Last checked at 20 Mar 2015 08:00
Morgan Sindall Group plc ('the Company')
Annual Financial Report
Further to the release of the Company's Preliminary Results announcement on 19 February 2015, the Company announces that it has today posted the following documents on its website at www.corporate.morgansindall.com/investors:
· 2014 Annual Report
· 2014 Sustainability Report
· Circular containing the notice of the 2015 annual general meeting
The Company will hold its annual general meeting at 12.00pm on Thursday 7 May 2015 at the offices of Jefferies Hoare Govett, Vintners Place, 68 Upper Thames Street, London EC4V 3BJ.
A copy of each of the documents listed above has been submitted to the Financial Conduct Authority's national storage mechanism ('NSM') and can be accessed via the NSM website at www.hemscott.com/nsm.do.
In accordance with the requirements of Rules 4.1 and 6.3.5 of the Disclosure and Transparency Rules, a description of the principal risks and uncertainties affecting the Group is set out in appendix 1 to this announcement. The Company's Preliminary Results announcement released on 19 February 2015 contained all other information required by DTR 6.3.5.
ENQUIRIES:
Morgan Sindall Group plc Tel: 020 7307 9200
Clare Sheridan, Company Secretary
End
20 March 2015
Appendix 1
The Board recognises the importance of risk in running the business and that risks need to remain under regular review. Owing to the nature of its activities, risk is at the heart of everything the Group does but careful risk management is also perceived as an opportunity. Accordingly the Group has a long established culture of mature risk and control processes to manage both material and day-to-day circumstances.
The Group's risk and governance model is designed so that the Board maintains overall responsibility for risk while each division independently works to identify, control and mitigate threats within their operations to the Group achieving its goals. The reporting structure ensures that risk appetite is determined and risks managed within tolerance levels acceptable to the Board. The processes for the given business period are described in principle below:
• Each year the divisional boards undertake a comprehensive business planning process to identify objectives and set strategies to achieve their goals
• The executive directors meet with the divisions monthly throughout the year, using an established agenda and reporting format covering a range of matters that must be brought to their attention. This allows the executive directors to ensure that the Board maintains oversight and control over the material aspects of strategic, financial, operational and risk issues
• The risk environment is further underpinned by a clear set of Group and divisional delegated authorities that define processes and procedures for approving material decisions, particularly with regard to project selectivity, tender pricing, bid submissions and capital requirements. This ensures that projects are approved at the appropriate level of management, with the largest and most complex projects being approved at Board level
• Twice yearly each division carries out a detailed risk review which identifies mitigations or proposed actions for each significant risk. Risk registers document these together with any timescale by which actions are targeted for completion. In conjunction with the divisional risk reviews the executive directors, with other key corporate functions, compile their own assessment thus ensuring that a top-down, bottom-up approach is undertaken when considering the Group-wide environment. These risks are then routinely considered at the Board meetings, to ensure that they remain under continuous review
• An annual internal audit plan, approved by the audit committee and covering both project and corporate level risks, is developed by focusing upon the principal risks identified from the risk review process and feedback from current divisional performance. Following this the internal audit team reports regularly to the Board and the audit committee on the status of risk and control following its assignments
• It is the role of the Group audit committee to monitor and approve the work undertaken by the internal audit function and to ensure that the internal audit process remains efficient and effective. This monitoring process has been strengthened by divisional audit committees established separately for Construction & Infrastructure and Affordable Housing, which have larger and more complex operations than other divisions.
The Group's overall view of risk can be summarised as follows:
General
There is an underlying decrease in the overall risk perceived by the Group, due partly to the completion of a small number of contracts in Construction & Infrastructure which had experienced timetable slippages and increased costs. Other factors reducing risk are the increase in more favourable project tendering terms into 2015 and the continued recovery of the UK housing market, although there are signs of the housing market cooling. This is discussed in more detail in the following risk report, but is substantially a result of the improving market conditions currently prevailing in the UK economy, although there remains some uncertainty ahead of the General Election in 2015 and the effect this may have on market confidence.
