The development of a clear Group strategy in addition to the anticipated recovery in the core UK markets means that the Group is well placed for future growth.

Group overview

Ian Lawson Chief executive officer

This year has seen stabilisation and recovery in the UK business, but disappointment in India. Underlying profit before tax of £4.0m represented a significant turnaround from the underlying loss of £21.5m in the 15 months to 31 March 2013. This reflected both a good recovery in UK operating margins but also a share of losses from our Indian joint venture of £3.0m. The rights issue launched in February 2013 was completed in April 2013, significantly strengthening the Group's balance sheet. Good working capital management during the year has resulted in a positive net funds position of £0.3m at the year-end.

I was appointed in November 2013 which enabled John Dodds to step back into his role as non-executive chairman. I have continued to drive the UK operational improvement programme which started under John's leadership. In addition, I have conducted an initial review of the Group's branding, communications and market positioning, and have now put in place the initial foundations of a more comprehensive Group strategy.

UK review

UK turnover of £231.3m compared with £318.3m in the prior 15 month period and reflected a modest reduction in capacity at our largest business. More importantly, the underlying operating profit of £7.6m represents a recovery in the UK operating margin to 3.3 per cent which is a good step towards our previously stated target of 5–6 per cent by 2015/16 in current market conditions.

Substantial operational improvements have been achieved during the year."

The largest business in the Group, Severfield (UK) Limited ('SUKL') was reorganised in the first half of the year. Ian Cochrane, previously managing director of our Severfield (NI) Limited ('SNIL') business in Enniskillen and now chief operating officer, was appointed acting managing director of SUKL in April 2013 and implemented this reorganisation. There were three key elements to the reorganisation: firstly, a reduction in capacity of ten per cent to improve the overall supply and demand dynamic in the market, secondly, a further reduction in overheads following an initial reduction in the previous period, taking the total savings made to £4m per annum, and thirdly, a reorganisation and strengthening of the management team. This business reorganisation has been completed with all the anticipated savings realised, with a one-time restructuring charge of £2.6m recorded in the first half of the year.

In parallel with this reorganisation, a comprehensive operational improvement programme was launched across the Group. The objective of this has been to improve risk assessment and operational and contract management processes within the business. This programme has made good progress in the year, which is reflected in the improved underlying operating margin, and will continue into the 2014/15 financial year. Management believes the programme will lead to underlying operating margins reaching 5–6 per cent in 2015/16 in current market conditions.

During the year, good progress was made in resolving the main legacy contract issues which were at the core of the operating losses in the previous period. As expected, there were challenges in resolving some of these issues but overall the outcome of those legacy contracts has been in line with the board's expectations coming into the year, and the board believes that balance sheet risk relating to these contracts has now been removed.

Case study:

Aldgate Tower

Client: Aldgate Tower Developments

Location: London

Main contractor: Brookfield Multiplex

Tonnage: 5,500

Project overview:

The project is a new state-of-the-art office development, the first phase of a wider regeneration of the Aldgate area by Aldgate Tower Developments.

A steel solution has allowed the construction of an 18 storey commercial development on top of an existing raft foundation originally designed to support a smaller building. The building provides 16 floors of grade A office space, plus two upper levels for plant equipment.

Below ground, the structure is founded on an existing three level reinforced concrete basement raft, a feature that has had an overwhelming impact on the design and construction of the tower. As the raft was in use it had to be retained and incorporated into the design, so a framing material for the new building that could be safely and quickly erected above functioning office space was needed.

Order book and market conditions

The UK order book, at £168m, remains solid and within a range which management is comfortable with, representing approximately eight months of forward production capacity. It has reduced in overall terms over the year from previous levels but this reflects both the capacity reduction arising from the business reorganisation, as well as a longer negotiating period on major contracts arising from our improving risk management processes. The market has been stable during the year but prices have remained competitive and we continue to focus on ensuring that there is a fair balance of risk and reward within the contracts. There are signs that the market will pick up towards the end of 2014 but the current order book does not yet reflect this.

Projects

Throughout the significant reorganisation over the past 18 months, we have continued to deliver projects to our clients' expectations. Projects undertaken in the current year included:

  • Finsbury Square
  • Moorgate Exchange
  • 5 Broadgate
  • Fitzroy Place
  • BNP Paribas
  • Aldgate Tower
  • Nova, Victoria
  • Glasgow Smartbridge
  • Microsoft Data Centre, Amsterdam
  • Birmingham New Street Station
  • Paris Philharmonic
  • Manchester Victoria Station
  • Jaguar Land Rover, Midlands
  • Intel Developments, Ireland

India

Performance from the Indian joint venture, JSW Severfield Structures Limited ('JSSL'), was disappointing in the year, with the Group's share of losses totalling £3.0m, particularly as in the previous period the business had achieved close to a breakeven position. While order book levels at the start of the year were satisfactory, unexpected delays and timing variations to some of the contracts within that order book quickly led to the factory being underutilised. Pressure to fill this spare capacity led to deterioration in the project mix within the business with low and even negative margin industrial projects being secured to utilise some of the spare capacity and make a contribution towards the overheads of the business. This situation did not improve as the year progressed.

