Strategic Report Chief Executive’s strategic review

A STABLE PLATFORM FOR FUTURE PROGRESS

This year’s performance has been underpinned by our leading market positions. We have delivered increased profits and our order books are at record levels. With changing market conditions, it is important we remain fit and healthy for future growth. We have therefore launched the Future Proofing Kier programme which is focused on improving our ways of working. We have market-leading positions supported by Record order book specialist capabilities, enabling us to deliver for our clients. £10.2bn It is anticipated that our decision to How would you summarise the (2017: £8.9bn) Group’s performance in 2018? stabilise investment in the Property and Residential businesses and the Overall it was a good year for Kier and I am Future Proofing Kier programme will pleased with our underlying performance. significantly reduce net debt over the This performance is particularly noteworthy next two to three years. given the challenges that the contracting sector has had to address during the year. Following the acquisition of McNicholas in July 2017, we have successfully completed We have made progress on our key financial the integration of that business, making us and non-financial targets and are on track to one of the largest providers of services in deliver on our Vision 2020 goals. We utilities with specialisms in the energy and increased profit by 10%, delivering full-year 1,2 power, telecoms and water sectors. Revenue underlying operating profit of £160m in line with our expectations and market We have also performed well against our consensus. We also maintained our market- Vision 2020 non-financial targets covering £4.5bn leading positions in the infrastructure safety, customer experience, employee (2017: £4.3bn) services and buildings markets, and our engagement and retention, and top-three position in the affordable housing sustainability. These targets are intrinsically and maintenance market. linked to our strategic priorities and business model, creating value for our With greater investor attention on debt customers and other stakeholders. following the demise of Carillion, our net debt position remains under focus. Net debt increased in the year, as expected, following the acquisition of McNicholas in July 2017.

1 Continuing operations. Group and share of joint ventures. 2 Continuing operations. Stated before non-underlying items. See note 4 to the consolidated financial statements.

14 plc | Report and Accounts 2018 “OUR CLIENTS’ PRIMARY Strategic Report OBJECTIVES ARE TO SERVICE THEIR END-USERS AND WE NEED TO SUPPORT THAT GOAL” Governance

Turning to safety, which is at the heart How will the new Future Proofing What is your balance sheet strategy? of our licence to operate and remains a Kier programme help to drive Our debt position remains a key area of priority for clients when procuring work, efficiency across the Group? focus for us and our investors. Historically I am delighted to say that our safety we have used our asset-backed debt performance in 2018 was encouraging. Following the launch in June of Future Proofing Kier, our efficiency and strategy to fund our Property and We achieved an accident incidence rate Residential activities. We have now taken (AIR) of 96, which is UK-leading for the streamlining programme, we are currently focused on improving our productivity, action to accelerate the reduction of our Group as a whole and reflected a 26% net debt position and stabilise the Group’s improvement on the previous year. removing duplication of processes and non-value activities, and disposing of investment in our Property and Residential I am pleased with our overall performance divisions through the use of joint ventures non-core operations. It is anticipated that Financial Statements for the year. the actions taken during FY19 will deliver with our clients. Our current average net annual profit and cash flow improvements debt position of £375m is backed by Can you explain the rationale of 10% of profit from operations, c.£20m assets at a cost of £500m, which provides for the move to the three from July 2019, with targeted proceeds of significant cover for our net debt position. market positions? £30m-£50m from the disposal of non-core The average net debt figure for this year The transition to the three market positions businesses. This programme will help the increased on the previous year as a result of Infrastructure Services, Buildings, and Group achieve its target of year-end net of the acquisition of McNicholas and the Developments & Housing, reflects the cash and average net debt of £250m for reduced revenues over the increasing demand in these markets FY21. The programme activity undertaken winter due to bad weather, which have from customers as well as our in the current financial year will be cash since returned to levels in line with our specialist capabilities. and earnings neutral and I expect the expectations. I believe our efforts to reduce programme to deliver material net debt will yield results, and these will In adopting this approach, we also aim to improvements in operating margins and now be further strengthened by the results address the main challenges facing the cash generation in the financial year ending of the Future Proofing Kier programme. UK today. All three of these markets have 30 June 2020 and beyond. robust long-term fundamentals which are Pension surplus Our alignment to three market positions driven by changing demographics and Looking more broadly at the balance sheet, and our significant investment in new the increasing use of technology. As part our pension schemes are now in surplus. systems provides the opportunity to of Future Proofing Kier programme, a Our current pension scheme is fully funded optimise how we operate. We want to be re-aligned business model focuses the and we therefore expect our tri-annual resilient to accommodate changes in the efforts of our teams and makes it easier valuation discussions in March 2019 to be marketplace; our markets continue to for us to deliver for our clients. positive. At the same time, our working evolve, which requires us to be flexible and Whatever sector they operate in, our capital performance is strong, with front-footed to ensure we meet the clients’ primary objectives are: to service operating cash conversion for 2018 at changing needs of our clients and the their end-users – be they water consumers, more than 100%, which shows we continue markets in which they operate. road users, housing tenants or rail to maintain very good financial discipline. passengers – as best they can. Through Streamlining and transforming the Group in Having reached the end of our major our three market positions, we aim to this way will make us more agile and give systems investment, we also expect our leverage our skills, knowledge and greater responsibility and accountability to capital expenditure to return to normalised innovation to provide solutions which make our operations. In procurement, for levels of around £30m per annum, having this happen as efficiently and effectively as example, we have created a powerful been around £90m per annum for the last possible. We also want to build closer back-of-house shared services function. few years. relationships with clients, so we can better The Future Proofing Kier programme will understand the challenges they face and ensure this and other similar back-of-office find solutions with them. functions link seamlessly to the operations. Overall, the programme will improve the resilience of the Group in a changing market and help us to better leverage the system investments we have made while strongly positioning the Group for 2020 and beyond.

