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The Construction and
Regeneration Group
ANNUAL REPORT 2018
Contents
STRATEGIC REPORT
Who we are
Chair’s statement
GOVERNANCE
01 Board of directors
02 Group management team
36
37
Chief Executive’s statement
03 Directors’ and corporate governance report 38
Market overview
Business model
Engaging with our stakeholders
Our strategy
05 Remuneration report
07
10
11
FINANCIAL STATEMENTS
Independent auditor’s report
Key performance indicators
12 Consolidated financial statements
Operating review
Financial review
Principal risks
Viability statement
Non-financial reporting statement
14 Company financial statements
Shareholder information
20
22
32
33
59
76
84
119
129
Performance highlights
Sustainable growth
Shareholder returns
Social responsibility
ORDER BOOK
£3.6bn
2017: £3.8bn
-7%
REGENERATION AND
DEVELOPMENT PIPELINE
£3.1bn
2017: £3.2bn
-4%
REVENUE
£2,972m
2017: £2,793m
+6%
YEAR END NET CASH
£207m
2017: £193m
+7%
PROFIT BEFORE TAX (ADJUSTED*)
ACCIDENT FREQUENCY RATE1
£81.6m
2017: £66.1m
+23%
PROFIT BEFORE TAX
£80.6m
2017: £64.9m
+24%
0.08
2017: 0.09
-11%
CARBON INTENSITY2
9.9
2017: 10.2
-3%
BASIC EARNINGS PER SHARE (ADJUSTED*)
APPRENTICES AND NEW GRADUATES
265
2017: 217
+22%
Note: the Group adopted IFRS 15, IFRS 9 and IFRS 16 in the
period. Refer to the significant accounting policies on pages
89 to 91 for further detail.
* See note 2 to the consolidated financial statements for
alternative performance measure definitions and reconciliations.
1 The number of RIDDOR (Reporting of Injuries, Diseases
and Dangerous Occurrences Regulations 2013) reportable
accidents multiplied by 100,000 and divided by the number
of hours worked.
2 Carbon intensity is total carbon emissions per £m of revenue.
151.8p
2017: 121.1p
+25%
BASIC EARNINGS PER SHARE
149.8p
2017: 118.8p
+26%
TOTAL DIVIDEND
53.0p
2017: 45.0p
+18%
STRATEGIC REPORT
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
1
01
STRATEGIC REPORT
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Who we are
Morgan Sindall Group is a leading UK construction and regeneration group, operating through six divisions:
Construction
Performance highlights
Sustainable growth
Shareholder returns
Social responsibility
PROFIT BEFORE TAX (ADJUSTED*)
ACCIDENT FREQUENCY RATE1
Regeneration
Construction & Infrastructure
Morgan Sindall Construction & Infrastructure Ltd provides infrastructure services in the
highways, rail, aviation, energy, water and nuclear markets, including tunnel design; and
construction services in education, healthcare, defence, commercial, industrial, leisure and
retail. BakerHicks Limited offers a multidisciplinary design and engineering consultancy.
Fit Out
Overbury plc specialises in fit out and refurbishment in commercial, central and local
government offices, retail banking and further education. Morgan Lovell plc provides
office interior design and build services direct to occupiers.
Property Services
Morgan Sindall Property Services Limited provides response and planned maintenance
for social housing and the wider public sector.
Partnership Housing
Lovell Partnerships Limited delivers housing through mixed-tenure and contracting activities.
Mixed tenure includes building and developing homes for open market sale, affordable
rent, private renting or shared ownership in partnership with local authorities and housing
associations. Contracting includes the design and build of new homes and planned
maintenance and refurbishment for clients who are mainly local authorities, housing
associations and the Defence Infrastructure Organisation.
Urban Regeneration
Muse Developments Limited works with landowners and public sector partners to transform
the urban landscape through the development of multi-phase sites and mixed-use
regeneration, including residential, commercial, retail and leisure.
Investments
Morgan Sindall Investments Limited provides the Group with construction and regeneration
opportunities through long-term strategic partnerships to develop under-utilised public land
across multiple sites, and generates development profits from such partnerships.
Our reporting suite
This annual report is simpler and more streamlined than our
previous reports. We are launching our new website in the second
quarter of 2019, which displays news of our projects and other
information that complements the regulatory disclosures contained
in this report.
In addition, the new style will help us prepare for the ESMA
European Single Electronic Format required from 2020.
The annual report and our 2018 responsible business report
can be downloaded from our website at morgansindall.com.
Contents
Chief Executive’s statement
03 Directors’ and corporate governance report 38
STRATEGIC REPORT
Who we are
Chair’s statement
Market overview
Business model
GOVERNANCE
01 Board of directors
02 Group management team
05 Remuneration report
Engaging with our stakeholders
FINANCIAL STATEMENTS
Our strategy
Independent auditor’s report
Key performance indicators
12 Consolidated financial statements
14 Company financial statements
Shareholder information
Operating review
Financial review
Principal risks
Viability statement
Non-financial reporting statement
07
10
11
20
22
32
33
36
37
59
76
84
119
129
ORDER BOOK
£3.6bn
2017: £3.8bn
-7%
REGENERATION AND
DEVELOPMENT PIPELINE
£3.1bn
2017: £3.2bn
-4%
REVENUE
£2,972m
2017: £2,793m
+6%
YEAR END NET CASH
£207m
2017: £193m
+7%
BASIC EARNINGS PER SHARE (ADJUSTED*)
APPRENTICES AND NEW GRADUATES
0.08
2017: 0.09
-11%
CARBON INTENSITY2
9.9
2017: 10.2
-3%
265
2017: 217
+22%
Note: the Group adopted IFRS 15, IFRS 9 and IFRS 16 in the
period. Refer to the significant accounting policies on pages
89 to 91 for further detail.
* See note 2 to the consolidated financial statements for
alternative performance measure definitions and reconciliations.
1 The number of RIDDOR (Reporting of Injuries, Diseases
and Dangerous Occurrences Regulations 2013) reportable
accidents multiplied by 100,000 and divided by the number
of hours worked.
2 Carbon intensity is total carbon emissions per £m of revenue.
£81.6m
2017: £66.1m
+23%
PROFIT BEFORE TAX
£80.6m
2017: £64.9m
+24%
151.8p
2017: 121.1p
+25%
BASIC EARNINGS PER SHARE
149.8p
2017: 118.8p
+26%
TOTAL DIVIDEND
53.0p
2017: 45.0p
+18%
02
STRATEGIC REPORT
STRATEGIC REPORT
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
2
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Chair’s statement
Morgan Sindall Group is well positioned in the industry due to
our established capabilities in construction and regeneration. We
have a balanced business that fits the increasing demand in the
UK for affordable housing, urban regeneration and investment in
infrastructure. We also have a strong balance sheet, a talented
workforce and a high-quality supply chain, all underpinned by
our culture.
The government’s Brexit negotiations have had a limited impact in our
markets, although longer-term effects on consumer confidence remain
hard to predict and we must avoid complacency. Our divisions are alert
to changes in their markets and are careful in managing their exposure
to risk. Construction & Infrastructure has continued to improve the quality
of its earnings through careful selection of contracts. Fit Out is focusing
on exceptional project delivery and repeat business, as well as growing
opportunities in frameworks. In regeneration, Partnership Housing has
new leadership and a new strategic plan focused on cultivating public
sector land partnerships. In respect of its residential activity, Urban
Regeneration has increased its emphasis on the private rented sector,
developing forward-funded schemes alongside open-market units.
Investments continues to create joint venture development programmes
with councils that generate returns for local authorities while serving
the long-term needs of their communities.
Our culture
Our culture is founded on our core values, which are an important
source of strength and consistency for the Group:
• the customer comes first
• talented people are key to our success
• we must challenge the status quo
• consistent achievement is key to our future
• we operate a decentralised philosophy
We work closely with our clients and partners to understand and deliver
their objectives and develop mutually reinforcing relationships that result
in strategic alliances, framework opportunities and repeat business.
The quality of our delivery is down to the knowledge and expertise of our
employees, and we are committed to developing and motivating them
to achieve a high standard of performance, and to providing a supportive
work environment for them to thrive in. Our decentralised approach
empowers our divisions to meet the specific needs of their markets, and
to challenge the status quo so that we can drive innovation and progress.
Board changes
Having served on the Board for nine years, Patrick De Smedt decided to
step down as senior independent director and non-executive director
of the Company on 31 December 2018. I would like to thank Patrick
for his counsel and commitment over the past nine years, and wish
him the very best for the future.
We welcome David Lowden to the Board, who joined us in
September as a non-executive director. David is currently
chair of FTSE 250 PageGroup plc and non-executive director of
Huntsworth plc, becoming chair on 6 March. His extensive commercial
experience in senior leadership positions, and as both executive and
non-executive director of several successful companies, will bring
valuable knowledge and insight to Board discussions. David took
over from Patrick De Smedt as senior independent director from
1 January 2019, and is a member of our audit, nomination and
remuneration committees.
Malcolm Cooper became chair of the health, safety and environment
committee, replacing Simon Gulliford, and Tracey Killen became chair
of the remuneration committee, replacing Patrick. Both appointments
took effect on 4 May 2018.
Our performance
2018 has been another successful year for the Group, our strong
trading performance showing the benefit of our strategic focus on
construction and regeneration activities. Revenue was up 6% at
£2,972m (2017: £2,793m), with adjusted* profit before tax up 23% to
£81.6m (2017: £66.1m). Balance sheet strength and cash generation have
remained high priorities and 2018 has again seen a positive operating cash
flow and a net cash position throughout the year. This provides significant
financial security for our customers, our supply chain partners and our
employees, giving us the flexibility to be highly selective with bidding in
construction activities while allowing us to invest in regeneration activities.
Dividend
The total dividend for the year has been increased by 18% to 53.0p
per share (2017: 45.0p), which includes a proposed increase in the
final dividend of 17% to 34.0p per share (2017: 29.0p). The increase
reflects the improved result in the year and the Board’s confidence
in the Group’s future prospects. The total dividend per share is
2.9 times covered by adjusted earnings per share.
Looking ahead
We have the right culture and strategy in place for serving the interests
of our stakeholders, and I am confident that due to the quality of our
workforce, senior leadership and Board we can continue to deliver
sustainable growth for the Group.
Michael Findlay
Chair
21 February 2019
Governance principles
Leadership (pages 39 to 41)
Board members challenge each other on strategy,
performance, responsibility and accountability to ensure
that we make high-quality decisions.
Effectiveness (pages 42 to 43 and 44 to 46)
The Board’s performance was assessed in our annual
evaluation and the actions arising from the results are set
out in our directors’ and corporate governance report on
page 43. Succession planning and the composition of the
Board and its committees have remained a key focus.
Accountability (pages 49 to 54)
All our decisions are discussed in the context of the risks
involved. Effective risk management is central to achieving
our strategic objectives.
Shareholder engagement (page 43)
We hold various events throughout the year to keep an
open dialogue with investors. See page 10 for how we
engage with our other stakeholders.
Remuneration (pages 59 to 74)
The Board ensures a clear link between remuneration and
delivery of the Group’s strategy.
STRATEGIC REPORT
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
2
03
STRATEGIC REPORT
STRATEGIC REPORT
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
2
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Chair’s statement
Chief Executive’s statement
Morgan Sindall Group is well positioned in the industry due to
for his counsel and commitment over the past nine years, and wish
our established capabilities in construction and regeneration. We
him the very best for the future.
to risk. Construction & Infrastructure has continued to improve the quality
remuneration committees.
have a balanced business that fits the increasing demand in the
UK for affordable housing, urban regeneration and investment in
infrastructure. We also have a strong balance sheet, a talented
workforce and a high-quality supply chain, all underpinned by
our culture.
The government’s Brexit negotiations have had a limited impact in our
markets, although longer-term effects on consumer confidence remain
hard to predict and we must avoid complacency. Our divisions are alert
to changes in their markets and are careful in managing their exposure
of its earnings through careful selection of contracts. Fit Out is focusing
on exceptional project delivery and repeat business, as well as growing
opportunities in frameworks. In regeneration, Partnership Housing has
new leadership and a new strategic plan focused on cultivating public
sector land partnerships. In respect of its residential activity, Urban
Regeneration has increased its emphasis on the private rented sector,
developing forward-funded schemes alongside open-market units.
Investments continues to create joint venture development programmes
with councils that generate returns for local authorities while serving
the long-term needs of their communities.
Our culture
Our culture is founded on our core values, which are an important
source of strength and consistency for the Group:
• the customer comes first
• talented people are key to our success
• we must challenge the status quo
• consistent achievement is key to our future
• we operate a decentralised philosophy
We work closely with our clients and partners to understand and deliver
their objectives and develop mutually reinforcing relationships that result
in strategic alliances, framework opportunities and repeat business.
The quality of our delivery is down to the knowledge and expertise of our
employees, and we are committed to developing and motivating them
to achieve a high standard of performance, and to providing a supportive
work environment for them to thrive in. Our decentralised approach
empowers our divisions to meet the specific needs of their markets, and
to challenge the status quo so that we can drive innovation and progress.
Board changes
Having served on the Board for nine years, Patrick De Smedt decided to
step down as senior independent director and non-executive director
of the Company on 31 December 2018. I would like to thank Patrick
Governance principles
We welcome David Lowden to the Board, who joined us in
September as a non-executive director. David is currently
chair of FTSE 250 PageGroup plc and non-executive director of
Huntsworth plc, becoming chair on 6 March. His extensive commercial
experience in senior leadership positions, and as both executive and
non-executive director of several successful companies, will bring
valuable knowledge and insight to Board discussions. David took
over from Patrick De Smedt as senior independent director from
1 January 2019, and is a member of our audit, nomination and
Malcolm Cooper became chair of the health, safety and environment
committee, replacing Simon Gulliford, and Tracey Killen became chair
of the remuneration committee, replacing Patrick. Both appointments
took effect on 4 May 2018.
Our performance
2018 has been another successful year for the Group, our strong
trading performance showing the benefit of our strategic focus on
construction and regeneration activities. Revenue was up 6% at
£2,972m (2017: £2,793m), with adjusted* profit before tax up 23% to
£81.6m (2017: £66.1m). Balance sheet strength and cash generation have
remained high priorities and 2018 has again seen a positive operating cash
flow and a net cash position throughout the year. This provides significant
financial security for our customers, our supply chain partners and our
employees, giving us the flexibility to be highly selective with bidding in
construction activities while allowing us to invest in regeneration activities.
Dividend
The total dividend for the year has been increased by 18% to 53.0p
per share (2017: 45.0p), which includes a proposed increase in the
final dividend of 17% to 34.0p per share (2017: 29.0p). The increase
reflects the improved result in the year and the Board’s confidence
in the Group’s future prospects. The total dividend per share is
2.9 times covered by adjusted earnings per share.
Looking ahead
We have the right culture and strategy in place for serving the interests
of our stakeholders, and I am confident that due to the quality of our
workforce, senior leadership and Board we can continue to deliver
sustainable growth for the Group.
Michael Findlay
Chair
21 February 2019
Leadership (pages 39 to 41)
Accountability (pages 49 to 54)
Board members challenge each other on strategy,
All our decisions are discussed in the context of the risks
performance, responsibility and accountability to ensure
involved. Effective risk management is central to achieving
that we make high-quality decisions.
our strategic objectives.
