 46,000 people and operates across the UK, in the Middle East and Canada.

The Group has four business segments.

Support services - this includes facilities management, facilities services, energy services, utility services, road maintenance, rail services, remote site accommodation services and consultancy services in the UK, Canada and the Middle East.

Public Private Partnership (PPP) projects - this includes investing activities in PPP projects for Government buildings and infrastructure, mainly in the Defence, Health, Education, Transport and Secure accommodation sectors in the UK and Canada.

Middle East construction services - this includes building and civil engineering activities in the Middle East.

Construction services (excluding the Middle East) - this includes building, civil engineering and developments activities in the UK and construction activities in Canada.

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