Kier Group plc | Report and Accounts 2018 15 Strategic Report Chief Executive’s strategic review continued

“WE WANT TO USE OUR POSITIONING TO BUILD CLOSER RELATIONSHIPS WITH CLIENTS, SO WE CAN BETTER UNDERSTAND THE CHALLENGES THEY FACE”

How did market developments Collaboration In health, the Government has recently impact Kier in 2018? We are known for our strong relationships announced an increase in NHS funding of 3.4% pa. Whilst it is expected that much of There has been a significant level of with clients, working collaboratively with this investment will go into front-line turbulence in our markets over the past them, anticipating issues they face, services, we expect this will create an 12 months. Unsurprisingly, this has led providing problem-solving solutions additional pipeline of opportunities in to increased scrutiny of the performance and innovation. related sectors such as bioscience where and financials of companies in our A good example of working collaboratively we have also successfully established a sectors and the ways in which we operate is our work with , who strong presence over the last few years. – for example, how we work with the supply have long-term, stable budgets and visible chain and SMEs with particular reference future investment plans. As a key supplier In addition, the UK’s investment in aviation, to payment terms. to Highways England, we work with them as with the approval for expansion at Heathrow airport, will provide a major, We are confident that Kier has always had they develop solutions such as their Routes multi-year boost to a sector which is seeing and will continue to have strong financial to Market strategy and are helping them growth across in the UK. Meanwhile, public and operational disciplines particularly in its with the transition to this model. Closer policy is increasingly supporting modern commercial and risk processes. working with our clients provides the best outcomes and is critical to securing new methods of construction (MMC) and we For example, in Construction our focus is work, such as the recently announced have already delivered over £2bn of on high-volume, modest-value contracts, extensions to Highways England Areas 3, projects that include MMC over the past primarily pursuing new work under 6, 8 and 9 contracts. five years. frameworks or lower risk contract models. In our Residential division, we are set to We operate over 400 projects at any one Sector opportunities benefit from the UK Government’s Help to time, with an average value of about More generally in transport, a market Buy scheme that has been extended to £7-8m. This helps us spread our sector where Kier has established 2021, supporting the increase in the operational risk and means we are more credentials, there are considerable building of affordable housing. With a agile to respond to market developments. opportunities arising in local authority national shortfall of a least one million We are a key supplier to government in the roads, and in the rail sector with the launch homes, this is a market with significant markets in which it is investing in e.g. of its next investment period, CP6. Our growth potential and one we are actively affordable housing, social and economic credentials in rail have been significantly targeting. Our innovative approach to using infrastructure. Many of our businesses enhanced following the acquisition of joint ventures, such as the Homes England operate through government frameworks McNicholas and we expect to play an active joint venture launched in May, is enabling and five-year funding periods, which gives role in the next review period, CP6. us to accelerate the development of our us access to more visible pipelines of work. In infrastructure we anticipate the increase residential land bank through a capital More specifically, as a result of market in demand for UK power generation will efficient model. The creation of the Homes developments in the year including the present opportunities in the nuclear, England joint venture has created an liquidation of Carillion, Kier acquired a renewables and gas sectors over the next opportunity for Kier to increase the scale of greater share of the HS2 project and the five-to-ten years. We will continue to its affordable house building activities by Highways England’s Smart Motorways monitor these markets closely and we are c.500 units per annum from 2020. portfolio. We transferred over 150 people also in discussion with many of our water into the company to help deliver these company clients as the water cycle, AMP7, increased project requirements and worked starts its procurement phase. closely and collaboratively with our clients In Buildings, we remain the UK market during these challenging periods. leader with a focus on key sectors such as education and health. In education, expenditure is driven by a growing population and the need to continually invest in the existing estate.

