Kier Regulatory News (KIE)

17 June 2019

Kier Group plc

Conclusions of strategic review, significant refocusing of Kier and update on indebtedness

On 15 April 2019, Kier Group plc ("Kier" or the "Group") announced that Andrew Davies, Chief Executive, would lead a strategic review which aims to further simplify the Group, better allocate capital resources across the Group and identify additional steps to improve cash generation and reduce leverage. This work has been accelerated over the last month due in part to the ongoing speculation regarding the Group's financial position. As a result, the Board is now announcing the conclusions of the strategic review and providing an update on the Group's indebtedness.

Strategic focus

Kier has a number of high-quality, market-leading businesses, in particular Regional Building, Infrastructure, Utilities and Highways, which are valued by our customers. The performance of these businesses is underpinned by long-term contracts and positions on frameworks for Government and regulated clients. Together these businesses are expected to deliver long-term, sustainable revenues and margins and, with a renewed focus on their inherently cash generative characteristics, will be the core activities of the Group in the future.

In recent years, the Group has grown substantially, including through acquisitions. This strategy added a number of highly attractive businesses to the Group, including Highways, Utilities and Rail. However, the strategic review concluded that, during this period, there was insufficient focus on cash generation and that the Group today has debt levels that are too high. It also concluded that the Group's portfolio is too diverse and contains a number of businesses that are incompatible with the Group's new strategy and working capital objectives.

Kier is therefore today announcing a new strategy for the Group that will:

· focus on Regional Building, Infrastructure, Utilities and Highways;

· simplify the Group's portfolio by selling or substantially exiting non-core activities: Kier Living, Property, Facilities Management and Environmental Services;

· fundamentally restructure the Group to reduce headcount by c.1,200 and deliver annual cost savings of c.£55m from FY2021; and

· embed a culture of performance excellence with a particular focus on cash generation to deliver reduced average net debt.

Residential ("Kier Living")

Kier Living is a housebuilding business which operates across England and Wales, with a principal focus on the affordable segment of the housing market. In FY2018, Kier Living completed 2,042 units and in the six months ended 31 December 2018, the business completed 842 units. At 31 December 2018, Kier Living had a land bank of 4,739 plots.

Kier Living is a strong business but has limited operational synergies with other parts of the Group and would require significant ongoing funding from Kier to deliver future growth. The Board has therefore determined that Kier Living is non-core and has commenced a process to sell the business. In recent weeks, Kier has received a number of inbound expressions of interest in Kier Living.

As at 30 June 2018, Kier Living had a tangible net asset value of £120m. This value excluded certain land assets which were on the Group balance sheet at £60m but which are not expected to be included in the sale perimeter of Kier Living. This land comprises sites where there is no immediate intention of development and therefore the Group will review the carrying value of this land when producing its accounts for FY2019.

The Kier Living business operates a number of joint ventures ("JVs"), including with Homes England. It is expected that any sale of the business will also include Kier's interests in these JVs, together with its share of the JVs' net debt.

The sale of Kier Living is expected to provide financial benefits beyond a reduction in net debt due to the release of associated working capital and a reduction in the Group's use of supply chain financing and off-balance sheet debt.

Property

Kier Property is a property development business which focuses principally on non-speculative schemes across a number of sectors. The business operates attractive mixed-use schemes, with developments being delivered through long-term joint ventures with Government or regulated partners. Current examples of these schemes include the Watford Health Campus, a joint venture with Watford Borough Council, and Solum Regeneration, a joint venture with Network Rail.

However, the Board has concluded that the investment requirements of the Property business are incompatible with the Group's capital requirements. As a result, the Board will accelerate a reduction in the level of capital invested in the business, which may extend to its sale. At a minimum, the average level of capital allocated to the Property business is expected to be reduced to £100m in FY2020. In the six months ended 31 December 2018, the average level of capital invested in the business was £184m.

These steps will deliver financial benefits to the Group which include a reduction in the level of capital invested in the business and reducing the level of working capital volatility within the Group.

Other activities

The Board has concluded that Kier's Facilities Management and Environmental Services businesses have limited operational synergies with Kier's core businesses. Kier will seek to exit these businesses in due course.