Construction
Contracts, terms, procurement routes and entry margins are all more favourable. Recessionary projects that were secured with less favourable terms are drawing to a close and should be substantially traded out by the half year, which added to improvements in project controls means the Group anticipates a more favourable risk and opportunity profile than in recent years.
Development
The Group's schemes are subject to economic viability, are non-speculative and have robust risk and capital controls, allowing the Group to take advantage of the current prevailing UK economy, but at the same time limiting any possible negative fluctuations in the market.
Capital and cash
The Group's banking facilities were substantively renewed this year and will mature in September 2018, which together with its robust cash and capital controls allow the Group to confidently manage its investment portfolio into the foreseeable future.
Resource
The People Promise initiated in 2014 is gathering momentum. People boards have been developed in each division to implement tools focused on succession planning and talent management. 2015 will see this investment begin to secure and develop the talent required to enable the Group's longer-term growth plans.
The Board has identified principal risks to the Group achieving its strategic goals, aligned to different elements of the Group's business model. The Group's risk management process ensures that principal risks are appropriately mitigated, allowing the Group to deliver value to all stakeholders. The principal risks and mitigations are set out below:
Risk category | Macro Trend * | Subcategory - Description and impacts | Mitigation | Key monitors/ Instruments for subcategory | Risk change in 2014 |
Markets The markets in which the Group operates are affected to varying degrees by general macroeconomic conditions. The Group is therefore focused on capitalising on the improving economic conditions and shaping the business to take account of future growth indicators. However, there is a risk that business opportunities within the Group's strategy may be delayed.
There is still some sensitivity in predicting the longer-term outlook. There remains uncertainty surrounding the UK's General Election in 2015 and its potential effects on market confidence and Government investment programmes that could impact on the Group's long-term strategy. | Ø | Macroeconomic - new opportunities The Group has identified the markets and sectors in which it anticipates future growth. Within those areas it remains focused on selecting opportunities that will provide sustainable margins and repeat business. The Group must seek to anticipate and appropriately respond to changes in the macroeconomic environment that may negatively impact on these chosen markets and sectors.
Failure to anticipate and respond to macroeconomic changes could result in inappropriate allocation of resources and capital. This could affect the Group's profitability and cash generation. | • Strategic focus on market spread, geographical capability and diversification offer measured protection against the cyclical effect of individual markets • Business planning process focuses on future markets and opportunities that fit the Group's risk appetite • Scale adds resilience by enabling the Group to compete and work in areas with higher barriers to entry • Added value can be offered to clients when Group divisions work together • Regular monitoring and reporting of financial performance, work won, prospects and pipeline of opportunities • Market intelligence helps detect potential shifts in spending and allows the Group to adapt its strategy if necessary. | • Annual business planning process • Ongoing Group and division delegated authorities reporting and approval process ('DELAPS') • Monthly Board reporting • Weekly pipeline and order book reporting • Weekly sales and marketing report. | Decrease Ú • The Group is enjoying greater levels ofopportunity in its Construction and Regeneration markets and increased development scheme volumes • This is partially tempered by levels of competition in the Construction market, albeit procurement routes, margins and terms are more favourable • Development schemes are sensitive to market and consumer confidence. The Group's strategy is geared to commit only if schemes prove economically viable. This means the impact of any negative market fluctuations can be minimised • Construction & Infrastructure has been restructured to take advantage of the current economic climate to minimise its risk exposure and to maximise opportunities to secure growth • The Group's DELAPS has been redesigned to align with its future strategic aims, risk appetite and capital allocation. |
Ú | Market capacity Positive market conditions have resulted in a risk of potential overtrading. The Group and its supply chain are facing upward pressure on cost and skills availability.