Effectiveness (pages 42 to 43 and 44 to 46)
Shareholder engagement (page 43)
The Board’s performance was assessed in our annual
We hold various events throughout the year to keep an
evaluation and the actions arising from the results are set
open dialogue with investors. See page 10 for how we
out in our directors’ and corporate governance report on
engage with our other stakeholders.
page 43. Succession planning and the composition of the
Board and its committees have remained a key focus.
Remuneration (pages 59 to 74)
The Board ensures a clear link between remuneration and
delivery of the Group’s strategy.
I am delighted to report that 2018 has been another year of strong
growth for the Group, and these excellent results reflect the high
quality of our operations and our people. Our strong balance
sheet, with average daily net cash* of £98.8m, and a business which
continues to generate positive operating cash flow, is a significant
differentiator for us.
Revenue from construction activities was up 6% from £2,133m in 2017
to £2,260m in 2018, while adjusted* operating profit was up 25% from
£58.2m in 2017 to £72.8m in 2018. In regeneration, revenue increased
by 9% from £659m in 2017 to £713m in 2018, and adjusted* operating
profit increased by 20% from £24.6m in 2017 to £29.4m in 2018.
Construction & Infrastructure’s ongoing focus on contract selectivity
and risk management enabled it to achieve an operating margin of
2.0%, up 50bps on the prior year, and an operating profit of £27.0m,
up 32%. Fit Out had another excellent year, with revenue growth
of 13% and an operating profit of £43.8m at a margin of 5.3%.
Property Services benefited from successful contract mobilisation and
operational improvements, delivering an operating profit* of £2.0m.
Partnership Housing was impacted by operational issues in its
contracting activities which resulted in operating profit* being lower
at £12.2m (2017: £14.1m), although the division is well-positioned
for future growth with a strong and visible pipeline. A very strong
contribution was made by Urban Regeneration, with operating
profit* up 96% to £19.6m (2017: £10.0m). Investments saw slippage
in some of its existing schemes which led to a loss of £2.4m in
the year. However, the division has made further progress with
developing its portfolio of property partnerships.
* See note 2 for alternative performance measure definitions and reconciliations.
Our clients and partners
Our divisions continue to build on long-term relationships with their
clients and partners. For example, Partnership Housing and Urban
Regeneration reported having worked with more than half of their
clients in 2018 for 10 years or more, while Construction & Infrastructure
entered its 25th consecutive year of working with Welsh Water. I am
pleased to report that Urban Regeneration’s joint venture, the English
Cities Fund (ECf) with Homes England and Legal & General, announced
in March 2018 that it was doubling its investment to £200m. This will
generate further opportunities for development in 2019 with local
authority partners and landowners.
Our Total Commitments
Our strategy for being a responsible business is based on five
Total Commitments, designed to address the needs of our
stakeholders and support the delivery of our strategic objectives:
• protecting people
• developing people
• improving the environment
• working together with our supply chain
• enhancing communities
In 2018, following the results of our biennial stakeholder survey to
identify sustainability issues they consider material to our business,
we carried out a thorough review of our Total Commitments and have
set new key performance indicators and targets to drive improvement
over the next 10 years. We also reviewed the sustainable development
goals (‘the Goals’) set by the UN in 2015 ‘to end poverty, protect the
planet and ensure prosperity for all’. We fully support the Goals and
are focusing our efforts on those that align closely with our Total
Commitments and where we can have the biggest impact.
For information on how we performed this year against our Total
Commitments targets and our new targets from 2019, please see
our 2018 responsible business report on our website.
Our people
Developing people is one of our strategic objectives, and we aim
to provide an inclusive and empowering culture that enables our
people to perform highly and progress their careers.
Training and development
During the year we provided an average of 3.2 training days per
employee and we are working to increase this figure. We sponsored
720 people on NVQs and professional qualifications, a 32% increase
on last year. Our divisions work with industry bodies and initiatives to
encourage people into a career in construction. These include Women
into Construction and the 5% Club, a national campaign that focuses
on getting more graduates and apprentices into the UK workforce.
The table below shows the percentage of Group employees making
up the 5% Club.
Apprentices
New graduates recruited
Sponsored students
Total structured trainees
Percentage of total workforce1
1 Based on number of employees at 31 December.
2018
186
79
13
278
4.5%
2017
161
56
21
238
3.8%
The increase in percentage of structured trainees in the year is
due to an increase in the number of graduates recruited and
apprentices directly employed.
Diversity and inclusion
We are committed to treating all our employees fairly and equally,
without discrimination. A diverse workforce provides us with a deeper
insight into different markets and the needs of our clients. In 2018 the
Board agreed a range of initiatives for our divisions to help improve
diversity. From 2019 we will look at how we can attract more people
from underrepresented groups and will start to track their progression
throughout their employment. We will also capture data on informal
and formal flexible working arrangements. Further details of our
approach to inclusion and a gender breakdown of our workforce
can be found in the nomination committee report on pages 45 to 46.
04
STRATEGIC REPORT
CHIEF EXECUTIVE’S STATEMENT CONTINUED
STRATEGIC REPORT
CHIEF EXECUTIVE’S STATEMENT CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
3
Health, safety and wellbeing
Over the past three years we have seen a significant improvement
in our overall health and safety performance. In 2018 the number
of RIDDOR1 incidents fell from 43 to 39, a reduction of 10%, and
our accident frequency rate2 reduced from 0.09 to 0.08. We want
to reduce our RIDDOR incidents still further and have introduced
a new methodology for analysing high potential incidents (RIDDOR
reportable, RIDDOR recordable or non-RIDDOR incidents or near
misses with the potential for work- or life-changing outcomes).
We can then use the data we capture through this process to
identify any trends, which will help us continue to improve our
risk management and safety performance.
In 2018, we reviewed our health and safety policy and will focus this
year on three strategic themes: occupational health and wellbeing,
including mental wellbeing; high potential incidents; and innovation
to drive further improvements in our safety performance, particularly
in managing our biggest health and safety risks.
The Group has been supporting external programmes in the UK
such as the mental health charity, Mind; CIRIA, the construction
industry research and information association, in its project ‘Delivering
wellbeing at site level’; and Loughborough University, in its report on
the costs of occupational ill-health in the construction industry. We
have also introduced a range of measures to address respiratory
health, and resilience training (helping people respond to pressure
and the demands of daily life).
More information on our approach to health, safety and wellbeing
can be found in the health, safety and environment committee report
on pages 46 to 49 and in our 2018 responsible business report.
1 The Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 2013.
2 The number of RIDDOR reportable accidents multiplied by 100,000 and divided by the number
of hours worked.
Our suppliers
The input of our suppliers and subcontractors is a vital resource for
the Group. We subscribe to the Prompt Payment Code, and comply
with payment practice reporting regulations, while our divisions have
endeavoured during the year to reduce their payment days wherever
possible. We do not use any supplier finance arrangements.
Local communities
We currently run two social enterprises to provide training and work
opportunities to people who live in the vicinity of our projects. One of
these is BasWorx, set up two years ago in partnership with Basildon
Council, and which in 2018 welcomed its fifth cohort of trainees.
See our 2018 responsible business report for more information.
Environment
We maintained our A- position in the CDP3 index in 2018, and are
one of three contractors to achieve this score which is within the
CDP’s ‘Leadership’ band. We achieved a 3% reduction in our carbon
intensity ratio for 2018, giving a total reduction of 18% against our
2016 baseline, and a total reduction of 67% against our 2010 results,
which is a significant achievement. Details of our carbon emissions
are set out in the health, safety and environment committee report
on pages 48 and 49. In 2019, we will report against our science-based
targets, which were approved during the year by the Science Based
Targets initiative.
3 Formerly the Carbon Disclosure Project, which runs a global disclosure system for managing
environmental impacts.
Looking to the future
We have focused on maintaining an appropriate risk balance in our
order book and contract selectivity remains a key discipline across
all divisions. As a result, while our secured order book at the year end
was £3,567m, down 7% from the previous year and down 1% from
the half year, the quality of work across the order book has continued
to improve, setting the Group up well for the future. Our regeneration
and development pipeline, which provides longer-term visibility of
activity for the regeneration divisions, was £3,107m at the year end,
down 4%. Our strategic investment in regeneration is scheduled to
continue in 2019, with the precise timing and amount depending on
the phasing and timing of individual schemes.
In the year ahead, we expect continued margin improvement
in Construction & Infrastructure; and Fit Out to deliver within its
target profit range, having significantly exceeded it in 2018.
Partnership Housing’s progress towards its medium-term target is
expected to be limited, and Investments is expected to make a loss
in 2019 based on current scheme completions. However, we expect
Property Services and Urban Regeneration to make progress towards
their medium-term targets. There is significant positive momentum
across the Group and this provides the platform for future strategic
and operational progress. We are in a strong position to deliver on
our expectations and look forward to another positive year ahead.
John Morgan
Chief Executive
21 February 2019
STRATEGIC REPORT
CHIEF EXECUTIVE’S STATEMENT CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
3
05
STRATEGIC REPORT
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MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
4
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Market overview
Health, safety and wellbeing
Environment
Over the past three years we have seen a significant improvement
We maintained our A- position in the CDP3 index in 2018, and are
in our overall health and safety performance. In 2018 the number
one of three contractors to achieve this score which is within the
of RIDDOR1 incidents fell from 43 to 39, a reduction of 10%, and
our accident frequency rate2 reduced from 0.09 to 0.08. We want
CDP’s ‘Leadership’ band. We achieved a 3% reduction in our carbon
intensity ratio for 2018, giving a total reduction of 18% against our
to reduce our RIDDOR incidents still further and have introduced
2016 baseline, and a total reduction of 67% against our 2010 results,
a new methodology for analysing high potential incidents (RIDDOR
which is a significant achievement. Details of our carbon emissions
reportable, RIDDOR recordable or non-RIDDOR incidents or near
are set out in the health, safety and environment committee report
misses with the potential for work- or life-changing outcomes).
on pages 48 and 49. In 2019, we will report against our science-based
We can then use the data we capture through this process to
targets, which were approved during the year by the Science Based
identify any trends, which will help us continue to improve our
Targets initiative.
risk management and safety performance.
3 Formerly the Carbon Disclosure Project, which runs a global disclosure system for managing
There are four fundamental long-term trends that will
support growth in the Group over the next 10 to 20 years.
We target sectors that are forecast to grow and our diverse
portfolio of activities mitigates the impact of fluctuations
within each market.
Opportunities for the Group
• To deliver for the transport, energy, education, health and defence
sectors through Construction & Infrastructure and for the housing
sector through Partnership Housing.
• To regenerate areas around transport hubs.
HOUSING SHORTAGES
4m
shortfall of homes in England
POPULATION GROWTH
69.2m
projected UK population in 2026
In 2018, we reviewed our health and safety policy and will focus this
year on three strategic themes: occupational health and wellbeing,
including mental wellbeing; high potential incidents; and innovation
to drive further improvements in our safety performance, particularly
in managing our biggest health and safety risks.
The Group has been supporting external programmes in the UK
such as the mental health charity, Mind; CIRIA, the construction
industry research and information association, in its project ‘Delivering
wellbeing at site level’; and Loughborough University, in its report on
the costs of occupational ill-health in the construction industry. We
have also introduced a range of measures to address respiratory
health, and resilience training (helping people respond to pressure
and the demands of daily life).
More information on our approach to health, safety and wellbeing
can be found in the health, safety and environment committee report
on pages 46 to 49 and in our 2018 responsible business report.
1 The Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 2013.
2 The number of RIDDOR reportable accidents multiplied by 100,000 and divided by the number
of hours worked.
Our suppliers
The input of our suppliers and subcontractors is a vital resource for
the Group. We subscribe to the Prompt Payment Code, and comply
with payment practice reporting regulations, while our divisions have
endeavoured during the year to reduce their payment days wherever
possible. We do not use any supplier finance arrangements.
Local communities
We currently run two social enterprises to provide training and work
opportunities to people who live in the vicinity of our projects. One of
these is BasWorx, set up two years ago in partnership with Basildon
Council, and which in 2018 welcomed its fifth cohort of trainees.
See our 2018 responsible business report for more information.
environmental impacts.
Looking to the future
We have focused on maintaining an appropriate risk balance in our
order book and contract selectivity remains a key discipline across
all divisions. As a result, while our secured order book at the year end
was £3,567m, down 7% from the previous year and down 1% from
the half year, the quality of work across the order book has continued
to improve, setting the Group up well for the future. Our regeneration
and development pipeline, which provides longer-term visibility of
activity for the regeneration divisions, was £3,107m at the year end,
down 4%. Our strategic investment in regeneration is scheduled to
continue in 2019, with the precise timing and amount depending on
the phasing and timing of individual schemes.
In the year ahead, we expect continued margin improvement
in Construction & Infrastructure; and Fit Out to deliver within its
target profit range, having significantly exceeded it in 2018.
Partnership Housing’s progress towards its medium-term target is
expected to be limited, and Investments is expected to make a loss
in 2019 based on current scheme completions. However, we expect
Property Services and Urban Regeneration to make progress towards
their medium-term targets. There is significant positive momentum
across the Group and this provides the platform for future strategic
and operational progress. We are in a strong position to deliver on
our expectations and look forward to another positive year ahead.
John Morgan
Chief Executive
21 February 2019
In May 2018, the National Housing Federation published the results
of research by Heriot-Watt University showing that England has a
shortfall of four million homes and that to meet the backlog, the
country needs to build 340,000 homes a year until 2031, of which
145,000 need to be affordable. In October, Theresa May announced
that the government will remove the cap on how much councils can
borrow to build new homes. By the end of that month, 60 local
councils had vowed to borrow more money, leading to hopes of the
biggest council housebuilding programme since the 1970s (source:
The Guardian). In its 2017 Autumn budget, the government had
announced £15.3bn of new financial support for housebuilding
over the next five years.
A report published in July 2018 by the House of Lords Science
and Technology Committee proposed the increased use of off-site
manufacture (‘OSM’) to meet the need for housing and infrastructure,
citing evidence that OSM can increase productivity in construction
by up to 70%.
The London School of Economics and Political Science reported
in January 2018 that the proportion of homeownership is shrinking
significantly while nearly 20% of all households rely on the private
rented sector.
Opportunities for the Group
• To deliver mixed-tenure, including social and affordable, homes
in partnerships with local authorities and housing associations.
• To provide accelerated housebuilding through Partnership Housing’s
continued investment in modern methods of construction.
• To build homes for sale and private rent which can be forward sold
to investors.
INVESTMENT IN INFRASTRUCTURE
£37bn
expanded National Productivity Investment Fund
Investment in infrastructure remains a government priority to
boost UK productivity and growth. The government announced in
its 2018 Autumn budget that it will extend the National Productivity
Investment Fund by an extra year to 2023-2024 and expand it to
£37bn. It also announced the largest ever road investments package,
with £25.3bn to be spent on England’s strategic roads between 2020-
2025; £20.5bn of funding for the NHS over the next five years; and
£1bn of investment in defence across 2018-2020 (source: gov.uk).
In June 2018 the ONS reported that the UK population had reached
66 million in mid-2017, representing a growth rate of 0.6% on the
previous year. While this was the lowest annual growth rate since
2004, due to a fall in net migration following the EU referendum, fewer
births and more deaths, the ONS stated that the population is still
growing faster than at any time since the post war ‘baby boom’ and
the expansion of the EU in 2004.