In contrast, the Board has concluded that Kier's Housing Maintenance and Middle East construction businesses will be retained by the Group and will be managed in a way that is consistent with the Group's financial objectives.

Operational restructuring and Future Proofing Kier programme

As announced on 3 June 2019, since the arrival of Andrew Davies as Chief Executive, the Group has accelerated the Future Proofing Kier programme and as part of the strategic review considered the scope of the programme.

As a result of the programme, c.1,200 full time employees ("FTEs") have left or will leave the Group. Under the accelerated programme, c.650 FTEs will have left the Group by 30 June 2019 and an additional c.550 FTEs are expected to leave during FY2020.

Following the completion of the programme, Kier expects to deliver annual sustainable cost savings of c.£55m from FY2021. The costs of delivering the programme are expected to be c.£28m during FY2019 and c.£28m during FY2020. The reduced cost base will provide clear foundations for Kier's improved competitiveness and future growth; it will also enable investment in the Group's processes and delivery capabilities.

Capital structure and current indebtedness

The disposals and other actions outlined above are expected to deliver a material reduction in the overall indebtedness of the Group. They will also reduce the historical volatility in the Group's working capital profile. Going forward, Kier will focus on managing its retained businesses to deliver long-term profits and a sustained reduction in the Group's underlying debt levels rather than targeting lower debt positions at reporting dates.

The Group has committed debt facilities of £920m, with its bank debt not maturing until June 2022 and the majority of its private placement debt maturing between 2021 and 2024. While some of the recent external commentary has had an adverse effect on confidence, with a consequential impact on the Group's working capital position, the Group's liquidity headroom is able to absorb the volatility that this has caused. However, it will result in reported net debt at 30 June 2019 being higher than current market expectations and an increase in FY2019 average month-end net debt to £420m-£450m.

Kier is in regular dialogue with its largest customers who continue to be supportive during this period of volatility. Kier understands that certain suppliers have experienced a reduction in the level of trade credit insurance available to them; Kier is working with those suppliers to mitigate the impact of this.

The Board considers that the revised strategy outlined above, together with the related actions which are now underway, will result in a significant reduction in the Group's net debt during FY2020.

Dividend policy

The Board is suspending dividend payments for FY2019 and FY2020. The Board will continue to review dividend policy for future financial periods.

Andrew Davies, Chief Executive of Kier, said "Since becoming Chief Executive on 15 April, I have visited many of our key locations and spent time with all of our businesses, meeting the leadership teams and many of our dedicated people in the process. I have also met with many of our clients. Kier has a number of high-quality, market-leading businesses, in particular Regional Building, Infrastructure, Utilities and Highways. I believe that these businesses will deliver long-term, sustainable revenues and margins and are inherently cash generative.

As previously announced, I have been leading a strategic review which has resulted in the actions being announced today. These actions are focused on resetting the operational structure of Kier, simplifying the portfolio, and emphasising cash generation in order to structurally reduce debt. By making these changes, we will reinforce the foundations from which our core activities can flourish in the future, to the benefit of all of our stakeholders."

A conference call with Andrew Davies (Chief Executive) and Bev Dew (Finance Director) for analysts and investors will be held at 8.00 a.m. (BST) today. Dial-in details are as follows:

Telephone number: 0800 358 6374 or +44 (0)330 336 9104

Passcode: 016830

This announcement contains inside information for the purposes of Market Abuse Regulation (Regulation (EU) No. 596/2014). The person responsible for making this announcement on behalf of the Company is Hugh Raven, General Counsel and Company Secretary.

- ENDS -

This announcement does not constitute an offer of securities by Kier Group plc (the "Company" and, together with its subsidiaries, the "Group"). This announcement may include statements that are, or may be deemed to be, ''forward-looking statements''. 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 or the Group's ability to control or predict. Forward-looking statements are not guarantees of future performance. 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 2018 and the section of the Company's rights issue prospectus dated 30 November 2018 entitled "Risk factors" for a further discussion of the factors that could affect the Company's or the Group's future performance and the industry in which it operates. 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.