16 Kier Group plc | Report and Accounts 2018 Strong progress against Vision 2020 Strategic Report

Since 2014 we have made good progress on our Vision 2020 targets. Key metrics 2020 target June 2018

Annual average operating On target profit growth > 10%

Property – ROCE Ahead > 15% Governance Residential – ROCE to 15% On track and improving Construction – EBITA to 2.5% On track Services – EBITA to 5.0% On track Financial Statements Net debt: EBITDA 1:1 Achieved Dividend cover 2x On track and improving​

How is affecting your Our regional presence will therefore During the year, we maintained our focus markets and business? significantly mitigate any Brexit labour on promoting a good safety culture. As the mobility risk that arises, as will our sector majority of our safety incidents are slips, We have seen no material impact of diversification. Our property development trips and minor falls, our priority is to Brexit to date. However, the Kier internal business has experienced limited change in improve behaviour rather than overhaul Brexit Taskforce team monitors our occupier demand and investment, but it working policies and practices. supply chain-labour mobility and materials continues to closely monitor the market availability. With continued uncertainty, To this end, in 2018 we engaged and and the phasing of property transactions. we are scenario-planning and working partnered with external safety consultants with our clients and others in the industry How did Kier perform from a non- to address the issue of minor incidents, particularly in our Highways and Buildings to ensure we are able to respond to financial perspective this year? future developments. businesses. Looking ahead, we will continue to progress with our current We are particularly focused on monitoring Safety efforts, focus more on every day the issue of labour mobility. The strength Our safety performance in 2018 was behaviours, and drive improvements in of many of our supply chain partners is encouraging, although improvements can areas such as health and wellbeing. directly linked to the flow of people and always continue to be made. Our safety focus is a key element of how we operate skills into the UK, particularly in London Health and wellbeing as a business. We achieved an accident and the South East, where a larger The health and wellbeing of our teams, incidence rate (AIR) of 96, reflecting a 26% proportion of our supply chain workforce both Kier employees and the supply chain, improvement on the previous year. As a is made up of non-domestic individuals. is key as it directly impacts on operational recognised measure of safety performance, safety. We have approximately 100 health our AIR not only reflects how we do champions across the Group who are business but is a key differentiator in trained to monitor and assess employees’ the market. Indeed, safety is becoming mental and physical wellbeing. They are increasingly important for our clients at supported by a team of qualified on-site the selection stage. healthcare professionals. We provide fitness-for-work health screening for Kier employees as well as ongoing care through the occupational health team.

Kier Group plc | Report and Accounts 2018 17 Strategic Report Chief Executive’s strategic review continued