Increased activity levels require rigorous reviews of resource levels against anticipated workloads. Cost inflation in the supply chain could impact on the Group's margins. | • Rigorous DELAPS requires teams at bid stage to verify that appropriate levels of qualified resource are available • Regular review of the Group's operational resource levels against anticipated workload • Supply chain utilisation monitoring and reporting and continued focus on initiatives within each division • The Group seeks to differentiate itself by being the customer of choice to its partners through the development and management of effective supply chain relationships • The appointment of a supply chain leadership team is planned for the Construction & Infrastructure division. | • Ongoing DELAPS • Weekly resource planning reviews • Ongoing supply chain feedback reporting • Ongoing tender review boards. | Increase Ù • The industry continues to experience skills and cost inflation pressures that the Group is managing through disciplined bid and project selection processes • People Promise initiative to help secure and develop talent. | |
Risk category | Macro Trend * | Subcategory - Description and impacts | Mitigation | Key monitors/ Instruments for subcategory | Risk change in 2014 |
Markets continued
| Ø | Exposure to UK housing market The UK housing sector is strongly influenced by Government stimulus and consumer confidence.
If mortgage availability and affordability become untenable this could make existing schemes difficult to sell and future developments unviable, reducing profitability and tying up capital. | • Monitoring of key UK statistics including unemployment, lending and affordability • The Board carefully controls commitments to development schemes via its rigorous three-stage development approval process • Development structures limit speculative development to minimise the impact of negative market fluctuations • Where possible, the forward purchase of land is subject to economic viability prior to commitment • When feasible, sections of large-scale residential schemes are forward sold to institutional investors. | • Annual business planning process • Monthly Board reporting • Monthly sales and marketing report • Monthly development forecasting. | No change Ø • Sales volumes, pace and inflation have all increased in both the investor and private markets. However, macroeconomic influences are difficult to predict and could affect future confidence. |
People The Group's performance and business conduct affects employees, subcontractors and the public and, in turn, can affect its reputation and commercial performance. The Group prides itself on its industry leading practices and works in some high profile and technically challenging environments.
As markets emerge from recession employee turnover has increased. If the Group does not succeed in attracting and retaining the right talent for its future needs it will not be able to develop the business as anticipated. | Ø | Environmental or safety incident With upward pressure on the supply chain there is an increased risk of an accident or incident occurring, causing harm to an individual or a community.
This could result in legal proceedings, financial penalties, insurance claims, reputational damage and project delays.
Consequently the Group fails to pre-qualify in its markets due to a poor health, safety and environmental ('HSE') record and ultimately fails to deliver its targets. | • Key executives with specific responsibility for HSE are identified in each division and on the Board • HSE policy frameworks are widely communicated and senior managers appointed to manage them in each division and at project level • Group-wide HSE forum operates to share learning, best practice and emerging risks • Established safety systems, site visits, monitoring and reporting procedures, including near-miss and potential hazard reporting, are in place across the Group • Investigation and root cause analysis of accidents, incidents and near misses are undertaken • Regular HSE training, including behavioural training, and update courses are provided • Major incident management plans and business continuity plans are in place and periodically reviewed and tested. | • Monthly HSE Board report • Quarterly Group HSE forum • Ongoing HSE project audit and training schedules and ratios • Ongoing HSE incident investigation report. | No change Ø • The Group monitors comparable industry leading statistics. A significant level of work is carried out in highly complex and very public environments, which requires strict observation of the highest levels of Health and Safety Executive standards. |
Risk category | Macro Trend * | Subcategory - Description and impacts | Mitigation | Key monitors/ Instruments for subcategory | Risk change in 2014 |
People continued | Ø | Failing to attract and retain talented people In the current rising economic environment, it may become increasingly difficult to attract and retain the best people. This could impact on the Group's ability to create the most talented teams possible.
