Kier Regulatory News (KIE)

9 March 2023

Kier Group plc

Results for the period ended 31 December 2022

Strong performance: Order book increased 26%

Kier Group plc ("Kier", the "Company" or the "Group"), a leading UK infrastructure services, construction and property group, announces its results for the six months ended 31 December 2022 ("HY23" or the "period").

1 Revenue of the Group and its share of revenue from joint ventures

2 Stated before adjusting items of £9.1m (HY22: £19.0m) and amortisation of acquired intangible assets of £9.8m (HY22: £9.9m).

3 Stated before adjusting items of £10.6m (HY22: £20.4m) and amortisation of acquired intangible assets of £9.8m (HY22: £9.9m).

4 Disclosed net of the effect of hedging instruments and excludes leases - see note 11 to the preliminary financial statements.

HY23 Highlights 

· Strong performance despite ongoing inflationary pressure

o Adjusted operating profit increased 6% to £57m (HY22: £54m)

o Margin improved 20 basis points to 3.7%; above medium-term target of c. 3.5%

o Adjusted basic EPS increased 9% to 8.5p (HY22: 7.8p)

o Net debt at 31 December 2022 of £(131)m: reflecting seasonal working capital unwind

o Average month-end net debt of £(243)m from £(191)m: operating cash flow used to reduce debt-like items

o Supply chain finance ("KEPS") repaid in full during the period (HY22: £69m, HY19: £201m)

· High quality order book, increased 26% to £10.1bn (HY22: £8.0bn) providing high degree of visibility

o 96% of expected FY23 revenue secured

· Reported profit from operations increased 51% to £38m (HY22: £25m)

· Continued commitment to Sustainability Framework and ESG targets

· Trading is in line with the Board's expectations and the Group remains confident in achieving its medium-term value creation plan targets

Andrew Davies, Chief Executive, said:

"The strong performance of the Group over the last six months reflects our enhanced resilience and strengthened financial position. Our order book has increased significantly against the prior year, reflecting a large number of contract wins across our divisions and this provides us with good, multi-year revenue visibility. These awards reflect the bidding discipline and risk management now embedded in the business.

Looking ahead, we expect to generate positive operating cashflow for the full year and deliver a net cash position at the year-end. Current trading remains in line with the Board's expectations despite political and economic uncertainties. The Group is well positioned to continue benefiting from UK Government infrastructure spending commitments and focused on the delivery of a sustainable net cash position and a sustainable dividend, in line with our medium-term value creation plan."

HY23 Results Presentation

Kier Group plc will host a presentation for analysts and investors at 9:00am on 9 March 2023 at the offices of Peel Hunt, 100 Liverpool Street, London EC2M 2AT.

Analysts wishing to attend should contact FTI Consulting to register - Connie.Gibson@fticonsulting.com

Analysts unable to attend in person will be able to join the webcast using the details below:

Webcast: https://www.investis-live.com/kier/63e67e753e92bb0c008b700f/cdsvd

United Kingdom: +44 800 640 6441

United Kingdom (Local): +44 20 3936 2999

Conference password: 073819

An audio recording will be available on our website in due course.

Medium-Term Value Creation Plan

The Group is focused on delivering its medium-term targets over a three to five year period:

The Group aims to achieve these medium-term targets through:

· volume growth and improved contract profitability

· continued management discipline

· deploying additional capital in the Property business

The Group continues to make good progress against these targets. Despite political and economic uncertainties, our core markets have remained favourable. We are a "strategic supplier" to the UK Government and over 90% of our contracts are with the public sector and regulated companies.

Order Book

The Group continues to deliver against its medium-term value creation plan.

The order book at 31 December 2022 was £10.1bn, a significant increase of 26% against the prior year, reflecting a large number of contract wins across all divisions and providing multi-year revenue visibility. 

The order book is 96% secured for FY23 which provides us with a high degree of certainty against wider market conditions. The awards are high quality and profitable reflecting the bidding discipline and risk management embedded in the business.

Customers and winning new work

We remain focused on winning work through our long-standing client relationships and regionally based operations.

Highlights in the year:

· Utilities

o  reappointed to the £55m per annum, 3 year extension of the Network Service Alliance framework by South West Water and Bournemouth Water

· Construction

o  two Kier joint ventures have been appointed to all six lots of the £10bn Offsite Construction Solutions framework; re-appointed to the North West Construction Hub High Value Construction Framework; appointed on a £22m investment programme by the Isle of Wight NHS Trust to redevelop St Mary's Hospital and awarded three school projects by the Department for Education 

o  Kier Places - preferred bidder on a £75m housing maintenance contract for 10 years with RHP Group across its housing portfolio in Richmond, Hounslow, Kingston and Hillingdon

Strategy

The simplification and strengthening of the Group's balance sheet has resulted in Kier being well-placed to continue to pursue its strategic objectives successfully within its chosen markets and allow it to further enhance and capitalise on its position as a strategic partner to its customers.

The Group's strategy continues to be focused on:

· UK Government, regulated industries and blue-chip customers

· operating in the business-to-business market

· contracting through long-term frameworks

Our core businesses are well-placed to benefit from the announced and committed UK Government spending plans to invest £600bn in infrastructure over 5 years. We have secured places on long-term frameworks through which much of the increased spend will be deployed.