Diversity We also continued our strong focus on our The breadth of our Services business also Diversity and inclusion is a key priority and graduate and apprenticeship programme, provides both job interest and career one where we are taking meaningful action where we have maintained more than 5% opportunities for our employees, and stable as a business. Our business and industry of our workforce on approved training financial performance. We have chosen to already employs people with very diverse schemes. As a member of the UK’s 5% work in markets where we provide critical socio-economic backgrounds, but we Club, we have approximately 1,200 services, such as repairing roads or fixing acknowledge we have considerable scope for graduates and apprentices currently leaks in water networks – essential improvement in the areas relating to ethnic engaged in training across the business. everyday maintenance that has to be and gender diversity. We have established As a responsible business, it is vital we are undertaken, and where future investment several internal forums, such as our in a position to develop the necessary UK is more certain. skills and expertise to support industry Balanced Business Network and the LGBT+ We are increasingly using joint ventures growth in the future. We are actively and Allies Network. In addition, we have across our Property and Residential seeking to encourage the Government and created a Gender Strategy Steering Group operations to make more efficient use of the public sector to make this level of which is responsible for driving leadership our capital. This is evidenced through the commitment a pre-requisite for tenders. action on gender. We have a particular focus Cross Keys and Homes England joint We are continuing to promote our Shaping on gender pay, where our median pay gap ventures announced over the last year, and Your World campaign, launched in reported this year was 20.2%, higher than the use of joint ventures on many of our September 2017, which encourages the national average. We have fewer women property development schemes, such as 11-15 year olds to consider careers in in senior roles which means we have those with and Watford construction and the built environment. proportionately more men earning higher Borough Council. salaries. We are focused on tackling this gap We are proud to report that we have to increase the number of women coming exceeded the targets we put in place for We provide specialist services to a broad into Kier and progressing to senior roles. the first year of the campaign with over 350 range of sectors, and we have a track Shaping Your World ambassadors across record of problem-solving and providing In addition to Group initiatives, our the Company who regularly visit schools to fresh thinking to our clients. For example, operational businesses support a number explain the industry and to talk about the we regularly use off-site construction of key topics which are of particular many and varied career opportunities and modern methods of construction importance to their clients. For example, available. This campaign reached more on projects. As part of this process, in our Highways business, we have made than 15,000 students in its first year. we offer our clients a unique breadth of good progress around disability, and in complementary capabilities to help meet 2018 we achieved the Disability Confident Environment their project requirements. accreditation for our work, supporting In 2018 we launched the first three Highways England’s focus on this topic. environmental initiatives as part of our 30 Supply chain by 30 strategy, which aims to reduce our Our focus is truly local, using local energy usage by 30% by 2030. The strategy resources and talent to benefit the local Shaping Your covers a broad range of activities, from the community. It’s what I call a national reduction of construction waste to water footprint with a local flavour. Our regional World campaign consumption and use of plastics. It should network of over 80 offices enables us to begin to deliver financial savings over the deliver projects and services anywhere in next 12 to 18 months, and over time will the UK. Another key differentiator is the fact 350+ enable us to make a greater contribution to that, as a result of our average project size Kier ambassadors environmental protection and sustainability. and the every day services we provide, we use very local SME supply chains. Around What sets Kier apart from the business, we have a strong regional the competition? focus, unique among our peers, having developed robust supplier relationships built 15,000+ The Kier business model is at the heart of on local knowledge and trust over many our competitive differentiation. Through our Students engaged years. These relationships have helped us three market positions, we aim to leverage establish powerful market positions outside our skills, knowledge and innovation to of London and the South East. provide solutions which make this happen as efficiently and effectively as possible. Collaboration with our supply chain is also Safety: Group Our business model provides stability and critical, and each year our businesses Accident Incidence certainty when individual markets fluctuate. spend time with our suppliers, working to understand how we can better partner and In Construction, our high-volume, low-value Rate (AIR) innovate alongside them. Keen to deepen approach offers a lower risk model which these relationships and ensure continuity protects us from profit and cash flow of supply, we offer a variety of contract volatility. It provides us with long-term 96 types and payment mechanisms, including visibility, with projects often delivered in early payments schemes for the supply Improved by 26% framework arrangements, many with chain. These are popular, often helping (2017: 130) five-year terms. them with their working capital challenges, a typical feature of the sector.

18 Kier Group plc | Report and Accounts 2018 “THROUGH OUR THREE MARKET Strategic Report POSITIONS, WE AIM TO LEVERAGE OUR SKILLS, KNOWLEDGE AND INNOVATION TO PROVIDE

SOLUTIONS WHICH Governance ARE EFFICIENT AND EFFECTIVE”

Watch Haydn Mursell’s interview online – www.kier.co.uk Financial Statements

These activities are clear recognition of the We are on track to deliver on our Vision importance of our suppliers to our long-term 2020 goals. We have a record order book business success and sustainability. of c.£10.2bn, and our Construction and Services divisions are 90% secured, with In our Highways business, we have brought improved visibility of the work they need to new technology into the sector. For undertake in the 2019 financial year. We example, the Kier Highways team has also have a pipeline of work of £3.5bn in transferred the concept of Roadrake, which our property and residential businesses. is used to clean beaches in Australia, to These developments will provide the Group the UK to clear litter on the Highways with greater resilience as we progress to England network. This technology is now 2020 and beyond. being rolled out on to other parts of the Highways England network. Working in I believe our core businesses are collaboration with our supply chain, we are performing well and we have leading responsible for introducing a range of new positions in our chosen markets. Kier is technology into the highways market which very well placed for the future. Highways England and other members of their supply chain have adopted. We are proud of our track record in this field. What are your future priorities? The UK’s demographic trends support our Haydn Mursell three market positions while our balance Chief Executive sheet will continue to strengthen and 19 September 2018 benefit further from the implementation of our Future Proofing Kier programme. We are focused on reducing our net debt, which will also benefit further from the Future Proofing Kier programme. We will continue to pursue growth in our core operations, streamlining the Group’s portfolio of businesses as necessary, and we will increase the operational efficiency of the business, ensuring we continue to deliver for our clients and be their trusted partner. In light of market challenges, we will continue to closely monitor the risk profile of the Group.

Kier Group plc | Report and Accounts 2018 19