Kier Services

Kier Services comprises five main businesses: Maintenance, which provides both reactive and planned maintenance largely to local authorities and housing associations; Facilities Management (FM), providing services to public and private sector clients; Environmental, offering services for domestic and commercial waste collection and the management and operation of a major recycling facility, street scene and grounds maintenance; Asset Management, which was formerly within the Property division; and Energy Solutions, including our photovoltaic production, design and installation business.

Revenue increased 3% to £484m (2010: £471m) with growth, in particular, in Maintenance and Environmental. Operating profit, before deducting the amortisation of intangibles of £3.4m, increased to £21.7m (2010: £21.4m), with a resilient operating margin of 4.5% (2010: 4.5%). Cash balances were healthy at £28m (2010: £32m), underpinning the profit recognition and come after approximately £18m of further investment in Pure Recycling, the acquisition of Beco and additions to our street services and plant equipment.

The order books are at a healthy £2,030m at 30 June 2011 (2010: £2,128m); this figure does not include potential contract extensions, which could add approximately £750m if all were exercised by our customers.

Our Maintenance business saw revenues increase by 2% to £351m (2010: £344m), which highlights the strength of this business given the budget restrictions that are now affecting local authorities. We currently maintain approximately a quarter of a million homes, placing us as one of the largest providers of housing maintenance services in the UK.

We have been successful in negotiating an extension to our partnership with Sheffield City Council, Kier Sheffield LLP, for a further year to 2014, with a value of £64m. We have also secured the remainder of Sheffield City Council’s Decent Homes Programme for the three-year period to 2014, with a value of up to £27m over the period.

We were awarded three contracts for Homes for Islington (HFI), the arm’s length management organisation (ALMO) for Islington Council. The contracts, to repair and maintain 29,500 properties in the London Borough of Islington, are for an initial four-year period, extendable up to ten, and all commenced in October 2010. This contract with Islington Council was first secured in 2000 and, therefore, represents our first ‘re-win’.

Having been re-awarded a £20m responsive repairs contract with Ealing Council over five years, we have also secured a £60m partnership with Gosport Borough Council for ten years, extendable for a further five years, and have secured valuable framework positions with EMPA, Riverside Group and North Bransholme for the next four years.

The Facilities Management business generated more than £100m of revenue in the year and was successful in renewing key contracts of approximately £30m including Surrey County Council, Sussex Police and London Fire Brigade and adding new customer contracts of almost £20m.

Our Environmental business has been awarded several significant contracts, valued in aggregate at more than £150m. An eight-year contract, with a potential eight-year extension, for North Norfolk District Council and the Borough Council of King’s Lynn and West Norfolk, serving 240,000 homes, and a seven-year contract for East Northamptonshire serving 37,600 homes, were also awarded. In addition, we have secured a £48m waste and recycling services contract for London Borough of Waltham Forest for eight years, with the potential to increase to £90m with extensions.

Our new Pure Recycling materials recovery facility (MRF) in Ettington, Warwickshire officially opened for business at the end of February 2011. The MRF is licensed to process 150,000 tonnes of mixed dry recyclable materials a year, and is one of the largest in the UK. The completion of the MRF is an important milestone for our Environmental business and we already have contracts to process dry recyclables for 80,000 tonnes per annum. With councils committed to meeting increasingly demanding recycling targets over the next few years, the MRF offers a fully integrated waste and recycling collection solution.

The newly formed Energy Solutions business, strengthened by the acquisition of Beco in November 2010, has provided a stronger platform to enter the energy solutions marketplace. This business, together with the Maintenance business, has secured several contracts in the year covering up to 10,000 properties (£30m) in North Tyneside, Stoke-on-Trent and Harlow, the latter where we are delivering a funded photovoltaic scheme onto 1,200 rooftops of council housing stock. The business has identified a good pipeline of opportunities in the retrofit social housing market, which will utilise the combined strengths of the Maintenance business and the structured finance business.

As expected, levels of activity have been subdued over the past 12 months. However, we are seeing an increasing number of outsourcing opportunities as both the public and registered provider sectors, in particular, seek to alleviate cost pressure and examine their current service delivery requirements. We anticipate that this increase in activity will translate into revenue growth for the division in the year to June 2013.

Our order book in the Services division is at a healthy level of £2.0bn, giving good forward visibility of workload, coupled with a strong pipeline of further opportunities. We expect our operating margins to be maintained at a resilient 4.5%.

The Maintenance business continues to offer best value solutions for clients through proven partnership and provides long-term visible revenues to 2020 and beyond at strong, consistent margins. These long-term contracts and partnerships allow us to expand our activities through the involvement of other Group businesses as our clients and partners seek a one-stop, integrated delivery model to service their businesses, a model that we are well placed to deliver.

The cost pressures on local authorities are also leading to increasing opportunities for us in the waste collection and street scene market where we have seen considerable success this year and remain optimistic about growth. The private sector is also examining its cost base and is demonstrably outsourcing more of its non-core activities. Our diverse offering, covering both hard and soft FM, is doing well but we consider it would benefit from greater scale in the premium office and retail market. This remains a key focus for us in the coming years.