The ONS has forecast the UK population to increase by 3.6 million
(5.5%) over the next 10 years, hit 69.2 million in 2026 and pass
70 million by mid-2029. It has projected that the proportion of people
aged 85 and over will double over the next 25 years, and that the
number of five to 19-year-olds will increase from 11.5 million in
2017 to 12.4 million in 2027.
Opportunities for the Group
• To develop and regenerate urban areas.
• To deliver, upgrade and maintain social infrastructure, particularly
in housing, education, transport and healthcare.
• To deliver extra care housing for the elderly, through Investments.
CONSTRAINED PUBLIC EXPENDITURE
Cost efficiencies
required in the public sector
The government confirmed in its Autumn budget that the deficit has
been reduced by four fifths since 2010 and debt is falling. However,
it stated that debt is still too high, leaving public finances vulnerable
to economic shocks and significant debt interest costs, and that it
is important to continue to reduce borrowing and debt. The public
sector therefore requires services that help it reduce its expenditure.
Opportunities for the Group
• To deliver increased efficiencies in public sector assets and
services through all divisions, via standalone projects or positions
on local and national public sector frameworks (see pages 14 to 19
for further details).
• To regenerate areas related to public sector land disposals and
property consolidation.
• To provide funding solutions for local authority and NHS Trust
development schemes through Investments’ strategic partnerships.
06
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General construction industry conditions
According to the IHS Markit/CIPS UK construction purchasing
managers’ index (PMI), the construction industry suffered a slowdown
in December. This largely reflected reduced activity in the commercial
sector owing to rising business uncertainty in the run up to Brexit.
However, there remained a strong demand for residential property
among first-time buyers and civil engineering activity rose at the
quickest rate since May 2017. Companies in the PMI survey reported
improved confidence in their outlook for construction activity for the
year ahead.
Our markets
In December 2018 the government published its roadmap to
delivering Dame Judith Hackitt’s recommendations in her review
of building regulations and fire safety following the Grenfell Tower
tragedy. The government has committed to consulting on a new
regulatory framework, clearer safety guidance for builders and
manufacturers, and a stronger voice for residents. We have reviewed
the Hackitt report and made the necessary changes to our processes.
We will continue to monitor and review any future changes to the
regulatory framework.
The Board has reviewed the potential impact on the Group of the UK
leaving the EU, under the scenario of a controlled departure under the
terms of a withdrawal agreement and under the scenario of leaving
without a deal. Being UK-focused, no changes have been required
to the Group’s model, with any obvious effects already factored into
forecasting. Clearly, given the number of permutations associated with
Brexit, a ‘risk free’ situation is difficult to completely mitigate, but can
be limited. The majority of our construction activities and regeneration
schemes are with public sector and regulated clients, underpinned
via long-term frameworks and joint-venture style arrangements. We
consider that the strength of this client base, together with the quality
and volume of our order book and pipeline, provide some insulation
against any specific adverse consequences arising from the UK’s
departure from the EU.
The Construction Products Association (‘the CPA’), in its Autumn
2018 construction industry forecasts, estimates the overall UK
construction market at £162.7bn in 2018 (2017: £162.4bn), up
0.1%. The CPA forecasts growth of 0.6% in 2019 and 1.9% in 2020.
This includes growth in infrastructure of 8.7% in 2019 and 7.7% in
2020; growth in private housing of 2.0% in 2019 and 1.0% in 2020;
and decline in retail construction of 2.0% in 2019 with a rise of 2.0%
in 2020. New office construction output is forecast to decline by 20%
in 2019 and 2.0% in 2020. The CPA attributes much of this decline to
the uncertainty surrounding Brexit, and suggests that clarity following
Brexit and the implementation period would be expected to boost
business confidence and incentivise new long-term major investment.
Output in publicly-funded education construction is forecast to remain
flat in 2019 and rise by 3.0% in 2020.
Specific risks include the potential for increased material costs as
a result of exchange differences arising from materials imported
from EU countries, potential delays to construction programmes
in importing materials and potential skills deficiencies arising from
difficulties in obtaining EU workers within the supply chain.
We have reviewed these potential impacts and consider that
there are sufficient mitigations in place via contract terms or
allowances that offset increased costs, including: normal hedging
arrangements for significant imported purchases; specific project-
related arrangements that secure ‘leave date’ materials and labour;
and arrangements with our key suppliers to deal with any initial
shortages. We continue to closely monitor the potential impacts
that leaving the EU may have on the business.
The chart below shows our key targeted markets that contributed
more than 5% to the Group’s revenue in 2018.
Commercial
Community and other public sector
excluding education and social housing
Education
Social housing
Transport
Mixed-tenure housing
26%
14%
13%
13%
12%
10%
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Business model
General construction industry conditions
Our markets
According to the IHS Markit/CIPS UK construction purchasing
In December 2018 the government published its roadmap to
managers’ index (PMI), the construction industry suffered a slowdown
delivering Dame Judith Hackitt’s recommendations in her review
in December. This largely reflected reduced activity in the commercial
of building regulations and fire safety following the Grenfell Tower
sector owing to rising business uncertainty in the run up to Brexit.
tragedy. The government has committed to consulting on a new
However, there remained a strong demand for residential property
regulatory framework, clearer safety guidance for builders and
among first-time buyers and civil engineering activity rose at the
manufacturers, and a stronger voice for residents. We have reviewed
quickest rate since May 2017. Companies in the PMI survey reported
the Hackitt report and made the necessary changes to our processes.
improved confidence in their outlook for construction activity for the
We will continue to monitor and review any future changes to the
year ahead.
regulatory framework.
The Board has reviewed the potential impact on the Group of the UK
The Construction Products Association (‘the CPA’), in its Autumn
leaving the EU, under the scenario of a controlled departure under the
2018 construction industry forecasts, estimates the overall UK
terms of a withdrawal agreement and under the scenario of leaving
construction market at £162.7bn in 2018 (2017: £162.4bn), up
without a deal. Being UK-focused, no changes have been required
0.1%. The CPA forecasts growth of 0.6% in 2019 and 1.9% in 2020.
to the Group’s model, with any obvious effects already factored into
This includes growth in infrastructure of 8.7% in 2019 and 7.7% in
forecasting. Clearly, given the number of permutations associated with
2020; growth in private housing of 2.0% in 2019 and 1.0% in 2020;
Brexit, a ‘risk free’ situation is difficult to completely mitigate, but can
and decline in retail construction of 2.0% in 2019 with a rise of 2.0%
be limited. The majority of our construction activities and regeneration
in 2020. New office construction output is forecast to decline by 20%
schemes are with public sector and regulated clients, underpinned
in 2019 and 2.0% in 2020. The CPA attributes much of this decline to
via long-term frameworks and joint-venture style arrangements. We
the uncertainty surrounding Brexit, and suggests that clarity following
consider that the strength of this client base, together with the quality
Brexit and the implementation period would be expected to boost
and volume of our order book and pipeline, provide some insulation
business confidence and incentivise new long-term major investment.
against any specific adverse consequences arising from the UK’s
Output in publicly-funded education construction is forecast to remain
departure from the EU.
flat in 2019 and rise by 3.0% in 2020.
Specific risks include the potential for increased material costs as
The chart below shows our key targeted markets that contributed
a result of exchange differences arising from materials imported
more than 5% to the Group’s revenue in 2018.
from EU countries, potential delays to construction programmes
in importing materials and potential skills deficiencies arising from
difficulties in obtaining EU workers within the supply chain.
We have reviewed these potential impacts and consider that
there are sufficient mitigations in place via contract terms or
allowances that offset increased costs, including: normal hedging
arrangements for significant imported purchases; specific project-
related arrangements that secure ‘leave date’ materials and labour;
and arrangements with our key suppliers to deal with any initial
shortages. We continue to closely monitor the potential impacts
that leaving the EU may have on the business.
Commercial
Community and other public sector
excluding education and social housing
Education
Social housing
Transport
Mixed-tenure housing
26%
14%
13%
13%
12%
10%
Our business model is founded on a talented workforce and
supply chain; long-term relationships with clients and partners;
and our financial strength as a Group. We use these resources to
deliver high-quality construction projects and complex, long-term
regeneration schemes that create sustainable growth for the
Group while leaving lasting legacies for local communities.
Why we’re different
Our specialism in the complementary activities of construction and
regeneration makes us competitive in the industry. The diversity of
our offering mitigates the impact of fluctuations in individual markets
and our geographical spread provides us with local knowledge and
access to a local supply network. Our decentralised structure enables
our divisions to tailor their resources and respond quickly to the needs
of their clients and partners. As a Group, we achieve synergies by our
divisions sharing opportunities and collaborating on schemes.
How our business model works
Construction is cash generative while regeneration requires significant
initial investment and projects can take several years to complete.
We therefore use the cash from our construction activities to invest in
regeneration schemes that will generate additional profits over the long
term. Our progress in construction is measured by margin and working
capital, while performance in regeneration is measured using return
on capital employed.
Our Investments business acts mainly as a facilitator and provides
opportunities in construction and regeneration. The division has
built up a portfolio of property partnerships with local authorities and
government bodies which generate a stream of development profits.
See page 1 for more information on the activities of each division,
and pages 14 to 19 for their financial contributions.
Our resources
A talented workforce
We employ over 6,600 people with a broad range of expertise to support
our clients through all stages of the project life cycle, from development to
design, build, maintenance and refurbishment. Of our employees, 34%
have been with the Group for six years or more, and developed a bank
of knowledge and experience that they can pass on to newer recruits.
High-quality supply chain
We have a trusted, national network of suppliers and subcontractors
who are aligned to our values and Perfect Delivery1 philosophy, and
can help us deliver projects efficiently and to a high standard. We use
a variety of large and small local suppliers and occasionally source
specialist products overseas.
Strong client and partner relationships
We have formed long-term relationships and strategic alliances with
clients and partners. Of our current order book, 22% is in frameworks.
Technology as an enabler
We use technology to create faster, more efficient processes, manage
risk, improve our methods of construction, install better health and
safety measures, and enable our employees and subcontractors to
increase their productivity and perform at higher levels. This enhances
the experience of our clients and partners.
Financial strength
The Group’s balance sheet remains strong. In 2018 shareholder equity
was £346.6m (2017: £316.6m) with average daily net cash* of £98.8m
(2017: £118.0m).
* See note 2 for alternative performance measure definitions and reconciliations.
1 Perfect Delivery status is granted to projects that meet all four customer service criteria
specified by each division.
Our business model
Resources
E
N
R
U
O
T
I
C
T
U
C
R
U
T
R
S
T
A
S
N
R
F
O
N
C
I
&
F IT OUT
P A R TNERSHIP
H OUSING
CONSTRUCTION
Generates cash
REGENERATION
Invests cash
R
E
U
R
B
A
N
G
E
N
E
R
A
T
IO
N
Value
created
PROPER T Y
SERVIC E S
INVESTMENTS
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trained in NVQs and professional qualifications
new apprentices drawn from local communities
voluntary employee turnover
Considerate Constructors Scheme average score
members of the Morgan Sindall Supply Chain Family
reduction in carbon emissions against 2010 baseline
Local communities
113
39.8/50
Environment
54%
A-
CDP score
Our people
720
12%
Supply chain
392
2,343
preferred subcontractors
‘
Maintaining and enhancing our resources
Helping our employees to succeed
We recruit talented people, from apprentices and graduates to
specialists in their field. We create a safe working environment by
applying rigorous health and safety standards and through initiatives
to support occupational health and wellbeing (see our 2018
responsible business for more information). We develop our people
through training and mentoring to increase the skills and knowledge
they require to maximise their potential and meet the needs of our
markets. Our decentralised approach, together with our core value of
challenging the status quo, empowers our people to think differently
and find the best solutions for our clients.
Partnering with our supply chain
We build long-term relationships with our suppliers and subcontractors
based on fairness and respect. We support their development through
the Supply Chain Sustainability School and suppliers’ events (see our
2018 responsible business report for more information). We operate
schemes that motivate our subcontractors to achieve preferred status
and give feedback on their performance. Our scale enables us to
procure goods and services efficiently, and through our Group-wide
agreements we can also provide our subcontractors with access to
better pricing. By aligning our supply chain to our values and quality
criteria, we reduce the likelihood of errors on projects and increase
efficiency and client satisfaction.
Meeting our clients’ and partners’ needs
Using our talented workforce, high-quality supply chain and enabling
technology we deliver safe, efficiently run, high-quality projects that
match our clients’ and partners’ objectives. Our regional coverage
means we can engage at a local level and tailor our services as
needed. The relationships we build as a result increase the prospect
of repeat business, framework positions and negotiated work, which
can have a positive impact on profitability and long-term growth.
Investment in technology
Our divisions continually invest in new technology, such as
Construction & Infrastructure’s new risk management software and
supply chain certification and payment portal. In 2018, the Group
invested £3.6m in new technology (2017: £2.0m), which includes
moving existing systems to the Cloud to make them accessible to
employees while they are on the move. We have continued to invest
in information security controls and have engaged an external security
partner who advises on strategy. Our IT team achieved ISO 27001
accreditation in 2018.
Disciplined financial management
We monitor our cash levels on a daily basis and foster good relationships
with financial institutions to provide access to competitively priced
debt facilities. We minimise the use of our funds wherever possible
by working collaboratively with landowners to avoid the need to
purchase land on the open market, and by forward selling
the properties we build.
Our culture
Underpinning our business model, our core values and Total
Commitments create a culture that is focused on developing
and empowering our employees, delivering high-quality projects
for clients, enhancing the environment, creating value for all our
stakeholders, including local communities where we work, and
maintaining a disciplined use of capital (see pages 2 and 3 for
more information). These principles are driven by the Board and
embedded in the culture and operations of all divisions. Information
on our performance against our Total Commitments can be found
in our 2018 responsible business report.
Value created
See our key performance indicators on pages 12 to 13 for further
information.
Shareholders
151.8p
EPS adjusted*
22%
annual dividend growth over three years
Clients and partners
83%
of projects achieved Perfect Delivery1
58%
of order book and pipeline is in frameworks and partnerships
* See note 2 for alternative performance measure definitions and reconciliations.
1 Perfect Delivery status is granted to projects that meet all four customer service criteria specified
by each division.
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Our people
720
Local communities
113
trained in NVQs and professional qualifications
new apprentices drawn from local communities
12%
39.8/50
voluntary employee turnover
Considerate Constructors Scheme average score
Supply chain
392
Environment
54%
members of the Morgan Sindall Supply Chain Family
reduction in carbon emissions against 2010 baseline
2,343
preferred subcontractors
‘
A-
CDP score
Maintaining and enhancing our resources
Disciplined financial management
Helping our employees to succeed
We recruit talented people, from apprentices and graduates to
specialists in their field. We create a safe working environment by
applying rigorous health and safety standards and through initiatives
to support occupational health and wellbeing (see our 2018
responsible business for more information). We develop our people
through training and mentoring to increase the skills and knowledge
the properties we build.