This, combined with our nationwide coverage and project management expertise, is expected to drive our strategic actions of disciplined growth, consistent delivery and strong cash generation.

Financial Summary

Kier reported revenue of £1.5bn (HY22: £1.5bn) which reflects resilience in Infrastructure Services, growth in Construction, offset by the anticipated cyclical reduction in activity in the Property business.

The Group's HY23 results demonstrate a strong performance despite continuing cost inflation relating to materials, wages and other costs. We remain successful in mitigating these pressures through having c.60% of our order book under target cost or cost reimbursable contracts, procurement strategies, ability to mitigate risk through negotiations on fixed price contracts and an average order size of c.£14m in our Construction business resulting in a regular re-pricing of contracts.

The Group delivered adjusted operating profit of £57m which represents a 6% increase on the prior year (HY22: £54m). Both our Infrastructure Services and Construction divisions performed well in the first half of the year, partially offset by the expected reduction in transactions within the Property division.

Group adjusted operating profit margin increased by 20 basis points to 3.7% (HY22: 3.5%). Reported profit from operations increased 51% to £38m (HY22: £25m) with a reduction in adjusting items.

Adjusted basic earnings per share increased 9% to 8.5p (HY22: 7.8p) and reported earnings per share increased 114% to 4.7p (HY22: 2.2p).

The Group had a free cash outflow of £(88)m (HY22: £(110)m). This reflects continued underlying working capital improvements offset by the usual seasonal working capital unwind and the repayment of the supply chain finance facility ("KEPS") of £50m in July 2022.

The Group's net debt position at 31 December 2022 was £(131)m and remains unchanged from HY22 in line with expectations. In the first half of the year, in addition to the full repayment of KEPS, the Group paid adjusting items, pension deficit obligations and purchased existing Kier shares for future employee share based remuneration. During the second half of the year, the Group is anticipating a reversal of the H1 seasonal working capital outflow and a return to net cash.

As anticipated, average month-end net debt for the period was £(243)m (HY22: £(191)m), higher than the prior year. The Group generated positive operating cash flow which was used to reduce the average month-end KEPS balance, pay adjusting items, tax and interest, pension deficit obligations and remaining HMRC COVID-19 support.

The Group fully repaid its remaining £50m KEPS facility in July 2022 followed by £54m of its Revolving Credit Facility ("RCF") and US Private Placement ("USPP") Notes which matured in December 2022.

Capital Allocation

In addition to the medium-term value creation plan, the Group has set out its capital allocation priorities. The Group maintains a disciplined approach to capital and continuously reviews capital allocation priorities with the aim of maximising shareholder returns.

The Group's capital allocation is underpinned by its commitment to maintain a strong balance sheet. The capital priorities are:

· Capex - disciplined and non-speculative investment to support its businesses

· Deleveraging - further deleveraging. Targeting a sustainable net cash position in the medium-term and a funding profile which is appropriate for the medium and long-term needs of the Group

· Dividend - reinstating the dividend is key to ensuring that shareholders share the benefits of the Group's growth. In the medium-term, the Group is targeting a dividend cover of around three times through the cycle

· Mergers and acquisitions - the Group will consider value accretive acquisitions in core markets where there is potential to accelerate the medium-term value creation plan

Performance Excellence

Through our Performance Excellence culture, which was introduced in 2020, Kier has embedded a strong operational and financial risk management framework across the Group. It is essential to, and embedded within Kier's contract selection and delivery processes. 

During 2022, we updated Performance Excellence to match the evolving needs of Kier and its clients. Five new workstreams were established, Culture and Behaviours, Customers, Digital, Simplification and Wellbeing. These workstreams ensure we continue to meet our obligations to the environment and the communities we work within, as well as our investors and client expectations.

The key tenets are as follows:

· measure clients' and customers' experiences objectively, using data to improve our external relationships

· adopt a digital-first approach through a digitally enabled workforce increasing productivity

· instil best practices in our workforce through behaviour, cultural programmes, and wellbeing initiatives

· simplify processes across the Group

· win new business with attractive margins

Performance Excellence is also fundamental to the Group's overall approach to safety. We aim to continually improve the Group's processes and performance by operating through this framework.

Supply Chain Partners

We have also focused on maintaining and growing relationships with our key stakeholders, including our supply chain. Many of our suppliers are long-term partners of the Group and we value their contribution.

We were pleased to report that, in our latest Duty to Report on Payment Practices and Reporting submission, covering the period from 1 July 2022 to 31 December 2022, the Group's aggregate average payment days was 34 days (HY22: 34 days) and the percentage of payments made to suppliers within 60 days was 87% (HY22: 92%).

We are committed to making further improvements in our payment practices and continue to work with both customers and suppliers to achieve this. We are fully committed to complying with the 30-day payment requirements for small and medium sized firms.

Management Change

The Group has continuously focused on the strength of its talent and succession management. This was demonstrated in the first half of the year with Louisa Finlay's promotion to Chief People Officer replacing Helen Redfern. Stuart Togwell was appointed as Group Managing Director, Construction, replacing Liam Cummins.