Without talent, it becomes very difficult to maintain the highest levels of customer service and technical excellence that the Group strives for. | • Launch of the People Promise which aims to build the Group's talent pool, identify people with high potential for future leadership, offer exciting careers and recognise achievement • Further investment made in graduate, trainee and apprenticeship schemes to secure an annual inflow of new talent • Monitoring of future skills and capability requirements • Annual employee appraisal process in place, providing two-way feedback on performance • Training and development plans seek to maximise relevant skills and experience • Remuneration packages are benchmarked where possible. | • Monthly HR Board reporting • Weekly employee joiners and leavers report • Annual appraisal process • Regular divisional People boards to review talent. | Decrease Ú • Although the industry is suffering from a lack of skilled talent and this will remain an issue for the foreseeable future, the Group's investment in the People Promise and associated initiatives will help position it to meet its growth strategy. |
Risk category | Macro Trend * | Subcategory - Description and impacts | Mitigation | Key monitors/ Instruments for subcategory | Risk change in 2014 |
Winning in our markets The Group undertakes several hundred contracts each year and it is important that contractual terms reflect risks arising from the nature and complexity of the works and the duration of the contracts and that these risks are effectively managed. | Ú | Mispricing contracts When pricing a contract the planned works are not costed correctly, increased commodity prices are not factored in or risk is not properly evaluated, leading to a contract being mispriced.
Leads to loss of profitability on a contract that reduces overall gross margin. May also lead to damaged client and project team relationships. | • Robust DELAPS governs the selection of all bids and the acceptance of work at key stages • Well established and experienced bidding teams and tender process • Robust pre-selection, due diligence and risk assessment of individual bids • Contract tender reviews at three key stages: pre-qualification, pre-tender and final tender submission - each stage approved by appropriate level of senior management via tender review boards. | • Ongoing DELAPS • Ongoing tender review boards • Monthly Board reporting. | Decrease Ú • Improving contract procurement routes and terms • Recessionary contracts with less favourable terms substantially traded out by 2014 year end. |
Ø | Managing changes to contracts and contract disputes As contracts progress there are inevitably changes to the works being delivered and a risk exists that the Group does not get properly reimbursed for the cost of the changes as a result of disagreement, poor commercial controls or disputes.
Leads to costs being incurred that are not recovered and loss of profitability on a contract and delayed cash. Ultimately the Group may need to resort to legal action to resolve disputes which can prove costly, with uncertain outcomes, and can adversely affect the Group's client relationships. | • Work carried out under standard terms wherever possible • Contract terms reviewed at tender stage and any variations approved by the appropriate level of management • Well established systems of measuring and reporting project progress and estimated outturns, including contract variations • Enhanced project management systems with lead indicators that assist in the early identification of potential issues • Increasing BIM adoption helping to overcome potential design and constructability issues before they become too costly or time consuming • Regularised project review process including peer reviews to ensure rigour is applied in core processes, to facilitate early warning and subsequent mitigation strategies • Decision to take legal action based on appropriate legal advice and suitable provision made for legal costs. | • Ongoing project financial performance • Ongoing project operational performance • Ongoing electronic project management tool dashboard. | Decrease Ú • Improving contract procurement routes and terms with an increasing two-stage and negotiated approach • Enhanced contract early warning techniques. |
Risk category | Macro Trend * | Subcategory - Description and impacts | Mitigation | Key monitors/ Instruments for subcategory | Risk change in 2014 |
Winning in our markets continued | Ú | Poor contract selection Risk that the Group accepts a contract outside of its core competencies or for which it has insufficient resources. This can become a greater risk in a rising market when there are more opportunities but of varying quality, coupled with a limit on the availability of the appropriate skills and resources.
This may lead to poor understanding of project risks and poor project delivery and may ultimately result in contract losses and reputational damage. | • Business planning identifies markets, sectors and clients that the Group will target • Plans for specific types of work and contract size agreed by each division • System of delegated authorities governs bid selectivity and the acceptance of work • Staff planning to ensure appropriate levels and calibre of resource • Initiatives to select supply chain partners that match the Group's expectations in terms of quality, sustainability and availability. | • Weekly pipeline and order book reporting • Ongoing tender review boards • Ongoing DELAPS • Monthly Board reporting • Ongoing sales and marketing reporting • Ongoing supply chain feedback reporting. | Decrease Ú • Majority of material projects are secured with repeat clients with strong relationships • Current market allows the division to be more selective in respect of which contracts to bid for. |
Ø | Poor project delivery The quality of workmanship or poor commercial and operational delivery of a contract, whether by the Group, a joint venture partner or a subcontractor, does not meet expectations of clients.