Behind this poor performance it became increasingly clear that the market for steel fabrication and commercial development of the business was not progressing as well as expected. India remains primarily a concrete construction market which presents great opportunity for steel. This potential continues to be reaffirmed in all the market research that we carry out, both formal and informal. However, converting concrete projects to steel projects continues to take longer than anticipated and efforts in this area are being stepped up.

In response to these challenges, Derek Randall, executive director, moved to India full-time in August 2013. It was then agreed with our joint venture partner, JSW Steel, to reorganise the management of the business in December, at which point Derek became managing director. An overhead reduction programme was initiated, and now completed, and a new business development and operational improvement programme is in place which is expected to generate a substantial improvement in the performance of the business in the current financial year. Ultimately the business is developing a sustainable position whilst the market continues the expected conversion from concrete to steel. Greater economic optimism following the recent election may help this development.

Business investment

UK investment was kept at relatively low levels during the year while the business was reorganised and stabilised. Total investment was £2.2m and represented low level replacement of some older plant and equipment. While the general stock of capital equipment across the business remains in good order, it is likely that the level of investment will need to increase to a more normal replenishment rate of £4-5m per annum in the future.

New equity of £3.5m was invested in the Indian joint venture during the year. This was required both to fund the ongoing losses of the business and the balance of the investment initiated in 2012 to increase the capability and capacity of the factory.

Safety

The Group's accident frequency rate (AFR) for the year was 0.57. Whilst this was only marginally worse than the level of 0.55 for the previous period, it fell short of the targets that the board had set for improvement. This performance reflected a disappointing first half of the year, followed by a marked improvement in the second half. The Group's approach towards health and safety was reviewed during the year and a number of new initiatives were implemented. It is hoped that the improving trend we have seen in the second half of the year is a result of some of these initiatives but more time is needed to confirm that this is the case and that we have a sustainable trend heading in a positive direction. The safety and welfare of all our employees is of paramount importance to the Group and in order to further strengthen and improve on our safety culture and systems a new SHE director was appointed in April 2014.

Strategy, branding and communication

Following my appointment, we undertook a comprehensive review of the Group's branding and market positioning and feedback was gathered from major customers, management and staff. This resulted in the change of the Group's name to Severfield plc in May 2014, a simpler and less confusing naming structure for the Group's main operating businesses, and a new branding strategy to support this, elements of which are reflected in this report. It is believed that this new approach will better reflect the Group's strong market position and enable improved and clearer communication with all stakeholders in the future.

This review identified a number of areas for improvement in the Group's internal and external communications strategy and this will be a key area of activity in the coming year.

A significant amount of work was also undertaken in developing a new long-term strategy for the Group. The core of this strategy revolves around the continuation of the UK operational improvement plan to ensure that we have a sustainable, profitable base for the business going forward. Beyond this, it will involve a continual drive to improve operational efficiency, investment to ensure that the Group continues to have market leading technology, greater focus on developing our people and, most importantly, providing an unrivalled quality of service to customers. The strategy will provide a platform for continued growth and we will be looking more actively for opportunities to expand the business both in the UK and in overseas markets. The UK in particular may involve looking for new market areas where the business has not operated in the past as well as growing market share in areas where the business already operates.

Vision, values and people

Our core values are safety, integrity, customer focus and commitment."

As part of the branding and strategy development work, the executive and senior management team articulated a vision for the Group, and its core values. The vision is 'to be recognised as world-class leaders in structural steel, known for our ability to deliver any project, to the highest possible standards'. The core values are safety, integrity, customer focus and commitment.

The values represent much of what the organisation lives by, even in recent challenging times. To that end, I would like to recognise the difficult times that our staff and employees have experienced recently and to thank them not only for their continued efforts on behalf of the Group, but also for the warm welcome which I have received since I was appointed.

Summary and outlook

The Group is recovering well and has made significant progress during the year in strengthening operations and management. With a developing strategy, focused branding and better market positioning, the Group is increasingly well placed to deliver stronger growth in the future, particularly if the core UK market starts to recover as expected.

While the Indian joint venture remains challenging, there is significant market potential. The strengthened management team, reduced cost base and greater business development focus are expected to lead to improved performance in the current year.

Ian Lawson
Chief executive officer
11 July 2014