Our culture
We monitor our cash levels on a daily basis and foster good relationships
with financial institutions to provide access to competitively priced
debt facilities. We minimise the use of our funds wherever possible
by working collaboratively with landowners to avoid the need to
purchase land on the open market, and by forward selling
they require to maximise their potential and meet the needs of our
Underpinning our business model, our core values and Total
markets. Our decentralised approach, together with our core value of
Commitments create a culture that is focused on developing
challenging the status quo, empowers our people to think differently
and empowering our employees, delivering high-quality projects
and find the best solutions for our clients.
for clients, enhancing the environment, creating value for all our
stakeholders, including local communities where we work, and
maintaining a disciplined use of capital (see pages 2 and 3 for
more information). These principles are driven by the Board and
embedded in the culture and operations of all divisions. Information
on our performance against our Total Commitments can be found
in our 2018 responsible business report.
procure goods and services efficiently, and through our Group-wide
See our key performance indicators on pages 12 to 13 for further
agreements we can also provide our subcontractors with access to
information.
Partnering with our supply chain
We build long-term relationships with our suppliers and subcontractors
based on fairness and respect. We support their development through
the Supply Chain Sustainability School and suppliers’ events (see our
2018 responsible business report for more information). We operate
schemes that motivate our subcontractors to achieve preferred status
and give feedback on their performance. Our scale enables us to
better pricing. By aligning our supply chain to our values and quality
criteria, we reduce the likelihood of errors on projects and increase
efficiency and client satisfaction.
Meeting our clients’ and partners’ needs
Using our talented workforce, high-quality supply chain and enabling
technology we deliver safe, efficiently run, high-quality projects that
match our clients’ and partners’ objectives. Our regional coverage
means we can engage at a local level and tailor our services as
needed. The relationships we build as a result increase the prospect
of repeat business, framework positions and negotiated work, which
can have a positive impact on profitability and long-term growth.
Investment in technology
Our divisions continually invest in new technology, such as
Construction & Infrastructure’s new risk management software and
supply chain certification and payment portal. In 2018, the Group
invested £3.6m in new technology (2017: £2.0m), which includes
moving existing systems to the Cloud to make them accessible to
employees while they are on the move. We have continued to invest
in information security controls and have engaged an external security
partner who advises on strategy. Our IT team achieved ISO 27001
accreditation in 2018.
Value created
Shareholders
151.8p
EPS adjusted*
22%
annual dividend growth over three years
Clients and partners
83%
of projects achieved Perfect Delivery1
58%
of order book and pipeline is in frameworks and partnerships
* See note 2 for alternative performance measure definitions and reconciliations.
1 Perfect Delivery status is granted to projects that meet all four customer service criteria specified
by each division.
10
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Engaging with
our stakeholders
Engaging with our key stakeholders is critical to our business.
Regular dialogue and feedback helps us to ensure that our goals
and strategies remain relevant and that our approach to being
a responsible business is effective.
Our shareholders
Our executive directors communicate with institutional shareholders
and analysts on a regular basis to keep them updated on the Group’s
activities, performance and strategy. This includes presentations to
analysts, with Q&A sessions, at our preliminary and half year results
announcements, and individual meetings with our institutional
investors. All shareholders are invited to the Company’s annual
general meeting (AGM) and the non-executive directors are available
to meet with shareholders at any time. Additional information on the
Board’s engagement with shareholders can be found in the directors’
and corporate governance report on page 43.
Our people
We keep our employees informed of our financial performance
through regular newsletters, email notifications and briefing sessions,
and make them aware of any external factors and significant events
that might have an impact. We offer a savings-related share option
plan to encourage employee engagement with business performance
and progress.
Each division communicates with its teams through a variety of
channels on market conditions and divisional performance, and
ensures they are kept aware of key business priorities. Employees
take part in forums and consultative meetings where open dialogue
and feedback is encouraged, and annual conferences give people
a chance to network across different roles and regions. All new
employees receive a formal induction which includes a presentation
on the important role played by our core values and Total
Commitments in our culture and operations.
Our divisions undertake regular employee surveys. The results are
reviewed, shared with employees and acted on. In 2018, Construction
& Infrastructure, Fit Out, Partnership Housing and Urban Regeneration
all carried out surveys. Property Services carried out a limited survey
and once this has been reviewed and updated, will conduct a full
survey in 2019.
Each year two divisional senior teams meet less formally with
the Board. In 2018 the Board met with Partnership Housing and
Investments, allowing the non-executive directors the opportunity
to meet senior managers and their wider teams to gain a deeper
understanding of these divisions. In 2019, the chair and non-executive
directors will each attend a divisional employee conference or forum
and feed their findings back to two designated Board discussions on
employee engagement. This will enable the Board to consider issues
that have been raised by employees around the Group.
Our suppliers and subcontractors
We are committed to nurturing long-term relationships with high-
quality suppliers and subcontractors, and work collaboratively with
them to achieve the best outcome for our clients. Of the Group’s
total spend on materials and plant, 69% (2017: 77%) is covered by
Group-wide agreements with our supply chain. Our policy is to treat
our supply chain fairly, with agreed payment terms and procedures
in place to minimise late payments. We hold an annual supplier
event and provide learning and support through the Supply Chain
Sustainability School. The Morgan Sindall Supply Chain Family consists
of 392 (2017: 379) manufacturers and suppliers, and around 69%
(2017: 80%) of materials used by the Group can be traced back to
members of the Supply Chain Family, which guarantees that they
are responsibly sourced. Further information can be found in our
2018 responsible business report.
Our divisions operate preferred partner status programmes for
their subcontractors, which involves setting standards and managing
performance, including assessment and reward. Preferred status is
awarded to subcontractors who meet our high standards, who then
benefit from long-term relationships and repeat work.
Our clients and partners
We aim to develop long-term relationships with our clients and
partners by gaining an in-depth understanding of their priorities
and objectives. Our decentralised approach means that each division
can focus on the specific needs of its markets, regions and clients.
Our objective is wherever possible to secure a steady stream of work
through framework arrangements or repeat business. Our Perfect
Delivery1 programme helps to ensure that we deliver our projects
to the standard our clients and partners expect as well as driving
continuous improvement. On completion of each project, clients are
asked to provide feedback on their experience. The results are shared
across the different teams within the division and analysed by the
divisional managing directors, in order to drive further improvements.
Local communities
Our divisions have dedicated engagement teams who are responsible
for liaising with local residents and communities before and during
our projects, and where appropriate may engage members of the
local community in consultation on the project’s development.
Project teams in all divisions get involved in local events, such as
holding school talks or career fairs, or supporting local charities.
Local and national government
We engage regularly with policy makers through our active
involvement in industry bodies including the UKGBC (UK Green
Building Council) and the CBI (Confederation of British Industry).
Our construction divisions all deliver work for the public sector,
including through government frameworks, and our regeneration
divisions form partnerships with local authorities on schemes that
serve the long-term needs of their communities.
We ensure compliance with legislation and run e-learning
programmes for employees on subjects including market abuse
and anti-bribery and corruption.
1 Perfect Delivery status is granted to projects that meet all four customer service criteria
specified by each division.
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11
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Engaging with
our stakeholders
Engaging with our key stakeholders is critical to our business.
Regular dialogue and feedback helps us to ensure that our goals
and strategies remain relevant and that our approach to being
a responsible business is effective.
Our shareholders
Our suppliers and subcontractors
We are committed to nurturing long-term relationships with high-
quality suppliers and subcontractors, and work collaboratively with
them to achieve the best outcome for our clients. Of the Group’s
total spend on materials and plant, 69% (2017: 77%) is covered by
Group-wide agreements with our supply chain. Our policy is to treat
Our executive directors communicate with institutional shareholders
our supply chain fairly, with agreed payment terms and procedures
and analysts on a regular basis to keep them updated on the Group’s
in place to minimise late payments. We hold an annual supplier
activities, performance and strategy. This includes presentations to
event and provide learning and support through the Supply Chain
analysts, with Q&A sessions, at our preliminary and half year results
Sustainability School. The Morgan Sindall Supply Chain Family consists
announcements, and individual meetings with our institutional
of 392 (2017: 379) manufacturers and suppliers, and around 69%
investors. All shareholders are invited to the Company’s annual
(2017: 80%) of materials used by the Group can be traced back to
general meeting (AGM) and the non-executive directors are available
members of the Supply Chain Family, which guarantees that they
to meet with shareholders at any time. Additional information on the
are responsibly sourced. Further information can be found in our
Board’s engagement with shareholders can be found in the directors’
2018 responsible business report.
and corporate governance report on page 43.
Our people
We keep our employees informed of our financial performance
through regular newsletters, email notifications and briefing sessions,
and make them aware of any external factors and significant events
that might have an impact. We offer a savings-related share option
plan to encourage employee engagement with business performance
and progress.
Our divisions operate preferred partner status programmes for
their subcontractors, which involves setting standards and managing
performance, including assessment and reward. Preferred status is
awarded to subcontractors who meet our high standards, who then
benefit from long-term relationships and repeat work.
Our clients and partners
We aim to develop long-term relationships with our clients and
partners by gaining an in-depth understanding of their priorities
Each division communicates with its teams through a variety of
and objectives. Our decentralised approach means that each division
channels on market conditions and divisional performance, and
can focus on the specific needs of its markets, regions and clients.
ensures they are kept aware of key business priorities. Employees
Our objective is wherever possible to secure a steady stream of work
take part in forums and consultative meetings where open dialogue
through framework arrangements or repeat business. Our Perfect
and feedback is encouraged, and annual conferences give people
Delivery1 programme helps to ensure that we deliver our projects
a chance to network across different roles and regions. All new
to the standard our clients and partners expect as well as driving
employees receive a formal induction which includes a presentation
continuous improvement. On completion of each project, clients are
on the important role played by our core values and Total
asked to provide feedback on their experience. The results are shared
Commitments in our culture and operations.
Our divisions undertake regular employee surveys. The results are
reviewed, shared with employees and acted on. In 2018, Construction
& Infrastructure, Fit Out, Partnership Housing and Urban Regeneration
all carried out surveys. Property Services carried out a limited survey
and once this has been reviewed and updated, will conduct a full
survey in 2019.
Each year two divisional senior teams meet less formally with
the Board. In 2018 the Board met with Partnership Housing and
Investments, allowing the non-executive directors the opportunity
to meet senior managers and their wider teams to gain a deeper
understanding of these divisions. In 2019, the chair and non-executive
directors will each attend a divisional employee conference or forum
and feed their findings back to two designated Board discussions on
employee engagement. This will enable the Board to consider issues
that have been raised by employees around the Group.
across the different teams within the division and analysed by the
divisional managing directors, in order to drive further improvements.
Local communities
Our divisions have dedicated engagement teams who are responsible
for liaising with local residents and communities before and during
our projects, and where appropriate may engage members of the
local community in consultation on the project’s development.
Project teams in all divisions get involved in local events, such as
holding school talks or career fairs, or supporting local charities.
Local and national government
We engage regularly with policy makers through our active
involvement in industry bodies including the UKGBC (UK Green
Building Council) and the CBI (Confederation of British Industry).
Our construction divisions all deliver work for the public sector,
including through government frameworks, and our regeneration
divisions form partnerships with local authorities on schemes that
serve the long-term needs of their communities.
We ensure compliance with legislation and run e-learning
programmes for employees on subjects including market abuse
and anti-bribery and corruption.
1 Perfect Delivery status is granted to projects that meet all four customer service criteria
specified by each division.
Maximise efficiency of resources
We achieve operational efficiencies by securing Group-wide
procurement agreements, continuously improving our systems
and processes and developing new technology. By working closely
with our clients and subcontractors, we can ensure projects run
as smoothly as possible and changes are well managed.
Our drive to reduce carbon emissions results in energy savings and
we regularly monitor and measure our waste reduction and recycling
to ensure that we save both resources and landfill tax.
Pursue innovation
Employees are encouraged to think differently and given the
opportunity to share and test their ideas. As the divisions are run
independently they are able to pursue or adopt innovations that best
suit their markets and operations. Examples include Construction
& Infrastructure’s new plastic reduction campaign and Fit Out’s
adaptation of a project site to promote safe behaviours and wellbeing
(see our 2018 responsible business report for more information).
Performance against strategic objectives
The key performance indicators set out on pages 12 to 13 have
been selected to monitor and measure our progress against our
strategic objectives. In 2018 our gross margin in construction
activities was 10.5% (2017: 9.7%) and return on capital employed in
regeneration activities was 13.1% (2017: 11.6%). Pages 22 to 31 show
the principal risks to our strategic objectives and how we manage
and mitigate them.
1 Perfect Delivery status is granted to projects that meet all four customer service criteria
specified by each division.
Our strategy
The Group’s strategy remains focused on our well-established
core strengths of construction and regeneration in the UK.
Our recognised expertise and market positions in affordable
housing (through Partnership Housing) and mixed-use regeneration
development (through Urban Regeneration) reflect our deep
understanding of the built environment which we have developed
over many years, and our ability to provide solutions for complex
regeneration projects. As a result, our capabilities are aligned with
sectors of the UK economy which are expected to see increasing
opportunities in the medium to long term and which support the
UK’s current and future affordable housing and regeneration needs.
To achieve long-term sustainable growth, we use the cash generated
by our fit out, construction and infrastructure operations to
support investment in our affordable housing and mixed-use
development activities.
Our strategic objectives
We focus on five strategic objectives which we believe are
fundamental to delivering our strategy:
Win in targeted markets
We target markets where there is growth (see page 6) and pursue
opportunities that suit our experience and expertise. We take a
long-term approach to relationships with our clients, aiming to deliver
exceptional quality and service that encourages them to choose us on
their next project and recommend us to others. In 2018, 83% of our
projects achieved Perfect Delivery1 (2017: 82%).
To deliver consistently high quality, we employ talented people
and work closely with our supply chain to align them to our values
and standards.
Develop and retain talented people
We invest in developing and motivating our people to help them
achieve their potential. Personal development plans are designed
bespoke to the individual and we promote internally wherever
possible. In 2018, 9% of employees were promoted internally across
the Group. Our decentralised approach empowers our employees to
think of the best solutions and take responsibility for their decisions.
Disciplined use of capital
We rigorously manage our cash, working capital and overheads.
By working in partnership with local authorities and landowners
we avoid the need to purchase land on the open market for
development. We also use alternative sources of funding where
the conditions are favourable.
12
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Key performance indicators
We use financial and non-financial key performance indicators (KPIs)
to measure progress in delivering our strategic objectives.
Win in targeted markets
COMMITTED ORDER BOOK
(£m)
REGENERATION AND
DEVELOPMENT PIPELINE
(£m)
ACCIDENT FREQUENCY RATE
2016
2017
2018
3,637
2016
3,849
2017
3,567
2018
3,210
2016
3,233
2017
3,107
2018
0.14
0.09
0.08
See page 20 for a definition of committed
order book.
See page 20 for a definition of regeneration
and development pipeline.
Our order book decreased 7% on 2017,
owing to a continued focus on quality, with
a similar proportion of work secured through
negotiated, framework or two-stage bidding
processes. We will continue to be selective in
the work for which we bid in 2019.
Our pipeline was down 4% on 2017. The
pipeline is long term with 65% relating
to 2021 onwards. We continue to pursue
regeneration opportunities which will
contribute to the pipeline in future years.
The accident frequency rate (AFR) is the
number of RIDDOR reportable accidents
multiplied by 100,000 and divided by the
number of hours worked.
Our health and safety performance has
continued to improve. We are encouraged
to see an 11% reduction in the AFR, and over
the last 12 months our accident incident rate
has also fallen from 199 to 180, a reduction
of 10%. We continue to review causation
of incidents to develop our approach.