Interim cash receipts may be withheld, impacting on working capital. Project issues may also affect contract profitability, corporate reputation and the Group's ability to win repeat business. | • Regular project review process to facilitate early warning and subsequent mitigation strategies • Development of electronic project management workbooks to enhance functionality, efficiency and ability for 'live' reporting of key project metrics such as programme, margin, change and cash • Escalation process to ensure senior management intervention at early stage • Formal internal peer reviews to highlight areas of improvement and/or risk/best practice • Collation and review of client feedback via Customer Satisfaction Questionnaires ('CSQs') and Perfect Delivery process • Lessons-learned exercises carried out on projects • Employees incentivised on basis of qualitative contract performance • Strategic supply chain trading arrangements in place to help ensure consistent quality. | · Ongoing electronic project management Tool • Ongoing project financial performance • Ongoing project operational performance • Monthly CSQ and Perfect Delivery performance monitoring. | Decrease Ú • The improving market and terms under which the Group contracts, alongside its drive to achieve operational excellence and consistent delivery, reduce the probability of disputes. However the upward pressure on skills and commodities needs close management. |
Risk category | Macro Trend * | Subcategory - Description and impacts | Mitigation | Key monitors/ Instruments for subcategory | Risk change in 2014 |
Maximising efficiency If employees are not properly engaged with the culture of the business, clients are less likely to receive exceptional levels of service. | Ø | Perfect Delivery The Group and its people do not fully adopt the philosophy and culture of Perfect Delivery.
Project failures that will likely incur additional costs that erode profit margins. It is also likely that client experiences will fall short of the standards set by the Group, potentially leading to a reduction in repeat business or in client referrals. | • Continuing engagement with employees, clients and supply chain on Perfect Delivery • Dedicated internal Perfect Delivery teams to maximise engagement and embed culture • Perfect Delivery led from the Board • Teams incentivised on Perfect Delivery outcomes to achieve high levels of customer satisfaction. | • Monthly Perfect Delivery performance monitoring • Monthly CSQ reporting • Ongoing project operational performance. | DecreaseÚ • Perfect Delivery differentiates the Group's offering and is being embedded in each division • The Group's recent investment in its talent strategy and initiatives will position the Group to meet its long-term growth. |
Disciplined use of capital Without sufficient liquidity, the Group's ability to meet its liabilities as they fall due would be compromised, which could ultimately lead to its failure to continue as a going concern.
In a rising market there is an increased risk that the Group's counterparties overtrade which could affect their liquidity. | Ø | Insolvency of key client, subcontractor or supplier Risk that insufficient credit checks and due diligence are not undertaken and that a key client, subcontractor or supplier becomes insolvent. There is also a risk that, given the wider macroeconomic climate, historical credit checks are relied upon that have subsequently been overtaken by events.
Insolvency of a client may result in significant financial loss due to a bad debt. Insolvency of a subcontractor or supplier may disrupt a contract's programme of work and lead to increased costs in finding replacements for their services. | • Work only carried out for financially sound clients, established through rigorous due diligence and credit checks • Seek and obtain financial security where required including specific commercial terms, such as payment terms, with escrow accounts used as appropriate • Contracts with clients, subcontractors or suppliers only entered into after review at the appropriate level of delegated authority • Work with approved suppliers wherever possible • Regular meetings with key supply chain members to give and receive feedback and maintain the quality of the relationship • Business strategy largely focused on public and commercial clients based in sound market sectors, reducing the risk of failure. | • Weekly pipeline and order book reporting • Ongoing tender review boards • Daily work in progress/debt/retention monitoring • Ongoing supply chain feedback reporting • Ongoing supply chain prequalification. | No change Ø • Need to remain vigilant as clients and supply chain emerge from recessionary into accelerating market, which may overstress their finances. |
Risk category | Macro Trend * | Subcategory - Description and impacts | Mitigation | Key monitors/ Instruments for subcategory | Risk change in 2014 |
Disciplined use of capital continued
| Ø | Treasury and Funding Risk that the Group fails to ensure that sufficient funding is in place to accommodate the strategic plans of the business.