Ross MacKenzie was appointed as Interim Group Managing Director, Infrastructure Projects, replacing Mark Pengelly. Mark Pengelly has been appointed as the Interim Managing Director of our HS2 joint venture, Eiffage, Kier, Ferrovial and BAM ("EKFB").

In addition, Andrew Davies was appointed as Chair to the EKFB board.

Environmental, Social and Governance ("ESG")

Kier's purpose is to sustainably deliver infrastructure which is vital to the UK. As a "strategic supplier" to the UK Government, ESG is fundamental to our ability to win work and secure positions on long-term frameworks. UK Government contracts above £5m require net zero carbon and social value commitments.

Our Building for a Sustainable World framework covers sustainability from both an environment and social perspective. Our framework is based on ten pillars and follows the guiding principles of the 17 United Nations Sustainable Development Goals ("SDGs").

· Environmental

Under the Group's sustainability framework, Kier has set out our pathway to become net zero carbon across our business operations by 2039 (Scope 1 and 2) and value chain (Scope 3) by 2045.

In the first half of the year, the Group launched battery storage units in place of generators to supply power across a number of our operational sites. Early trials have indicated a significant reduction in carbon as well as a cost saving opportunity.

· Social

We have also made commitments on social value. Our target is to create £5bn in social value by 2030. Our people are our greatest asset. At 31 December 2022, we had 559 apprentices employed within the organisation, which equates to 6% of our workforce. In addition, 7.5% of the workforce are on a formal learning programme.

In January 2023, we committed to offering paid internships to talented under-represented individuals in partnership with "10,000 Black Interns". We have initially pledged to offering 10 placements.

We continue to deliver training programmes as a key means of upskilling our employees and bringing in early careers recruits to reduce the industry skills gap.

The Group's 12-month rolling Accident Incident Rate ("AIR") at HY23 of 101 represents a decrease of c.12%, compared to FY22. The improvement demonstrates our commitment to continuously improve our safety performance and ensure our people and valued supply chain go home safe and well every day.

The 12-month rolling All Accident Incident Rate ("AAIR") at HY23 of 331 represents a slight increase of c.5% compared to the end of FY22. Whilst we are disappointed with this performance, we remain focused on improving this metric and believe that overall we retain a strong safety record and maintain the highest standards in our industry.

Recent initiatives such as our re-aligned health, safety and wellbeing structure along with our focus on safety mindsets, behaviours and raising the profile of our people's wellbeing has had a positive impact on our safety performance. Safety remains our license to operate and we continue to embed best practice and make conditions as safe as possible for our workforce.

On 23 January 2023, the UK's national regulator for workplace health and safety, Health and Safety Executive ("HSE") fined the Group £4.4m for safety breaches in connection with two incidents in our Highways business dating back to March 2018 and January 2019. The incidents relate to work carried out on the M6 motorway.

Since then the Highways business has been very successful in transforming its safety record over the last four years. At 31 December 2022, it was the highest ranked Tier 1 contractor for health and safety by National Highways and lost time incidents significantly reduced from 39 to 6 from FY19 to FY22.

· Governance

Governance remains a core component of the Group's approach to operations. The Group monitors governance matters through Annual BSI audits on ISO14001, 45001 & 9001 compliance, Integrated Operational Assurance Statement, processes and operating assurance statements.

Summary and Outlook

The performance of the Group over the last six months reflects our significantly enhanced resilience and strengthened financial position. Our order book has increased significantly against the prior year, reflecting a large number of contract wins across our divisions and this provides us with good, multi-year revenue visibility. These awards reflect the bidding discipline and risk management now embedded in the business.

Looking ahead, we expect to generate positive operating cash flow for the full year and deliver a net cash position at the year end. Current trading remains in line with the Board's expectations. The Group is well positioned to continue benefiting from UK Government infrastructure spending commitments and focused on the delivery of a sustainable net cash position and a sustainable dividend, in line with our medium-term value creation plan.

Operational Review

Infrastructure Services

5 Stated before adjusting items of £11.8m (HY22: £10.4m)

The Infrastructure Services segment comprises the Highways, Infrastructure and Utilities businesses.

Infrastructure Services revenue increased 5% against the comparative period, primarily due to the continued ramp up of capital works on HS2. Adjusted operating profit increased 3% to £34m due to mix. Higher HS2 volumes were offset by continued growth costs in Utilities. Adjusting items include £1.5m for the HSE fine in relation to Highways.

The Highways business designs, builds and maintains roads for National Highways, Transport for London and a number of district and county councils. The business is focused upon the successful delivery of the significant number of wins from FY22 which included new contracts and contract extensions in Highways Maintenance, alongside the design and build of three National Highways Major Projects.

The marketplace is seeing a shift towards major projects. Success in the Major Projects market requires relevant experience alongside a suite of skills and capabilities through the project life cycle, for which Kier is well positioned.

The Infrastructure business delivers major and complex infrastructure and civil engineering projects, including HS2, Devonport 10 dock facility, Oxford Railway Station and ongoing works at Sellafield and Hinkley Point C. Infrastructure benefited from a ramp up in HS2 volumes during the period.