Develop and retain talented people
VOLUNTARY EMPLOYEE TURNOVER
(%)
NUMBER OF APPRENTICES AND
AVERAGE NUMBER OF TRAINING
NEW GRADUATES
DAYS PER EMPLOYEE
2016
2017
2018
13
2016
11
12
2017
2018
167
217
2016
2017
265
2018
3.9
3.3
3.2
We are committed to developing a succession
pool of talent across the Group. Offering
employment opportunities to graduates and
apprentices helps us to create and further
develop these pools. In 2018 we sponsored
13 undergraduates and supported 720 people
through NVQs and professional qualifications.
This is the number of employees leaving the
business voluntarily during the year divided
by the average number of employees.
We recognise that a certain level of turnover
among employees is essential to ensure a
regular injection of new ideas and approach.
Our long-term target is to reduce employee
turnover to 10%. During 2018, our rate
increased primarily due to increases within
Fit Out and Partnership Housing. However,
a new senior management team has been
appointed to Partnership Housing to drive
operational improvements.
This KPI is calculated by dividing the
total number of days of training provided
to employees by the average number
of employees.
We provide employees at all levels with
the skills they need to advance their careers.
In 2018, 82 (2017: 94) employees completed
our leadership development programme.
As well as providing individuals with tools
that will help develop their leadership skills,
the programme provides an opportunity
for them to network with colleagues from
different divisions within the Group.
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13
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BUSINESS MODEL CONTINUED
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KEY PERFORMANCE INDICATORS CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
12
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
REGENERATION AND
DEVELOPMENT PIPELINE
(£m)
ACCIDENT FREQUENCY RATE
OPERATING CASH CONVERSION
(adjusted for investment in regeneration)
(%)
RETURN ON CAPITAL EMPLOYED
IN REGENERATION ACTIVITIES
(%)
WORKING CAPITAL AS A PERCENTAGE OF
REVENUE IN CONSTRUCTION ACTIVITIES
(%)
Disciplined use of capital
2016
2017
2018
174
144
301
2016
2017
2018
13.2
2016
(14.0)
11.6
2017
(13.4)
13.1
2018
(12.5)
Return on capital employed is calculated
as adjusted* operating profit less interest
on non-recourse debt less unwind of discount
on deferred consideration, divided by average
capital employed.
Working capital is defined as inventories
plus trade and other receivables, less trade
and other payables, adjusted to exclude
deferred consideration payable, accrued
interest, capitalised arrangement fees and
derivative financial assets and liabilities.
The increase in return on capital employed
was in line with our expectations, as schemes
started to deliver higher profits in 2018
following the previous year’s investment.
* See note 2 for alternative performance measure definitions
and reconciliations.
Our continuing focus on working capital
management has enabled us to maintain
this ratio at a similar level to 2017. No material
change is expected in 2019 as the Group
targets operating cash conversion of 100%.
Operating cash conversion is statutory
cash flow from operating activities (excluding
increases in inventory) as a percentage of
adjusted* operating profit.
Cash conversion was strong due to a
continued focus on working capital
management. However, as expected, the
percentage was lower than in the previous
year, as we have improved our supply chain
payment practices. We continue to target
operating cash conversion of close to 100%
after allowing for changes in capital employed
in regeneration schemes which often do
not follow an annual cycle.
* See note 2 for alternative performance measure definitions
and reconciliations.
Maximise efficiency of resources
GROSS MARGIN IN
CONSTRUCTION ACTIVITIES
(%)
OVERHEADS AS A PERCENTAGE OF
REVENUE IN CONSTRUCTION ACTIVITIES
(%)
CARBON INTENSITY
2016
2017
2018
8.9
9.7
2016
2017
10.5
2018
The ratio remained broadly unchanged
on 2017 as the overhead base grew in
line with revenue. No material change
is anticipated in 2019.
Gross margin is gross profit as a percentage
of revenue.
Our gross margin improved by 80bps,
reflecting the higher quality of work secured
as well as ongoing improved operational
delivery. This trend is expected to continue
as Construction & Infrastructure continues
to progress towards delivering more
normalised margins.
7.1
7.0
2016
2017
7.3
2018
12.0
10.2
9.9
Carbon intensity is total carbon emissions
per £m of revenue.
We continue to effectively manage our
environmental impact and in 2019 we will
roll out our new science-based targets, which
have been validated by the global Science
Based Targets initiative and will help us
drive further improvements. See pages 48
to 49 for more detail on our management
of carbon emissions.
Key performance indicators
We use financial and non-financial key performance indicators (KPIs)
to measure progress in delivering our strategic objectives.
Win in targeted markets
COMMITTED ORDER BOOK
(£m)
See page 20 for a definition of committed
See page 20 for a definition of regeneration
The accident frequency rate (AFR) is the
order book.
and development pipeline.
number of RIDDOR reportable accidents
multiplied by 100,000 and divided by the
Our order book decreased 7% on 2017,
Our pipeline was down 4% on 2017. The
number of hours worked.
owing to a continued focus on quality, with
pipeline is long term with 65% relating
a similar proportion of work secured through
to 2021 onwards. We continue to pursue
Our health and safety performance has
negotiated, framework or two-stage bidding
regeneration opportunities which will
continued to improve. We are encouraged
processes. We will continue to be selective in
contribute to the pipeline in future years.
to see an 11% reduction in the AFR, and over
the work for which we bid in 2019.
the last 12 months our accident incident rate
has also fallen from 199 to 180, a reduction
of 10%. We continue to review causation
of incidents to develop our approach.
Develop and retain talented people
VOLUNTARY EMPLOYEE TURNOVER
NUMBER OF APPRENTICES AND
AVERAGE NUMBER OF TRAINING
(%)
NEW GRADUATES
DAYS PER EMPLOYEE
This is the number of employees leaving the
We are committed to developing a succession
This KPI is calculated by dividing the
business voluntarily during the year divided
pool of talent across the Group. Offering
total number of days of training provided
by the average number of employees.
employment opportunities to graduates and
to employees by the average number
apprentices helps us to create and further
of employees.
We recognise that a certain level of turnover
develop these pools. In 2018 we sponsored
among employees is essential to ensure a
13 undergraduates and supported 720 people
We provide employees at all levels with
regular injection of new ideas and approach.
through NVQs and professional qualifications.
the skills they need to advance their careers.
Our long-term target is to reduce employee
turnover to 10%. During 2018, our rate
increased primarily due to increases within
Fit Out and Partnership Housing. However,
a new senior management team has been
appointed to Partnership Housing to drive
operational improvements.
In 2018, 82 (2017: 94) employees completed
our leadership development programme.
As well as providing individuals with tools
that will help develop their leadership skills,
the programme provides an opportunity
for them to network with colleagues from
different divisions within the Group.
14
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MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Operating review
Construction
& Infrastructure
REVENUE
(£m)
2017
2018
OPERATING PROFIT
(£m)
2017
2018
OPERATING MARGIN
(%)
2017
2018
-4%
1,395
1,343
+32%
27.0
+50bps
2.0
20.4
1.5
Construction & Infrastructure delivered a strong set of results in the
year, with further significant margin and profit growth generated from
its ongoing focus on improved operational delivery and disciplined
contract selectivity and risk management. Although revenue was
down 4% in the year to £1,343m, profit increased 32% to £27.0m
(2017: £20.4m) resulting in an operating margin of 2.0%, up 50bps.
Construction
Education remains Construction’s largest sector. Projects delivered
in the year include a £10m primary school in Bearsden, Scotland
for East Dunbartonshire Council, a £13m school for Aberdeen City
Council, funded through the council’s five-year capital programme and
a new £20m Mathematics and Science building for Warwick University.
Work also continued on the £45m Arts and Humanities facility for
Manchester Metropolitan University and the £35m Tonyrefail
education campus in South Wales, while significant wins in the year
included an £18m project to deliver new academic offices for the
University of Birmingham.
In leisure, three facilities were completed for Investments’ Slough
Urban Renewal joint venture: the £6.5m Langley Leisure Centre,
£5.7m Salt Hill Activity Centre and £10m Slough Ice Arena. In other
sectors, work progressed on projects for Liverpool City Council as
part of its Paddington Village development, including The Spine, a
£35m centre of clinical excellence for the Royal College of Physicians.
Significant wins in the period include a £60m contract to build a new
motorway services area at junction 45 of the M1 near Leeds, including
a food court, 100-bedroom hotel, parking areas and onsite roadways;
and a £46m mixed-use development in Leicester which includes
two new hotels.
Construction was also appointed to three new frameworks in the
year: the £20bn London Development Panel 2, set up to accelerate
housing development on surplus, public sector land, on which the
division was awarded a place together with Partnership Housing and
Urban Regeneration; the £1.1bn Scape Group Regional Construction
Framework, which will provide opportunities in the Midlands for public
sector projects valued between £1m and £5m; and the £750m Select
Property Group framework to deliver new student accommodation
facilities across the UK, with the first project awarded under the
framework under way, being a £25m development of 357 self-
contained studios in Birmingham at the old BBC Pebble Mill site.
Of the divisional revenue split by type of activity, Construction (which
includes Design) was down 17% at £669m (50% of divisional revenue),
while Infrastructure increased 15% to £674m (50% of divisional revenue).
Infrastructure
In Infrastructure, the focus remains on the key sectors of aviation,
highways, rail, nuclear, energy and water.
Construction and Infrastructure both delivered an operating margin
of 2.0%. In achieving this, Construction increased its margin 70bps
(from 1.3% in the prior year), whilst Infrastructure was up 30bps
(from 1.7% in the prior year). Both reflected a second half weighting
to margin, arising from a combination of work mix and ongoing
operational improvement, each generating a margin of 2.3% in
the second half compared to 1.7% in the first half.
The committed order book at the year end was £1,922m, up 4%
compared to the prior year end. Of this, Infrastructure’s order book
continued to grow, up 8% to £1,485m (77% of the total by value) and
has 100% of its revenue secured for 2019.
Consistent with its focus on contract selectivity, Construction’s order
book reduced 9% to £437m (23% of total value). Importantly, the
appropriate risk balance and profile has been maintained within
the Construction order book, with 88% of the value derived through
negotiated, framework or two-stage bidding procurement processes,
and only 12% derived through competitive tenders. In addition,
Construction had c£800m of orders at preferred bidder stage at the
year end, more than twice the amount compared to the prior year.
In aviation, works are ongoing at Heathrow Airport under the
Q6 framework, including the replacement of ground lighting and
resurfacing to the Alpha North and other taxiways and a new
cargo building with an automated handling system for IAG Cargo
and British Airways. The framework runs until the end of December
2019, with an anticipated extension to 2021.
In highways, the division secured a place on the £500m Midlands
Highway Alliance Medium Schemes Framework 3 (MSF3) which will
deliver major highways and civils works over the next four years.
Project completions in the year included the final stage of the A1(M)
Leeming to Barton upgrade and the £290m A6 to Manchester Airport
relief road, with the new 10km A555 dual carriageway now in full use.
In rail, significant wins in the period included design and enabling
works for a £200m project at Werrington Junction near Peterborough,
where a new section of track will remove a critical bottleneck on the
East Coast Main Line. Additionally, a £196m contract was awarded,
in joint venture, by Transport for London to extend the London
Overground by 4.5km to Barking Riverside.
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OPERATING REVIEW CONTINUED
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MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Operating review
Construction
& Infrastructure
Construction
Education remains Construction’s largest sector. Projects delivered
in the year include a £10m primary school in Bearsden, Scotland
for East Dunbartonshire Council, a £13m school for Aberdeen City
Council, funded through the council’s five-year capital programme and
a new £20m Mathematics and Science building for Warwick University.
Work also continued on the £45m Arts and Humanities facility for
Manchester Metropolitan University and the £35m Tonyrefail
education campus in South Wales, while significant wins in the year
included an £18m project to deliver new academic offices for the
University of Birmingham.
In leisure, three facilities were completed for Investments’ Slough
Urban Renewal joint venture: the £6.5m Langley Leisure Centre,
£5.7m Salt Hill Activity Centre and £10m Slough Ice Arena. In other
sectors, work progressed on projects for Liverpool City Council as
part of its Paddington Village development, including The Spine, a
£35m centre of clinical excellence for the Royal College of Physicians.
Significant wins in the period include a £60m contract to build a new
motorway services area at junction 45 of the M1 near Leeds, including
a food court, 100-bedroom hotel, parking areas and onsite roadways;
and a £46m mixed-use development in Leicester which includes
two new hotels.
Construction was also appointed to three new frameworks in the
year: the £20bn London Development Panel 2, set up to accelerate
housing development on surplus, public sector land, on which the
division was awarded a place together with Partnership Housing and
Urban Regeneration; the £1.1bn Scape Group Regional Construction
Framework, which will provide opportunities in the Midlands for public
sector projects valued between £1m and £5m; and the £750m Select
Property Group framework to deliver new student accommodation
facilities across the UK, with the first project awarded under the
framework under way, being a £25m development of 357 self-
contained studios in Birmingham at the old BBC Pebble Mill site.
In Infrastructure, the focus remains on the key sectors of aviation,
highways, rail, nuclear, energy and water.
In aviation, works are ongoing at Heathrow Airport under the
Q6 framework, including the replacement of ground lighting and
resurfacing to the Alpha North and other taxiways and a new
cargo building with an automated handling system for IAG Cargo
and British Airways. The framework runs until the end of December
2019, with an anticipated extension to 2021.
In highways, the division secured a place on the £500m Midlands
Highway Alliance Medium Schemes Framework 3 (MSF3) which will
deliver major highways and civils works over the next four years.
Project completions in the year included the final stage of the A1(M)
Leeming to Barton upgrade and the £290m A6 to Manchester Airport
relief road, with the new 10km A555 dual carriageway now in full use.
In rail, significant wins in the period included design and enabling
works for a £200m project at Werrington Junction near Peterborough,
where a new section of track will remove a critical bottleneck on the
East Coast Main Line. Additionally, a £196m contract was awarded,
in joint venture, by Transport for London to extend the London
Overground by 4.5km to Barking Riverside.
Construction & Infrastructure delivered a strong set of results in the
year, with further significant margin and profit growth generated from
its ongoing focus on improved operational delivery and disciplined
contract selectivity and risk management. Although revenue was
down 4% in the year to £1,343m, profit increased 32% to £27.0m
(2017: £20.4m) resulting in an operating margin of 2.0%, up 50bps.
Of the divisional revenue split by type of activity, Construction (which
includes Design) was down 17% at £669m (50% of divisional revenue),
while Infrastructure increased 15% to £674m (50% of divisional revenue).
Infrastructure
Construction and Infrastructure both delivered an operating margin
of 2.0%. In achieving this, Construction increased its margin 70bps
(from 1.3% in the prior year), whilst Infrastructure was up 30bps
(from 1.7% in the prior year). Both reflected a second half weighting
to margin, arising from a combination of work mix and ongoing
operational improvement, each generating a margin of 2.3% in
the second half compared to 1.7% in the first half.
The committed order book at the year end was £1,922m, up 4%
compared to the prior year end. Of this, Infrastructure’s order book
continued to grow, up 8% to £1,485m (77% of the total by value) and
has 100% of its revenue secured for 2019.