The lack of liquidity may impact the Group's ability to continue to trade or restrict its ability to invest in regeneration schemes or growth markets. | • Recent banking facility renewal securing £140m maturing in September 2018, enabling the Group to fund its planned investment portfolio • Enhanced three-stage requirement for development- and investment-related schemes to give an early indication of potential long-term balance sheet commitments • Group disciplined capital allocation including for significant project-related capital and monitoring versus consideration of future requirements and return on investment • Daily monitoring of cash levels and regular forecasting of future cash balances and facility headroom • Regular stress testing of long-term cash forecasts • Group delegated authorities ensure prior approval is sought for significant project related capital. | • Monthly management accounts • Daily monitoring of cash levels • Weekly cash forecast report. | DecreaseÚ • The Group has recently refinanced a substantial part of its facilities to September 2018 • Debt availability and terms improving for the Group, its clients and supply chain. |
Ø | Management of working capital Risk that poor management of working capital leads to inadequate liquidity and funding problems. | • Working capital monitored and managed as appropriate, with acute focus on any overdue work in progress, debtors or retentions • Ongoing cash management focus continues to improve. Business remains vigilant and keeps driving a positive cash culture. | • Daily monitoring of cash levels • Weekly cash forecast report. | No change Ø • Working capital is expected to improve as recessionary projects unwind and general market terms improve • Increased cash optimisation focus and controls. |
Risk category | Macro Trend * | Subcategory - Description and impacts | Mitigation | Key monitors/ Instruments for subcategory | Risk change in 2014 |
Pursuing innovation The Group is committed to offering customers innovative and cost-effective solutions. If it fails to encourage an innovative approach across the Group it will lose its competitive edge and suffer reputational damage.
This is coupled with the risk that the Group's systems will not provide appropriate security levels or resilience needed to ensure reliable levels of business continuity. | Ø | Innovation Failure to adopt appropriate innovations in new products or techniques.
The Group becomes less effective than its competitors and is not able to secure best value for, or offer the best solutions to, its clients. New technologies and innovation are not promoted into the business environment making it a less attractive proposition to new and existing talent. | • BIM strategy developed to provide more efficient asset management across the whole lifecycle • A culture of innovation is encouraged and relevant ideas, sourced via employees, supply chain, customers and external sources, are promoted into the business environment • Reviews undertaken to promote elimination of waste of both resources and process, adopting lean methodology where appropriate • IT forum structure in place to review, sponsor and promote new innovations into the business • Significant innovation and IT capital expenditure is subject to delegated authority sign-off by senior management. | • Monthly work winning process • Ongoing project operational performance reviews • Ongoing IT change and programme reporting • Annual budgets. | Decrease Ú • The industry is slow in adopting new technologies, that if not reversed will stifle talent, efficiency and sustainability • Recent innovations include the roll out of Lync, BIM, enhanced project management tools and smartphone facilitation. |
Ù | Information Technology That the Group does not manage and optimise its IT infrastructure environment to avoid business interruptions, maximise efficiencies, keep pace with emerging technology, together with the prevalence of security and data threats.
If the Group fails to manage and invest in its IT environment it will ultimately not meet the future needs of the business in terms of expected growth, security and future innovation requirements, ultimately meaning that it will fail to maintain a sustainable business. | • Group-wide IT strategy remodelled to encompass an optimised shared services approach, direction and investment • Co-ordinated services approach driving efficiency and performance across the whole technology environment • Group-wide IT forum structure in place ensuring focused strategic development and day-to-day running of the Group's technology environment • Progressive IT investment now yielding real infrastructure, application and service delivery improvements • Group-wide risk and security strategies enacted, creating awareness, providing threat alerts and addressing risk and vulnerability prioritisation and response. | • Monthly Group and divisional IT forums • Ongoing IT monitoring and performance reporting. | No change Ø • The ever-evolving technology environment and cyber security threat will remain a threat for the foreseeable future • The Group's progressive investment in its IT strategy and programme is maturing. |