The Utilities business delivers long-term contracts providing construction and maintenance services to the water, energy, and telecoms sectors. The Utilities business has seen higher activity in the telecoms sector with the UK Government's commitment to rolling out 5G connectivity to the UK. As a result, the business has increased its investment in contract mobilisation costs. The ramp up has resulted in an adverse impact on margins. The Utilities business is currently undertaking a strategic review aimed at reviewing its back-office and regionally based support levels.

The Utilities business has continued to win work including being reappointed to the £55m per annum, 3 year extension of the Network Service Alliance framework by South West Water and Bournemouth Water.

97% of orders have been secured for FY23.

Construction

6 Stated before adjusting items of £7.2m (HY22: £13.5m)

Construction segment comprises Regional Building, Strategic Projects, Kier Places (including Housing Maintenance, Facilities Management and Environmental Services), as well as our International business. Construction has national coverage delivering schools, hospitals, defence, custodial facilities and amenities centres for local authorities, councils and the private sector.

Revenue increased 4% due largely to the start of works on the new custodial facility, HMP Full Sutton in Yorkshire and growth in Kier Places as we benefit from increased facilities and housing management contracts.

Adjusted operating profit increased 25% to £33m driven by increased volume and the impact of prior year's restructuring. Adjusting items include £4.0m relating to fire cladding costs.

The order book significantly increased from £3.5bn to £4.3bn reflecting a period of strong bidding activity.

We were recently re-appointed to the North West Construction Hub High Value Construction Framework, appointed on a £22m investment programme by the Isle of Wight NHS Trust to redevelop St Mary's Hospital and awarded three school projects by the Department for Education.

In January 2023, two Kier joint ventures were appointed to all six lots of the £10bn Offsite Construction Solutions framework.

As a regional contractor, we continue to be well placed to benefit from UK Government spending commitments focused on areas such as health, education and custodial services, where our Construction business has specialist expertise. However, during the year, we have seen UK Government procurement delays driven by cost inflation.

Our Kier Places business specialises in working in occupied properties both residential and offices, delivering maintenance, repairs, fire safety and compliance services. The business has benefited from increased work opportunities from existing customers, resulting in increases in both volumes and profitability. 

It continues to win new work and is the preferred bidder on a £75m housing maintenance contract for 10 years with RHP Group across its housing portfolio in Richmond, Hounslow, Kingston and Hillingdon.

The continued soft markets served by our UAE-based International business result in an ongoing focus on managing its cost base and projects.

95% of orders have been secured for FY23.

Property

7 Stated before adjusting items of £0.3m (HY22: £0.6m)

· Andover development in Partnership with Test Valley Borough Council was fully let

· Solum Regeneration, the Kier joint venture with Network Rail, sold its final residential block at Twickenham Gateway development

The Property business invests and develops primarily mixed-use commercial and residential schemes and sites across the UK. The business is a well-established urban regeneration and property developer and largely operates through joint ventures.

Revenue of £11m and adjusted operating profit of £4.7m in the first half of the year was driven by lower transaction activity as a result of market conditions, in contrast to a higher level of transactions in the prior year. Property recognised a fair value gain of £6.3m related to a transaction in its investment property portfolio in the first half of the year.

The Group has focused on the controlled expansion of the Property business through select investments and strategic joint ventures using a disciplined capital approach.

We expect to increase the average capital employed targeting £170m with a consistent rate of capital investment at the level expected to help smooth out the returns profile of the business over the medium-term. As at 31 December 2022, capital employed was £158m.

Corporate

8 Stated before adjusting items of £(0.4)m (HY22: £4.4m)

The Corporate segment comprises the costs of the Group's central functions and have reduced when compared to the prior year due to continuous improvement initiatives.

Financial Review

Introduction

The Group performed well through the first half of the year and delivered an adjusted operating profit of £57.2m (HY22: £54.2m, FY22: £120.5m). This represents a 20 basis points operating margin increase over the prior period to 3.7% with the Group exceeding its medium-term plan margin target of c.3.5%.

The continued strong operational performance, together with lower adjusting items led to a 51% increase in profit from operations to £38.3m (HY22: £25.3m, FY22: £45.1m) and a 100% increase in profit before tax to £25.4m (HY22: 12.7m, FY22: £15.9m). 

Adjusted earnings per share increased 9.0% to 8.5p (HY22: 7.8p, FY22: 16.8p).

As anticipated, the Group experienced a free cash outflow of £87.8m during the period (HY22: £109.7m, FY22: £54.6m inflow) driven by seasonal working capital and repayment of the Group's supply chain finance facility ("KEPS") (HY22: £69.3m, FY22: £49.8m).

Net debt at 31 December 2022 of £(130.6)m remained at a similar level to the period year (HY22: £(131.3)m, FY22: £2.9m). In the first half of the year, the Group repaid KEPS, adjusting items, pension deficit obligations and purchased existing Kier shares for future employee share based remuneration.

Average month-end net debt for the period ended 31 December 2022 was £(242.7)m (HY22: £(190.8)m, FY22 £(216.1)m), higher than the prior year. Positive operating cash flow was used to reduce the average month-end KEPS balance, pay adjusting items, tax and interest, pension deficit obligations and remaining HMRC COVID-19 support.