Consistent with its focus on contract selectivity, Construction’s order
book reduced 9% to £437m (23% of total value). Importantly, the
appropriate risk balance and profile has been maintained within
the Construction order book, with 88% of the value derived through
negotiated, framework or two-stage bidding procurement processes,
and only 12% derived through competitive tenders. In addition,
Construction had c£800m of orders at preferred bidder stage at the
year end, more than twice the amount compared to the prior year.
In nuclear, the division won a place on the Defence Infrastructure
Organisation’s £1.3bn, 10-year Clyde Commercial Framework to
upgrade infrastructure at the Royal Navy’s submarine base in West
Scotland. Works also continued for BAE Systems at Barrow-in-Furness,
and on the £1.1bn contract at Sellafield as part of the Infrastructure
Strategic Alliance.
In energy, new appointments in the year included £115m of projects
under National Grid’s ‘Engineer, Procure, Construct’ cable framework
and a number of schemes in northern Scotland through the Scottish
and Southern Electricity Networks (SSEN) overhead line and cable
frameworks; the SSEN overhead line framework has been extended
by four years and will now run to 2023.
In water, a total of £100m of works were carried out in 2018 under
the two AMP6 frameworks for Yorkshire Water and Welsh Water.
Work also continued on the seven-year joint venture project to
build the west section of the Thames Tideway Tunnel ‘super sewer’;
excavation has begun on the launch tunnel in preparation for
installing the tunnel boring machine in early 2019.
Divisional outlook
The focus for Construction & Infrastructure will remain on margin
improvement, project delivery and securing higher-quality work
with the appropriate risk balance. The medium-term target for both
Construction and Infrastructure is an operating margin of 2.5% and
further progress towards these targets is expected in 2019.
Fit Out
REVENUE
(£m)
2017
2018
OPERATING PROFIT
(£m)
2017
2018
OPERATING MARGIN
(%)
2017
2018
Fit Out delivered another excellent performance, driven by
consistently strong project delivery and a continued focus on
enhanced customer experience. With revenue increasing 13% to
£831m, operating profit increased 12% to £43.8m at an operating
margin of 5.3%, level with the prior year.
There was no significant change to the market sectors served, with
the commercial office market again being the largest, contributing
86% of revenue (2017: 84%). Higher education accounted for 8% of
revenue, while retail banking, government and local authority work
made up the remainder.
London remained the division’s largest geographical market,
accounting for 73% of revenue, with no significant change from
71% in the prior year. Other regions accounted for 27% of revenue.
In terms of type of work delivered in the year, 86% related to
traditional fit out work (2017: 84%), while 14% related to design and
build (2017: 16%). The proportion of revenue generated from the fit
out of new office space increased to 38% (2017: 23%), while the fit
out of existing office space reduced to 62% (2017: 77%). This reduction
was driven by a small number of larger new office space projects and
was not indicative of any longer-term trend. Of the fit out of existing
office space, 76% related to refurbishment ‘in occupation’, which
was up from 64% in the prior year and again, this did not reflect any
significant long-term trend. The average value of enquiries received
through the year remained at around £2m.
New project starts in the year included 220,000 sq ft of space at Royal
Dutch Shell’s new multi-storey office in York Road, London together
with a 27-storey fit out at the neighbouring Shell Centre tower; the fit
out of 155,000 sq ft at BBC Cymru Wales headquarters in Cardiff; and
the fit out and refurbishment of c100,000 sq ft for the Competition
& Markets Authority in London.
Significant project completions in the year included an 88,000 sq ft fit
out for ITV in London; the first phase of works for RWE Generation UK
in Swindon; 22,000 sq ft for Ocean Network Express (ONE) at Canary
Wharf; 30,000 sq ft for global flu vaccine company, Seqirus, in
Maidenhead, and 28,000 sq ft for the University of Bristol.
As with previous years, there was a second half weighting to operating
margin. Performance in the second half of the year was again strong, with
an operating margin of 6.2% (level with the prior year second half margin)
compared to a first half margin of 4.4% and was driven by the successful
completion of a number of contracts falling into the second half.
At the year end, the committed order book was £470m, a decrease of
6% on the prior year end. This also reflected a reduction of 11% from
the position at the half year, however it was level with the committed
order book as reported as at 30 September. Of the year end total of
£470m, £439m (93%) relates to 2019 and this level of orders for the
next 12 months is 6% lower than it was at the same time last year of
£468m. The balance of the order book in terms of geographical split
and type of work is broadly in line with previous years.
5.3
5.3
Key framework appointments in the year included the Department
for Work and Pensions Estate Contractor Framework for London and
the South East, Scotland and the North East, while the division was
awarded six projects under the Mayor’s Office for Policing and Crime
(MOPAC) framework.
Divisional outlook
Fit Out’s medium-term target is to deliver annual profit in the range of
£30m-£35m through the cycle. 2018 saw a record profit performance
for the division and the target range was significantly exceeded. For
2019, based on the current order book and the limited visibility of
future workload for later in the year, Fit Out is expected to deliver a
more ‘normalised’ performance which is back within its target range.
+13%
735
831
+12%
39.1
43.8
16
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OPERATING REVIEW CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
15
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Property Services
REVENUE
(£m)
2017
2018
OPERATING PROFIT/(LOSS)1
(£m)
2017 (1.3)
2018
OPERATING MARGIN1
(%)
2017 (2.0)
2018
City and District Council for repairs, void refurbishments and planned
maintenance works to over 4,800 properties, with a focus on
delivering efficiencies through integrated maintenance services;
and property maintenance covering 6,000 homes and 1,200 garages
for South Essex Homes, Southend-on-Sea Borough Council’s arms-
length management organisation.
+52%
66
In addition to the services highlighted for each of these contracts,
robust social value commitments have been made to deliver
employment and training opportunities to the various communities.
100
Divisional outlook
The medium-term target for Property Services is to increase its
operating margin to at least 3%. Looking ahead to 2019, with the
benefit of further operational efficiencies and the expected growth
from new and existing contracts, the division is expected to make
progress towards this target and beyond.
+254%
2.0
1 Before intangible amortisation of £1.0m (2017: £0.6m).
+400bps
Partnership Housing
2.0
REVENUE
(£m)
Property Services delivered a significantly improved performance,
with revenue up 52% to £100m and operating profit1 of £2.0m,
a margin1 of 2.0%.
2017
2018
Following the streamlining of its activities in 2017, the division has
concentrated on delivering repairs maintenance and planned works
to public sector housing through long-term integrated contracts with
housing associations and local authorities. This focus has helped
improve both efficiency and quality of service. The significant revenue
growth of 52% up to £100m in the year was largely secured from
developing existing contracts, as well as new work awarded by
Basildon Council and CityWest Homes. The division now delivers
services to 200,000 homes across the UK.
The operating profit1 of £2.0m reflected additional contribution from
the higher revenue together with improved operational efficiency
resulting from the previous year’s restructuring. In addition, Property
Services has continued to invest in its IT platform for managing repairs
and maintenance and planned activities. The data collected through
the platform helps with the strategic allocation of investment in
planned works, thus reducing the need for future repairs and
inconvenience for tenants.
At the year end, the committed order book was down 14% to £723m,
reflecting the division’s focus earlier in the year on successful contract
delivery and mobilisation and prioritising this above bidding for new
work. However, bidding activity increased later in the year and in January
(and therefore not included in the year end order book), the division
was awarded three separate housing repair and maintenance
contracts with a total value of £313m over a 15-year period.
OPERATING PROFIT 1
(£m)
2017
2018
OPERATING MARGIN1
(%)
2017
2018
AVERAGE CAPITAL EMPLOYED2
(last 12 months) (£m)
2017
2018
CAPITAL EMPLOYED2 AT YEAR END
(£m)
The three new contracts are: an award with the London Borough
of Waltham Forest to provide responsive repairs, refurbishment of
void homes (which have been unoccupied) and planned maintenance
programmes to their 10,000 properties; a contract with St Albans
2017
2018
+9%
519
474
-13%
14.1
12.2
-60bps
3.0
2.4
+£15.3m
99.7
115.0
+£18.6m
88.0
106.6
STRATEGIC REPORT
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
15
17
STRATEGIC REPORT
OPERATING REVIEW CONTINUED
STRATEGIC REPORT
OPERATING REVIEW CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
16
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Property Services
City and District Council for repairs, void refurbishments and planned
maintenance works to over 4,800 properties, with a focus on
delivering efficiencies through integrated maintenance services;
and property maintenance covering 6,000 homes and 1,200 garages
for South Essex Homes, Southend-on-Sea Borough Council’s arms-
length management organisation.
In addition to the services highlighted for each of these contracts,
robust social value commitments have been made to deliver
employment and training opportunities to the various communities.
Divisional outlook
The medium-term target for Property Services is to increase its
operating margin to at least 3%. Looking ahead to 2019, with the
benefit of further operational efficiencies and the expected growth
from new and existing contracts, the division is expected to make
progress towards this target and beyond.
1 Before intangible amortisation of £1.0m (2017: £0.6m).
Partnership Housing
Property Services delivered a significantly improved performance,
with revenue up 52% to £100m and operating profit1 of £2.0m,
a margin1 of 2.0%.
Following the streamlining of its activities in 2017, the division has
concentrated on delivering repairs maintenance and planned works
to public sector housing through long-term integrated contracts with
housing associations and local authorities. This focus has helped
improve both efficiency and quality of service. The significant revenue
growth of 52% up to £100m in the year was largely secured from
developing existing contracts, as well as new work awarded by
Basildon Council and CityWest Homes. The division now delivers
services to 200,000 homes across the UK.
The operating profit1 of £2.0m reflected additional contribution from
the higher revenue together with improved operational efficiency
resulting from the previous year’s restructuring. In addition, Property
Services has continued to invest in its IT platform for managing repairs
and maintenance and planned activities. The data collected through
the platform helps with the strategic allocation of investment in
planned works, thus reducing the need for future repairs and
inconvenience for tenants.
At the year end, the committed order book was down 14% to £723m,
reflecting the division’s focus earlier in the year on successful contract
delivery and mobilisation and prioritising this above bidding for new
work. However, bidding activity increased later in the year and in January
(and therefore not included in the year end order book), the division
was awarded three separate housing repair and maintenance
contracts with a total value of £313m over a 15-year period.
The three new contracts are: an award with the London Borough
of Waltham Forest to provide responsive repairs, refurbishment of
void homes (which have been unoccupied) and planned maintenance
programmes to their 10,000 properties; a contract with St Albans
ROCE3
(last 12 months)
11%
ROCE3
(average last three years)
12%
Although Partnership Housing delivered revenue growth of 9% to
£519m, profit was adversely impacted in the year by operating issues
on the contracting side of the business. Operating profit1 was down
13% to £12.2m resulting in an operating margin1 of 2.4%, down
60bps on the prior year.
Revenue growth was driven by the mixed-tenure activities, where
revenue was up 21% to £222m (43% of divisional revenue). Contracting
revenue (including planned maintenance and refurbishment) was up
2% in the year to £297m (57% of divisional total).
While mixed tenure performed as expected, a number of operating
issues in contracting impacted profit. As had been highlighted through
the year, the division experienced cost escalation and programme
delays on one design and build contract in London, which completed
in the second half and with the final account agreed. Contracting was
further impacted by underperformance in Scotland arising from cost
escalations and poor delivery. The resulting poor performances in the
London and Scotland regions more than offset the positive progress
made in the other six regional businesses.
A new divisional senior management team was appointed during the
year to drive and accelerate the necessary operational and financial
improvements and to leverage the strategic position of the division
in its markets. The immediate focus is on addressing the basic
operational performance of the contracting activities.
The capital employed2 at year end was £106.6m, with the average
capital employed2 for the last 12-month period of £115.0m, an
increase of £15.3m on the prior year. The overall ROCE3 was 11%.
Based on the profile, schedule and type of mixed-tenure development
currently anticipated, capital employed2 is expected to increase
towards £150m in 2019.
Mixed tenure
In mixed tenure, 952 units were completed across open market
sales and social housing compared to 887 in the prior year. The
average sales price of £233,000 compared to the prior year average
of £207,000, with the increase reflecting the geographical mix of
sales, with more units completed in the London/South East area.
In the year, the mixed-tenure regeneration and development pipeline
reduced 17% to a still healthy £708m, supported by the committed
order book for the contracting element in mixed tenure which was
broadly level at £77m. The division currently has a total of 45 mixed-
tenure sites at various stages of construction and sales, with an
average of 93 open market units per site. Average site duration is
34 months, providing long-term visibility of activity.
Works commenced on site at several developments during the year,
including a £25m development in partnership with Merthyr Tydfil
County Borough Council and Merthyr Tydfil Housing Association to
deliver 153 new homes on an old colliery site near Merthyr Vale in
South Wales. Work also commenced on the £15m development,
Keepers Gate, in Weston-super-Mare to deliver 50 new homes; a
£41m development for Homes England at Priorslee, Telford, to create
220 affordable and open market homes; and a £45m joint venture
project with Homes England at Leyland, Lancashire to build 200
homes through the government’s accelerated construction initiative.
Contracting
In contracting, the secured order book reduced by 44% to £250m and
reflected a reduced level of bidding while the operational issues noted
above were addressed.
During the year, construction commenced on the £9m first phase of
Great Yarmouth Borough Council’s major new homes development
at Beacon Park in Norfolk, scheduled for completion in mid-2020. The
division was also selected by Liverpool City Council to build 105 homes
for its new housing company, Foundations, with works due to start on
site in 2019. Work continued on the £250m contract for the Defence
Infrastructure Organisation at Salisbury Plain to deliver 917 new
homes, working to an accelerated handover which will peak at around
26 units per week in Spring 2019. Completions in the year include
a £10m regeneration programme of works to 300 homes at Manor
Farm in Coventry and £7m of sheltered housing at Reynolds Court
in Newport, Essex for Uttlesford District Council.
Divisional outlook
Partnership Housing’s medium-term target is to generate a return
on capital employed3 of over 20%. Overall, 2018 was a difficult year
for the division, with both returns and profit taking a step backwards.
Looking ahead to 2019, it is expected that operational improvements
will drive growth in profit; however, with the expected increase in
capital employed, progress towards its returns target is likely to
be limited.
1 Before intangible amortisation of £nil (2017: £0.4m).
2 Capital employed is calculated as total assets (excluding goodwill, intangibles and cash) less total
liabilities (excluding corporation tax, deferred tax, inter-company financing and overdrafts).
3 Return on average capital employed = adjusted operating profit divided by average capital employed.
18
STRATEGIC REPORT
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OPERATING REVIEW CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
17
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
+6%
175
185
+96%
19.6
+20.3
108.8
+4.4
85.0
89.4
Urban Regeneration
REVENUE
(£m)
2017
2018
OPERATING PROFIT 1
(£m)
2017
2018
10.0
AVERAGE CAPITAL EMPLOYED2
(last 12 months) (£m)
2017
2018
88.5
CAPITAL EMPLOYED2 AT YEAR END
(£m)
2017
2018
ROCE3
(last 12 months)
16%
ROCE3
(average last three years)
13%
Urban Regeneration delivered operating profit1 of £19.6m, up 96%
from the prior year. This significant uplift in performance was derived
from its diverse and substantial development portfolio and was in line
with the timing of scheme completions. Revenue in the year was up
6% to £185m, which was more indicative of the type of development
scheme from which the profits were generated than of the level of
underlying activity.