The Group continued to win new, high quality and profitable work in its markets on terms and rates which reflect the Group's bidding discipline and risk management. 

The order book has increased to £10.1bn, a 3% increase since the year-end and 26% higher than the prior period. (HY22: £8.0bn, FY22: £9.8bn). 96% of revenue for FY23 is already secured which provides certainty for the full year.

Summary of financial performance 

9 Reference to 'Adjusted' excludes adjusting items, see note 3.

Revenue

The following table bridges the Group's revenue from the period ended 31 December 2021 to the period ended 31 December 2022.

The Group grew revenue in both Infrastructure Services and Construction, offset by lower revenue in Property. There were increased transactions in Property in the prior financial year driven by market demand. The Group continues to focus on delivering high quality and high margin work. 

Alternative performance measures ("APMs")

The Directors continue to consider that it is appropriate to present an income statement that shows the Group's statutory results only.

The Directors, however, still believe it is appropriate to disclose those items which are one-off, material or non-recurring in size or nature. The Group is disclosing as supplementary information an "adjusted profit" APM. The Directors consider doing so clarifies the presentation of the financial statements and better reflects the internal management reporting and is therefore consistent with the requirements of IFRS 8.

Adjusted Operating Profit

A reconciliation of reported to adjusted operating profit is provided below:

Additional information about these items is as follows:

· Amortisation of acquired intangible assets £9.8m (HY22: £9.9m):

o Comprises the amortisation of acquired contract rights primarily through the acquisitions of MRBL Limited (Mouchel Group), May Gurney Integrated Services PLC and McNicholas Construction Holdings Limited.

· Restructuring and related charges £3.6m (HY22: £11.8m):

o Restructuring costs include £3.7m incurred on downsizing of personnel and other people related costs within the Group, including those related to the re-sizing of the International business. 

· Other costs £7.0m (HY22: £8.6m)

o Legal and compliance costs include £4.0m incurred on fire compliance and cladding claims. A further £1.5m was incurred in relation to the fine from HSE in relation to historical safety issues. In addition, £1.5m of finance costs relate to the IFRS 16 interest charge on leased properties that were previously vacated.

Earnings per share

Earnings per share ("EPS"), before adjusting items, from continuing operations amounted to 8.5p (HY22: 7.8p, FY22: 16.8p). EPS, after adjusting items, from continuing operations amounted to 4.7p (HY22: 2.2p, FY22: 2.9p).

Finance income and charges

The Group's finance charges include interest on the Group's bank borrowings and finance charges relating to IFRS 16 leases.

Interest on bank borrowings amounted to £11.9m (HY22: £9.6m, FY22: £18.9m) and finance lease charges were £4.7m (HY22: £3.3m, FY22: £6.5m). Interest costs have increased during the period due to the higher average month-end net debt and increased interest rates. The Group was able to partially mitigate the risk of higher interest rates with a fixed interest rate swap of £100m, which resulted in a fair value gain of £1.8m as at 31 December 2022. The swap expires in September 2023.

In February 2023, the Group entered into a further 3 year fixed interest rate swap of £100m reducing to £75m in its second year and £50m in its third year.

The overall cost of borrowing for the Group has decreased compared to previous years as a result of the Group's significantly improved average month end debt position.

The Group had a net interest credit of £3.8m (HY22: £0.4m, FY22: £1.0m) in relation to the defined benefit pension schemes which has arisen due to the combination of the large overall pension surplus and relatively high discount rate (derived from corporate bond yields), at the start of the financial year.

The Group continues to exclude lease liabilities from its definition of net cash/(debt).

Balance sheet

Net assets

The Group had net assets of £482.6m at 31 December 2022 (HY22: £509.1m, FY22: £554.6m). The primary driver for this is the decrease in the pension scheme surplus during the period.

Goodwill

The Group held intangible assets of £655.3m (HY22: £683.7m, FY22: £669.1m) of which goodwill represented £536.7m (HY22: £536.7m, FY22: £536.7m). No impairment triggers were identified in the period.

Deferred tax asset

The Group has a deferred tax asset of £133.7m recognised at 31 December 2022 (HY22: £116.9m, FY22: £108.8m) primarily due to historical losses. The asset has increased in the year due to the deferred tax credit in relation to the movement in the pension scheme asset.

Based on the Group's forecasts, it is expected that the deferred tax asset will be utilised over a period of approximately 11 years.

An adjusted tax credit of £3.9m (HY22: £5.6m, FY22: £14.8m) has been included within adjusting items, representing the tax impact of adjusting items.

Right-of-use assets and lease liabilities

At 31 December 2022, the Group had right-of-use assets of £122.0m (HY22: £88.5m, FY22: £80.6m) and associated lease liabilities of £197.9m (HY22: £167.8m, FY22: £157.6m). The increase in the period is principally due to the levels of hired plant and equipment required for major Infrastructure projects, including HS2 and Hinkley Point C.

Investment properties

The Group owns a number of office buildings which were formally utilised by the Group that have been vacated and are now leased out (or intended to be leased out) to third parties under operating leases. In addition, the Group's Property business invests and develops primarily mixed-use commercial and residential schemes and sites across the UK. One of these sites is held as an investment property. The Group recognised a fair value gain of £6.3m related to a transaction in the period which has been recognised in Other income.

Contract assets & liabilities

Contract assets represents the Group's right to consideration in exchange for works which have already been performed. Similarly, a contract liability is recognised when a customer pays consideration before work is performed. At 31 December 2022, total contract assets amounted to £336.5m (HY22: £332.6m, FY22: £397.5m).

Contract liabilities were £73.3m (HY22: £55.7m, FY22: £67.3m).

Retirement benefits obligation

Kier operates a number of defined benefit pension schemes. At 31 December 2022, the reported surplus, which is the difference between the aggregate value of the schemes' assets and the present value of their future liabilities, was £91.1m (HY22: £133.9m, FY22: £194.7m), before accounting for deferred tax, with the movement in the year primarily as a result of actuarial losses of £112.4m (HY22: £81.6m gains, FY22: £136.3m gains). A change in financial assumptions, resulting from higher corporate bond yields, has reduced the pension schemes' liabilities. However, there has also been a fall in the schemes' asset values, largely due to the level of liability hedging in the asset portfolio. High inflation rates have also impacted the pension surplus through higher annual pension increases awarded.

The Group is in the process of finalising its triennial pension valuation for 31 March 2022.

Free cash flow and Net debt

As expected, the Group experienced a free cash outflow during the year, driven by a seasonal working capital outflow and the repayment of £49.8m of KEPS in July 2022. Working capital is seasonal in the business with summer being a higher period of activity compared to winter months. Accordingly, during the second half of the year, the Group is anticipating a reversal of the H1 working capital outflow and a return to net cash.

The average month-end net debt position is higher than the comparative period at £(242.7)m, (HY22: £190.8m). Positive operating cash flow was used to reduce the average month-end KEPS balance, pay adjusting items, tax and interest, pension deficit obligations, remaining HMRC COVID-19 support and purchase existing Kier shares on behalf of employees.

The purchase of existing shares relates to the Group's employee benefit trusts which acquire Kier shares from the market for use in settling the long term incentive plan ("LTIP") share schemes when they vest. The trusts purchased and sold shares at a net cost of £11.9m (HY22: £1.8m; FY22: £7.0m).

For the full year 2023, we expect, as previously outlined that notwithstanding positive free cash flow, an increase in average month-end net debt attributable to the repayment of debt-like items such as KEPS and the HMRC COVID-19 support as well as the impact of lower activity in our Construction business until the fourth quarter of the year.

In FY24, we expect the average net debt to decrease with free cash flow generation given the Group's increased order book, expected revenue conversion and associated working capital inflow. The Group also expects a significant reduction in adjusting items.

Accounting policies

The Group's annual consolidated financial statements are prepared in accordance with UK-adopted International Accounting Standards and with the requirements of the Companies Act 2006. There have been no significant changes to the Group's accounting policies during the year.

Treasury facilities

Bank finance

The Group has committed debt facilities of £601.4m with a further £18.0m of uncommitted overdrafts.

The facilities comprise £515.0m Revolving Credit Facility ("RCF"), £78.5m US Private Placement ("USPP") Notes, £7.9m Schuldschein Notes as well as £18.0m of overdrafts.

During the period, the Group repaid £34.1m of USPP Notes and reduced the RCF by £20.0m. We expect to reduce a further £40.0m of the RCF, £7.9m of Schuldschein Notes and £3.4m of USPP Notes in the calendar year 2023. 

The Group has a £100m fixed interest rate swap through to September 2023. In February 2023, the Group entered into a further 3 year fixed interest rate swap at £100m reducing to £75m in its second year and £50m in its third year.

Supply chain finance

The Group's supply chain finance scheme was fully paid down in July 2022 (HY22: £69.3m, FY22: £49.8m).

Financial instruments

The Group's financial instruments mainly comprise cash and liquid investments. The Group selectively enters into derivative transactions (interest rate and currency swaps) to manage interest rate and currency risks arising from its sources of finance. The US dollar denominated USPP notes were hedged with fixed cross-currency swaps at inception to mitigate the foreign exchange risk. One non-recourse, project specific, property joint venture loan is hedged using an interest rate derivative to fix the cost of borrowing.

There are minor foreign currency risks arising from the Group's operations both in the UK and through its limited number of international activities. Currency exposure to international assets is hedged through inter-company balances and borrowings, so that assets denominated in foreign currencies are matched, as far as possible, by liabilities. Where exposures to currency fluctuations are identified, forward exchange contracts are completed to buy and sell foreign currency.

The Group does not enter into speculative transactions.

Going concern

The Directors are satisfied that the Group has adequate resources to meet its obligations as they fall due for a period of at least twelve months from the date of approving these financial statements and, for this reason, they continue to adopt the going concern basis in preparing these financial statements.

Further information on this assessment is detailed in note 1 of the condensed consolidated financial statements.