Key contributors to overall performance included the division’s
English Cities Fund (ECf) joint venture with Homes England and
Legal & General, through which over £50m of mixed-use development
was completed in Salford. This included a 635-space, multi-storey
car park pre-let to NCP and 135 apartments at The Slate Yard, where
construction commenced on a further 199 apartments for rent in the
third phase. In addition, two significant pre-let and forward-funded
deals were completed; 180,000 sq ft to Salford City Council and Aviva
Investors at Two New Bailey Square, Salford; and 157,000 sq ft to
HMRC and Legal & General at Three New Bailey, Salford.
Through the division’s Waterside Places joint venture with the Canal
& River Trust, progress was made at Islington Wharf, Manchester
where a third phase of construction of 101 homes is under way; in
London, a second phase of 157 homes was completed at Brentford
Lock West, and 108 apartments at Hale Wharf in Tottenham were
forward sold for private rental.
At Logic Leeds, the pre-let of a 361,000 sq ft, forward sold distribution
hub was followed by the lease of a second 360,000 sq ft unit to
an online retail operator. In addition, three speculative units were
completed, ‘Trilogy @ Logic’, totalling 100,000 sq ft, funded and
retained by Leeds City Council as a future revenue stream.
Also secured in the year was the sale of 23.5 acres of land in Crewe
to Homes England, and several lettings at the Marischal Square
development in Aberdeen. Construction also commenced on new
phases at several existing developments, including 256 homes at
Bristol’s Wapping Wharf and 60,000 sq ft of commercial space at
Stockport Exchange.
Other significant completions in the year included 100,000 sq ft of
civic offices pre-let to Conwy Borough Council at Colwyn Bay in Wales;
120 homes and 120,000 sq ft of council offices in Lambeth, London;
and 101 homes at Lewisham Gateway. Projects nearing completion
include a £110m leisure development in Warrington with a cinema
pre-let to Cineworld, and a £21m transport interchange in South
Shields which will merge the local metro and bus stations.
Urban Regeneration’s development portfolio remains extremely
active, with 13 projects on site at the year end and a further 18
projects expected to start on site in 2019. Further progress was
made with its existing town centre developments where planning
consent was obtained on six projects with a total development
value of £490m, including the final phase of Lewisham Gateway
which will comprise 654 homes, a cinema, retail, leisure and offices.
At the year end, the division’s combined committed order book and
regeneration and development pipeline amounted to £2.1bn and of
this, there is a diverse geographic and sector split:
• by value, 46% is in the South East and London, 34% in the North
West, 16% in Yorkshire and the North East, and 4% in the rest of
the UK; and
• by sector, 52% by value relates to residential, 29% to offices, and
the remainder is broadly split between retail, leisure, and industrial.
STRATEGIC REPORT
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
17
19
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STRATEGIC REPORT
OPERATING REVIEW CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
18
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Urban Regeneration
ROCE3
(last 12 months)
16%
ROCE3
(average last three years)
13%
Urban Regeneration delivered operating profit1 of £19.6m, up 96%
from the prior year. This significant uplift in performance was derived
from its diverse and substantial development portfolio and was in line
with the timing of scheme completions. Revenue in the year was up
6% to £185m, which was more indicative of the type of development
scheme from which the profits were generated than of the level of
underlying activity.
Key contributors to overall performance included the division’s
English Cities Fund (ECf) joint venture with Homes England and
Legal & General, through which over £50m of mixed-use development
was completed in Salford. This included a 635-space, multi-storey
car park pre-let to NCP and 135 apartments at The Slate Yard, where
construction commenced on a further 199 apartments for rent in the
third phase. In addition, two significant pre-let and forward-funded
deals were completed; 180,000 sq ft to Salford City Council and Aviva
Investors at Two New Bailey Square, Salford; and 157,000 sq ft to
HMRC and Legal & General at Three New Bailey, Salford.
Through the division’s Waterside Places joint venture with the Canal
& River Trust, progress was made at Islington Wharf, Manchester
where a third phase of construction of 101 homes is under way; in
London, a second phase of 157 homes was completed at Brentford
Lock West, and 108 apartments at Hale Wharf in Tottenham were
forward sold for private rental.
At Logic Leeds, the pre-let of a 361,000 sq ft, forward sold distribution
hub was followed by the lease of a second 360,000 sq ft unit to
an online retail operator. In addition, three speculative units were
completed, ‘Trilogy @ Logic’, totalling 100,000 sq ft, funded and
retained by Leeds City Council as a future revenue stream.
Also secured in the year was the sale of 23.5 acres of land in Crewe
to Homes England, and several lettings at the Marischal Square
development in Aberdeen. Construction also commenced on new
phases at several existing developments, including 256 homes at
Bristol’s Wapping Wharf and 60,000 sq ft of commercial space at
Stockport Exchange.
Other significant completions in the year included 100,000 sq ft of
civic offices pre-let to Conwy Borough Council at Colwyn Bay in Wales;
120 homes and 120,000 sq ft of council offices in Lambeth, London;
and 101 homes at Lewisham Gateway. Projects nearing completion
include a £110m leisure development in Warrington with a cinema
pre-let to Cineworld, and a £21m transport interchange in South
Shields which will merge the local metro and bus stations.
Urban Regeneration’s development portfolio remains extremely
active, with 13 projects on site at the year end and a further 18
projects expected to start on site in 2019. Further progress was
made with its existing town centre developments where planning
consent was obtained on six projects with a total development
value of £490m, including the final phase of Lewisham Gateway
which will comprise 654 homes, a cinema, retail, leisure and offices.
At the year end, the division’s combined committed order book and
regeneration and development pipeline amounted to £2.1bn and of
this, there is a diverse geographic and sector split:
• by value, 46% is in the South East and London, 34% in the North
West, 16% in Yorkshire and the North East, and 4% in the rest of
the UK; and
• by sector, 52% by value relates to residential, 29% to offices, and
the remainder is broadly split between retail, leisure, and industrial.
In addition, the division has been selected as preferred developer
on nearly £400m of mixed-use schemes with local authorities in
Slough, Gainsborough, Wirral and Rotherham.
Average capital employed2 for the last 12-month period was £108.8m,
an increase of £20.3m on the prior year and an overall ROCE3 of
16%. Capital employed2 at the year end was £89.4m and based on
the current profile and type of scheme activity across the portfolio,
the average capital employed2 for 2019 is expected to reduce and
be within the range of £90m-£95m.
Divisional outlook
The medium-term target for Urban Regeneration is to increase
its ROCE3 towards 20%. For 2019, based on the expected lower
amount of capital employed2, good progress towards its target
ROCE3 is expected.
1 Before intangible amortisation of £nil (2017: £0.2m).
2 Capital employed is calculated as total assets (excluding goodwill, intangibles and cash) less total
liabilities (excluding corporation tax, deferred tax, inter-company financing and overdrafts).
3 Return on average capital employed = (adjusted operating profit less interest on non-recourse
debt less unwind of discount on deferred consideration) divided by (average capital employed).
For 2018, interest and fees on non-recourse debt was £2.4m (2017: £1.5m) and the unwind
of discount on deferred consideration was £0.1m (2017: £0.2m).
Investments
OPERATING (LOSS)/PROFIT
(£m)
2017
2018
(2.4)
0.5
Investments made an operating loss of £2.4m in the year, impacted
by delays in progressing a number of its schemes. This slower
progress resulted from a range of factors, including planning delays,
challenges with forecast construction costs within its joint venture
developments delaying commencements, and general slippage in
reaching financial close on a number of developments.
Notwithstanding this, there was much positive progress made within
the division’s existing partnerships. In Slough Urban Renewal, a joint
venture with Slough Borough Council, seven projects were completed,
with a value in excess of £50m. In addition, two planning consents
were secured: for a mixed-use development on the former site of the
town’s central library, including 62 private apartments and two hotels,
to be delivered by Construction & Infrastructure; and for a private
housing development of 24 homes to be built by Partnership Housing.
Currently, five projects with a total construction value of £65m are
under way in Slough, with six more in the design and planning phase.
In Bournemouth, through its joint venture partnership with
Bournemouth Borough Council, 113 new private rental homes at
Berry Court were handed over in the year, as well as a 217-space,
multi-storey car park; planning approval was obtained for the £150m
multi-use redevelopment of Winter Gardens; and construction began
on 46 high-quality homes for market rent in St Stephen’s Road.
In addition, through its extra care joint venture, Morgan Ashley,
work started on site on the Isle of Wight’s first purpose-built,
extra care housing and retirement living scheme in Ryde, and
on a 60-unit development in Grimsby. Morgan Ashley was also
appointed preferred bidder on two extra care schemes in Hampshire
and four schemes in Leeds, with a combined development value
of approximately £60m.
Other key milestones were the completion in the year of a £16m
extra care development in Northampton and a 28-unit supported
living scheme in Birmingham, both delivered through the HB Villages
joint venture; and the £18m Gorbals Health and Care Centre in
Glasgow, delivered by Construction & Infrastructure through the
hub West Scotland joint venture.
Two new property partnerships were secured in the year. Chalkdene
Developments, a joint venture with Hertfordshire County Council, is
set to deliver a series of housing-led developments with an estimated
gross development value of £2bn. The programme is for an initial
period of 15 years, with the option to extend by a further five years.
The division also set up a 15-year partnership with Torbay and South
Devon NHS Foundation Trust: SDH Innovations Partnership is set to
develop over £150m of infrastructure in South Devon, including new
clinical buildings and commercial and housing developments.
Later in the year, the division launched an opportunity targeted at
institutional capital to finance a build-to-rent vehicle focused on prime
commuter locations around London and the South East. The vehicle
is aimed at providing investors with access to a portfolio of more than
1,000 purpose-built, residential rental units with a gross development
value of c£480m, drawn from the division’s strategic joint ventures.
After the year end in January 2019, the division entered into a new
residential partnership agreement with Residential Secure Income
(ReSI), which will initially target the delivery of 1,500 shared ownership
homes with a value of £300m.
Capital employed1 at the year end was £37.2m (2017: £38.6m), with
average capital employed for the last 12-month period of £40.1m
(2017: £30.7m). This is expected to increase within the range of
£40m-£45m in 2019 spread across a range of its partnerships.
Divisional outlook
Investments is expected to consistently deliver a positive return from
its capital employed each year, as well as generating construction and
regeneration work for the rest of the Group. Its target is to increase
ROCE2 up towards 20% in the medium term. Based on the current
profile of scheme completions, the division is expected to make a
loss in the year ahead.
1 Capital employed is calculated as total assets (excluding goodwill, intangibles and cash) less
total liabilities (excluding corporation tax, deferred tax, inter-company financing and overdrafts).
2 Return on average capital employed = (adjusted operating profit plus interest received from joint
ventures) divided by average capital employed.
20
STRATEGIC REPORT
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MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
19
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Financial review
We continue to achieve growth in profitability, which together with
our strong cash performance enables us to invest in regeneration
opportunities that will deliver sustainable returns for shareholders.
NET WORKING CAPITAL
Net working capital has increased by £11.0m to (£153.2m) as
shown below:
Performance
Revenue for the year was up 6% at £2,972m (2017: £2,793m), with
adjusted* operating profit up 25% to £85.5m (2017: £68.6m). This
resulted in an adjusted* operating margin of 2.9%, a significant
improvement of 40bps compared to the prior year. The net finance
expense increased to £3.9m (2017: £2.5m) due to higher interest
charge on some of the Group’s non-recourse project financing,
together with the inclusion of the notional interest expense on lease
liabilities under IFRS 16 for the first time. After deducting this, the
adjusted* profit before tax was £81.6m, up 23% (2017: £66.1m).
The tax charge for the year is £13.8m, which equated to an effective
tax rate of 17% and was slightly lower than the UK statutory rate
of 19% due to adjustments for prior year tax previously provided.
Almost all of the Group’s operations and profits are in the UK, and we
maintain an open and constructive working relationship with HMRC.
The adjusted* earnings per share was up 25% to 151.8p (2017: 121.1p),
with the fully diluted adjusted* earnings per share of 144.0p up
25% (2017: 114.8p). Reported basic earnings per share was 149.8p
(2017: 118.8p). The total dividend for the year increased 18% to
53.0p per share (2017: 45.0p).
Details on performance by division are shown on pages 14 to 19.
FINANCIAL PERFORMANCE
Revenue
Operating profit – adjusted*
Profit before tax – adjusted*
Earnings per share – adjusted*
Year-end net cash*
Average daily net cash*
Total dividend per share
Operating profit – reported
Profit before tax – reported
Basic earnings per share – reported
£2,972m
£2,793m
£85.5m
£81.6m
£151.8p
£68.6m
£66.1m
121.1p
£207.0m
£193.4m
£98.8m
£118.0m
53.0p
£84.5m
£80.6m
149.8p
45.0p
£67.4m
£64.9m
118.8p
Note: the Group adopted IFRS 15, IFRS 9 and IFRS 16 in the period. Refer to the significant
accounting policies on pages 89 to 91 for further detail.
* See note 2 for alternative performance measure definitions and reconciliations.
Inventories
Trade and other receivables1
Trade and other payables2
Net working capital
2018
£m
334.2
424.0
(911.4)
(153.2)
2017
£m
295.0
400.9
(860.1)
(164.2)
Change
£m
+39.2
+23.1
-51.3
+11.0
1 Adjusted to include contract assets of £192.0m (2017: £nil) and exclude capitalised arrangement
fees of £1.2m (2017: £1.6m) and derivative financial assets of £nil (2017: £1.6m).
2 Adjusted to include contract liabilities of £98.3m (2017: £nil) and exclude accrued interest
of £1.3m (2017: £0.4m), deferred consideration payable of £nil (2017: £2.2m) and derivative
financial liabilities of £nil (2017: £1m).
COMMITTED ORDER BOOK3
2018
£m
2017
£m
Change
%
Construction & Infrastructure
1,922
1,855
Fit Out
Property Services
Partnership Housing
Urban Regeneration
Investments
Inter-divisional orders
Total
470
723
327
119
6
–
500
836
523
141
7
(13)
3,567
3,849
+4%
-6%
-14%
-37%
-16%
-14%
n/a
-7%
book. The secured order book represents the Group’s share of future revenue that will be derived
from signed contracts or letters of intent. The framework order book represents the Group’s
expected share of revenue from the frameworks on which the Group has been appointed.
This excludes prospects where confirmation has been received as preferred bidder only, with
no formal contract or letter of intent in place.
REGENERATION AND DEVELOPMENT PIPELINE4
Partnership Housing
Urban Regeneration
Investments
Total
2018
£m
708
1,962
437
3,107
2017
£m
851
2,063
319
3,233
Change
%
-17%
-5%
+37%
-4%
4 Regeneration and development pipeline represents the Group’s share of the gross development
value of secured schemes, including the development value of open market housing schemes.
2018
2017
3 Committed order book comprises the secured order book and framework agreements order
STRATEGIC REPORT
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
19
21
STRATEGIC REPORT
FINANCIAL REVIEW CONTINUED
STRATEGIC REPORT
FINANCIAL REVIEW CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
20
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Financial review
We continue to achieve growth in profitability, which together with
our strong cash performance enables us to invest in regeneration
opportunities that will deliver sustainable returns for shareholders.