Statement of directors' responsibilities

The Directors confirm that these condensed interim financial statements have been prepared in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting', and the Disclosure Guidance and Transparency Rules sourcebook of the UK's Financial Conduct Authority and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

· an indication of important events that have occurred during the first six months and their impact on the consolidated financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

· material related-party transactions in the first six months and any material changes in the related-party transactions described in the last annual report.

There have been no changes to the directors of Kier Group plc as listed on pages 94 and 95 of the 2022 Annual Report and Accounts. Chris Browne OBE joined the Board as a Non-executive Director on 15 September 2022. A list of the current directors is also maintained on Kier Group plc's website at: www.kier.co.uk.

Signed on 8 March 2023 on behalf of the Board.

Cautionary Statement

This announcement does not constitute an offer of securities by the Company. Nothing in this announcement is intended to be, or intended to be construed as, a profit forecast or a guide as to the performance, financial or otherwise, of the Company or the Group whether in the current or any future financial year. This announcement may include statements that are, or may be deemed to be, ''forward-looking statements''. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms ''believes'', ''estimates'', ''anticipates'', ''expects'', ''intends'', ''plans'', ''target'', ''aim'', ''may'', ''will'', ''would'', ''could'' or ''should'' or, in each case, their negative or other variations or comparable terminology. They may appear in a number of places throughout this announcement and include statements regarding the intentions, beliefs or current expectations of the directors, the Company or the Group concerning, amongst other things, the operating results, financial condition, prospects, growth, strategies and dividend policy of the Group or the industry in which it operates. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and may be beyond the Company's ability to control or predict. Forward-looking statements are not guarantees of future performance. The Group's actual operating results, financial condition, dividend policy or the development of the industry in which it operates may differ materially from the impression created by the forward-looking statements contained in this announcement. In addition, even if the operating results, financial condition and dividend policy of the Group, or the development of the industry in which it operates, are consistent with the forward-looking statements contained in this announcement, those results or developments may not be indicative of results or developments in subsequent periods. Important factors that could cause these differences include, but are not limited to, general economic and business conditions, industry trends, competition, changes in government and other regulation, changes in political and economic stability and changes in business strategy or development plans and other risks.

Other than in accordance with its legal or regulatory obligations, the Company does not accept any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

Principal Risks and Uncertainties

You are advised to read the section headed ''Principal risks and uncertainties'' in the Company's Annual Report and Accounts for the year ended 30 June 2022 for a discussion of the factors that could affect the Group's future performance and the industry in which it operates. The Board believes that these principal risks and uncertainties will continue to apply to the Group in the second half of the financial year.

About Kier

Kier is a leading UK infrastructure services, construction and property group.

We provide specialist design and build capabilities and the knowledge, skills and intellectual capital of our people ensure we are able to project manage and integrate all aspects of a project.

We take pride in bringing specialist knowledge, sector-leading experience and fresh thinking to create workable solutions for our clients across the country.

Together, we have the scale and breadth of skills of a major company, while retaining a local focus and pride that comes from never being far from our clients, through a network of offices spanning across England, Wales, Scotland and Northern Ireland.

For further information and to subscribe to our news alerts, please visit: www.kier.co.uk

Follow us on Twitter: @kiergroup

Connect with us on LinkedIn: Kier Group

Independent review report to Kier Group plc

Report on the condensed consolidated interim financial statements

Our conclusion

We have reviewed Kier Group plc's condensed consolidated interim financial statements (the "interim financial statements") in the Condensed interim results of Kier Group plc for the 6 month period ended 31 December 2022 (the "period").

Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

The interim financial statements comprise:

· the Condensed consolidated balance sheet as at 31 December 2022;

· the Condensed consolidated income statement and Condensed consolidated statement of comprehensive income for the period then ended;

· the Condensed consolidated statement of cash flows for the period then ended;

· the Condensed consolidated statement of changes in equity for the period then ended; and

· the explanatory notes to the interim financial statements.

The interim financial statements included in the Condensed interim results of Kier Group plc have been prepared in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Basis for conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Financial Reporting Council for use in the United Kingdom ("ISRE (UK) 2410"). A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the Condensed interim results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

Conclusions relating to going concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed. This conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410. However, future events or conditions may cause the group to cease to continue as a going concern.

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the directors

The Condensed interim results, including the interim financial statements, is the responsibility of, and has been approved by the directors. The directors are responsible for preparing the Condensed interim results in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority. In preparing the Condensed interim results, including the interim financial statements, the directors are responsible for assessing the group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so.

Our responsibility is to express a conclusion on the interim financial statements in the Condensed interim results based on our review. Our conclusion, including our Conclusions relating to going concern, is based on procedures that are less extensive than audit procedures, as described in the Basis for conclusion paragraph of this report. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

PricewaterhouseCoopers LLP

Chartered Accountants

London

8 March 2023

Financial statements

Condensed consolidated income statement

For the six months ended 31 December 2022

1 Group revenue including joint ventures is an alternative performance measure.

2 Reference to 'adjusted' excludes adjusting items, see note 3. These are alternative performance measures.

Financial statements

Condensed consolidated statement of comprehensive income

For the six months ended 31 December 2022

Financial statements

Condensed consolidated statement of changes in equity

For the six months ended 31 December 2022

The numbers in the table above are shown net of tax as applicable.

Financial statements

Condensed consolidated balance sheet

As at 31 December 2022

Financial statements

Condensed consolidated statement of cash flows

For the six months ended 31 December 2022

Financial statements

Notes to the condensed consolidated financial statements

For the period ended 31 December 2022

1 Significant accounting policies

Reporting entity

Kier Group plc (the Company) is a public limited company which is listed on the London Stock Exchange and incorporated and domiciled in the UK. The Company's registered number is 2708030. The address of its registered office is 2nd Floor, Optimum House, Clippers Quay, Salford, M50 3XP.

The interim condensed consolidated financial statements (financial statements) for the period ended 31 December 2022 comprise the Company and its subsidiaries (together referred to as the Group) and the Group's interest in jointly controlled entities.

The accounting policies adopted are consistent with those of the previous financial year and corresponding interim reporting period.

Basis of preparation

The interim condensed consolidated financial statements for the half year ended 31 December 2022 have been prepared in accordance with the UK-adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

The unaudited financial information contained in this announcement does not constitute the Company's statutory accounts as at and for the six months ended 31 December 2022. Statutory financial statements for the year ended 30 June 2022 were approved by the Board of Directors on 14 September 2022 and delivered to the Registrar of Companies. The auditor's report on these accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain a statement under section 498 of the Companies Act 2006.

Going concern

The Directors continue to adopt the going concern basis in preparing the Group's interim financial statements.

The Group performed well through the half year ended 31 December 2022 and produced results in line with the Board's expectations.

As at 31 December 2022, the Group had £601.4m of unsecured committed facilities (30 June 2022: £654.0m) and £18.0m of uncommitted overdrafts (30 June 2022: £18.0m). Following the repayment of the outstanding KEPS facility, the Group had no uncommitted supply chain financing facilities at 31 December 2022 (30 June 2022: £49.8m).

Financial covenant certificates for December 2022 have been prepared with no breaches noted. The Directors have reviewed the Group's cash flow forecasts for the period to 30 June 2024, which are included in the Group's three-year strategic plan, on the basis of certain key assumptions, including a number of stressed but plausible downside scenarios and available mitigants under management control.

These scenarios included the consideration of risks which may arise to the Group's available liquidity and its ongoing compliance with financial covenants within the Group's principal debt facilities as a result of or in light of the following factors or circumstances:

· Potential reductions in trading volumes;

· Potential future challenges in respect of ongoing projects;

· Project inflation and subcontractor insolvency;

· Reduced investment/delays in Property transactions and cost of adoption of green legislation over and above the Group's net zero carbon commitment and waste reduction policies; and

· Plausible changes in the interest rate environment, noting the fixed interest rate swaps currently in place.

The Board also considered the macroeconomic and geopolitical risks affecting the UK economy, including the availability of labour, increased supply chain costs and increased interest rates. The Board noted that the Group's forecasts are underpinned by a significant proportion of revenue that is either secured or considered probable, often as part of long-term framework agreements, and that the Group operates primarily in sectors such as infrastructure, health, education and utilities, which are considered likely to remain largely unaffected by macroeconomic factors. Although inflationary pressures remain a risk, both in the supply chain and the labour market, this is partly mitigated by c.60% (30 June 2022: c.60%) of contracts being target cost or cost plus.

The Board has also considered the potential impact of climate change and does not consider the Group's operations are at risk from physical climate-related risks such as hurricanes and temperature changes in the short term. In the medium term the Board has concluded that any adverse financial impacts from required changes to operations in line with ESG requirements will be offset by opportunities which present the Group with additional volumes and profits, such as replacement of non-sustainable buildings, construction of new 'clean' power plants and 'green' building conversions. As such, the longevity of the Group's business model means that climate change has no material adverse impact on going concern.

Having reviewed the Group's cash flow forecasts, the Directors consider that the Group is expected to continue to have available liquidity headroom under its finance facilities and operate within its financial covenants over the going concern period, including in a downside scenario. The Directors also consider that the risk associated with going concern remains low following corporate actions taken in previous financial years and in light of the Group's execution of its strategic milestones, its most recent trading performance and latest forecasts, and the continued focus on improving headroom over liquidity and covenant limits.

As a result, the Directors are satisfied that the Group has adequate resources to meet its obligations as they fall due for a period of at least twelve months from the date of approving these interim financial statements and, for this reason, they continue to adopt the going concern basis in preparing these interim financial statements.

Segmental reporting

The Group operates three divisions: Infrastructure Services, Construction and Property, which is the basis on which the Group manages and reports its primary segmental information. Corporate includes unrecovered overheads and the charge for defined benefit pension schemes.

Segmental information is based on the information, which is provided to the Chief Executive, together with the Board, who is the Chief Operating Decision Maker. The segments are strategic business units with separate management and have different core customers and offer different services.

The accounting policies of the operating segments are consistent across the Group. The Group evaluates segmental information on the basis of profit or loss from operations before adjusting items (see note 3), interest and tax expense. The segmental results reported to the Chief Executive include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

2 Segmental reporting

Unaudited six months to 31 December 2022

Unaudited six months to 31 December 2021

Year to 30 June 2022