NET WORKING CAPITAL
shown below:
Net working capital has increased by £11.0m to (£153.2m) as
Performance
Revenue for the year was up 6% at £2,972m (2017: £2,793m), with
adjusted* operating profit up 25% to £85.5m (2017: £68.6m). This
resulted in an adjusted* operating margin of 2.9%, a significant
improvement of 40bps compared to the prior year. The net finance
expense increased to £3.9m (2017: £2.5m) due to higher interest
charge on some of the Group’s non-recourse project financing,
together with the inclusion of the notional interest expense on lease
liabilities under IFRS 16 for the first time. After deducting this, the
adjusted* profit before tax was £81.6m, up 23% (2017: £66.1m).
The tax charge for the year is £13.8m, which equated to an effective
tax rate of 17% and was slightly lower than the UK statutory rate
of 19% due to adjustments for prior year tax previously provided.
Almost all of the Group’s operations and profits are in the UK, and we
maintain an open and constructive working relationship with HMRC.
The adjusted* earnings per share was up 25% to 151.8p (2017: 121.1p),
with the fully diluted adjusted* earnings per share of 144.0p up
25% (2017: 114.8p). Reported basic earnings per share was 149.8p
(2017: 118.8p). The total dividend for the year increased 18% to
53.0p per share (2017: 45.0p).
Details on performance by division are shown on pages 14 to 19.
Inventories
Trade and other receivables1
Trade and other payables2
Net working capital
2018
£m
334.2
424.0
(911.4)
(153.2)
2017
£m
295.0
400.9
(860.1)
(164.2)
Change
£m
+39.2
+23.1
-51.3
+11.0
1 Adjusted to include contract assets of £192.0m (2017: £nil) and exclude capitalised arrangement
fees of £1.2m (2017: £1.6m) and derivative financial assets of £nil (2017: £1.6m).
2 Adjusted to include contract liabilities of £98.3m (2017: £nil) and exclude accrued interest
of £1.3m (2017: £0.4m), deferred consideration payable of £nil (2017: £2.2m) and derivative
financial liabilities of £nil (2017: £1m).
COMMITTED ORDER BOOK3
Construction & Infrastructure
1,922
1,855
Fit Out
Property Services
Partnership Housing
Urban Regeneration
Investments
Inter-divisional orders
Total
2018
£m
470
723
327
119
6
–
2017
£m
Change
%
500
836
523
141
7
(13)
+4%
-6%
-14%
-37%
-16%
-14%
n/a
-7%
3,567
3,849
FINANCIAL PERFORMANCE
Revenue
Operating profit – adjusted*
Profit before tax – adjusted*
Earnings per share – adjusted*
Year-end net cash*
Average daily net cash*
Total dividend per share
Operating profit – reported
Profit before tax – reported
Basic earnings per share – reported
Note: the Group adopted IFRS 15, IFRS 9 and IFRS 16 in the period. Refer to the significant
accounting policies on pages 89 to 91 for further detail.
* See note 2 for alternative performance measure definitions and reconciliations.
£2,972m
£2,793m
£85.5m
£81.6m
£151.8p
£68.6m
£66.1m
121.1p
£207.0m
£193.4m
£98.8m
£118.0m
53.0p
£84.5m
£80.6m
149.8p
45.0p
£67.4m
£64.9m
118.8p
2018
2017
3 Committed order book comprises the secured order book and framework agreements order
book. The secured order book represents the Group’s share of future revenue that will be derived
from signed contracts or letters of intent. The framework order book represents the Group’s
expected share of revenue from the frameworks on which the Group has been appointed.
This excludes prospects where confirmation has been received as preferred bidder only, with
no formal contract or letter of intent in place.
REGENERATION AND DEVELOPMENT PIPELINE4
Partnership Housing
Urban Regeneration
Investments
Total
2018
£m
708
1,962
437
3,107
2017
£m
851
2,063
319
3,233
Change
%
-17%
-5%
+37%
-4%
4 Regeneration and development pipeline represents the Group’s share of the gross development
value of secured schemes, including the development value of open market housing schemes.
Net cash
The Group’s cash performance has again been strong, with an
operating cash inflow* of £66.4m (2017: £41.0m), equivalent to 78%
of operating profit, converted into operating cash*. This was achieved
at the same time as increasing the capital employed in regeneration
activities by slightly over £20m. The cash inflow for the year was
£13.6m, resulting in closing net cash of £207.0m (2017: £193.4m).
The average daily net cash* for the year was £98.8m, compared to
£118.0m in the prior year.
Financing facilities
The Group has £180m of committed loan facilities maturing in 2022.
The banking facilities are subject to financial covenants, all of which
have been met throughout the year.
In the normal course of our business, we arrange for financial
institutions to provide client guarantees (bonds) as security against
the financial instability of the contractor prejudicing completion of
the works. We pay a fee and provide a counter-indemnity to the
financial institutions for issuing the bonds. As at 31 December 2018,
contract bonds in issue under uncommitted facilities covered
£170.8m (2017: £192.0m) of our contract commitments.
Further information on the Group’s use of financial instruments
is explained in note 25 to the consolidated financial statements.
Pensions
On 23 May 2018, the Trustees of The Morgan Sindall Retirement
Savings Plan (‘the Retirement Plan’) completed a buy-in transaction
with Aviva to insure the benefits of the defined benefit members.
The buy-in policy is an asset of the Retirement Plan that provides
payments that are an exact match to the pension payments made
to the defined benefit members covered by the policy. The insurance
policy was initially recognised as an asset at an amount equal to
its cost. It was then immediately remeasured to its fair value in
accordance with IAS 19, giving rise to an actuarial loss of £2.8m.
Tax strategy
The Group’s tax strategy is published on our website.
IFRSs 9, 15 and 16
We adopted IFRSs 9, 15 and 16 accounting standards from 1 January
2018. The net effect on opening reserves at 1 January 2018 was
£11.7m net of deferred tax. Further detail on the impact of these new
standards on the Group is disclosed within the significant accounting
policies on pages 89 to 91.
Going concern
The Group’s business activities, together with the factors likely to
affect our future development, performance and position, are set out
in this strategic report. As at 31 December 2018, the Group had net
cash of £207.0m and committed banking facilities of £180m which are
in place for more than one year. The Group has no pension funding
requirements for its small defined benefits scheme that was closed
to future accrual in May 1995. The directors have reviewed the Group’s
forecasts and projections, which show that we will have a sufficient
level of headroom within facility limits and covenants over the period
of assessment. After making enquiries the directors have a reasonable
expectation that the Company and the Group have adequate
resources to continue in operational existence for the foreseeable
future. Thus, they continue to prepare the annual financial statements
on the going concern basis. See page 32 for further information on
the Group’s longer-term viability.
CASH FLOW
(£m)
19.1
(23.9)
85.5
(23.2)
120
100
80
60
40
20
0
8.9
66.4
(2.9)
(13.9)
49.6
(21.5)
(14.5)
Operating
Profit*
Non-cash
adjustments1
Net capex &
finance leases2
Working
Capital3
Other operating
items4
Operating
cash flow*
Net interest
(non-joint venture)5
Tax
Free
cash flow
Dividends
Other6
13.6
Total
cash flow
* See note 2 for alternative performance measure definitions and reconciliations.
1 Includes depreciation (£18.5m), share option expense (£6.3m) and revaluation of investment
properties (£0.2m) less share of equity accounted joint ventures (£5.2m), movement of shared
equity loans receivable (£0.5m) and gain on disposal of property, plant and equipment (£0.2m).
4 Includes provision movements (£2.9m), shared equity redemptions (£3.1m), revaluation of
investment properties (£0.2m), dividend from joint ventures (£1.5m) and interest from joint
ventures (£1.4m (see note 5)) less gain on disposals (£0.2m).
5 Includes interest paid (£3.6m) less interest received excluding interest from joint ventures (£0.7m).
2 Includes repayment of lease liabilities (£13.5m), purchase of property, plant and equipment
6 Includes net loans advanced to joint ventures (£3.0m), deferred consideration paid to acquire an
(£9.2m) and purchase of intangible fixed assets (£1.6m) less proceeds on disposal of property,
plant and equipment (£0.4m).
3 The cash flow due to change in working capital excludes net £12.2m comprising non-cash
movement from the change in accounting policy (£11.7m) and the unwind of discounting on
land creditors (£0.5m).
additional interest in a joint venture (£2.0m), purchase of shares in the Company by the employee
benefit trust (£16.1m) and payment to establish an ‘other’ investment (£0.2m) less proceeds from
the issue of new shares (£4.6m) and proceeds from the exercise of share options (£2.2m).
22
STRATEGIC REPORT
STRATEGIC REPORT
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
21
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Principal risks
The Group’s risk profile continues to be supported by a strong
balance sheet and order book, and a continued focus on contract
selectivity. There have been no noticeable Brexit impacts, but we
remain vigilant.
Our approach
Risk is inherent in our business and cannot be completely eliminated
if we are to achieve growth. Our risk governance model ensures that
our principal risks and the controls implemented throughout the
Group are under regular review at all levels.
Risk governance
Group Board
The Board is responsible for setting the Group’s risk appetite and for ongoing risk management, including assessing the principal risks that
threaten our strategy and performance. For detailed information on our risk management and internal control governance, see pages 52 to 54.
AUDIT COMMITTEE
The audit committee assists the Board in monitoring risk management and internal control, and formally reviews the Group and divisional
risk registers on behalf of the Board.
DIVISIONAL BOARDS
RISK COMMITTEE
Each division identifies the risks facing its business and takes
measures to mitigate the impacts. Senior managers take ownership
of specific risks and ensure that tolerance levels are not exceeded.
Our risk committee consists of heads of key Group functions, including
legal, company secretarial, IT, finance, internal audit, tax, treasury and
commercial. The committee identifies risks for entering in the Group
risk register. It also reviews the Group and divisional risk registers
before they are presented to the Board and audit committee.
RISK REVIEWS
STRATEGIC PLANNING
DELEGATED AUTHORITIES
DIVISIONAL REPORTING
Twice a year each division
carries out a detailed risk
review, recording significant
matters in its risk register.
Each risk is evaluated, both
before and after the effect of
mitigation, on its likelihood of
occurrence and severity of
impact on strategy. The Group
head of audit and assurance
follows the same process for
identifying and reviewing
Group risks, conferring with
the risk committee.
INTERNAL AUDIT
Risk management is part of
our business planning process.
Each year objectives and
strategies are set that align
with the risk appetite defined
by the Board.
Our finance director and Group
head of audit and assurance have
produced a formal document
which delegates approval for
material decisions to appropriate
levels of management. Such
decisions include project
selection, tender pricing, and
capital requirements. Board
approval is required before
undertaking large, complex
projects. The approval system
is regularly reviewed.
The divisional risk registers
record the activities needed
to manage each risk, with
mitigating activities embedded
in day-to-day operations for
which every employee has
some responsibility. Rigorous
reporting procedures are in
place to monitor significant
risks throughout the divisions
and ensure they are
communicated to the Group
head of audit and assurance.
The Group head of audit and assurance reviews and collates the divisional risk registers and draws from them when compiling the
Group risk register. An annual review across the Group is undertaken, focusing on significant projects and trends, and areas of concern.
STRATEGIC REPORT
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
21
23
STRATEGIC REPORT
STRATEGIC REPORT
PRINCIPAL RISKS CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
22
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Principal risks
The Group’s risk profile continues to be supported by a strong
balance sheet and order book, and a continued focus on contract
selectivity. There have been no noticeable Brexit impacts, but we
Our approach
Risk is inherent in our business and cannot be completely eliminated
if we are to achieve growth. Our risk governance model ensures that
our principal risks and the controls implemented throughout the
Group are under regular review at all levels.
remain vigilant.
Risk governance
Group Board
The Board is responsible for setting the Group’s risk appetite and for ongoing risk management, including assessing the principal risks that
threaten our strategy and performance. For detailed information on our risk management and internal control governance, see pages 52 to 54.
AUDIT COMMITTEE
risk registers on behalf of the Board.
The audit committee assists the Board in monitoring risk management and internal control, and formally reviews the Group and divisional
DIVISIONAL BOARDS
RISK COMMITTEE
Each division identifies the risks facing its business and takes
Our risk committee consists of heads of key Group functions, including
measures to mitigate the impacts. Senior managers take ownership
legal, company secretarial, IT, finance, internal audit, tax, treasury and
of specific risks and ensure that tolerance levels are not exceeded.
commercial. The committee identifies risks for entering in the Group
risk register. It also reviews the Group and divisional risk registers
before they are presented to the Board and audit committee.
RISK REVIEWS
STRATEGIC PLANNING
DELEGATED AUTHORITIES
DIVISIONAL REPORTING
Twice a year each division
carries out a detailed risk
review, recording significant
matters in its risk register.
Each risk is evaluated, both
before and after the effect of
mitigation, on its likelihood of
occurrence and severity of
impact on strategy. The Group
head of audit and assurance
follows the same process for
identifying and reviewing
Group risks, conferring with
the risk committee.
INTERNAL AUDIT
Risk management is part of
our business planning process.
Each year objectives and
strategies are set that align
with the risk appetite defined
by the Board.
Our finance director and Group
The divisional risk registers
head of audit and assurance have
record the activities needed
produced a formal document
to manage each risk, with
which delegates approval for
mitigating activities embedded
material decisions to appropriate
in day-to-day operations for
levels of management. Such
which every employee has
decisions include project
some responsibility. Rigorous
selection, tender pricing, and
reporting procedures are in
capital requirements. Board
place to monitor significant
approval is required before
undertaking large, complex
risks throughout the divisions
and ensure they are
projects. The approval system
communicated to the Group
is regularly reviewed.
head of audit and assurance.
The Group head of audit and assurance reviews and collates the divisional risk registers and draws from them when compiling the
Group risk register. An annual review across the Group is undertaken, focusing on significant projects and trends, and areas of concern.
In terms of resourcing our medium- and long-term plans, we have
committed banking facilities until 2022, a strong cash profile and
robust capital controls in place. Voluntary employee turnover is at
optimum levels in most businesses and where we are recruiting
we have witnessed a healthy interest in the new positions we
require to help us achieve our strategic objectives.
This review should be read in conjunction with the viability statement
on page 32.
Principal risks
The principal risks to the business are set out on the following pages,
as they relate to our Group strategic objectives.
The list is not exhaustive but includes those risks currently considered
most significant in terms of potential impact, together with mitigating
actions being taken.
The risks have been extensively reviewed but have not changed
significantly in the reporting period. Any changes in severity and
likelihood of impacts compared to 2017 have been indicated, and
signify the Board’s opinion of pre-mitigation risk movement.
Overview of the Group’s risk profile
During 2018 the Board reviewed the Group’s risk appetite (see
page 52) and no significant changes were identified. The ongoing
negotiations over the UK’s exit from the EU continue to generate
uncertainty and we are keeping a close watch on developments.
However, the economy has continued to perform well in the reporting
period and this is reflected in our trading position. We will adjust our
strategy in response to any clear indicators, but are reassured that
the majority of our regeneration schemes and a sizeable portion of
our construction order book and pipeline are supported by public
sector or regulated clients, via frameworks and joint venture
arrangements secured over the medium to longer term.
Our diversity of offering through construction and regeneration
protects the business from cyclical changes in individual markets.
Government commitments continue to support our business model
and strategy, particularly in housebuilding and regeneration – areas
expected to be a primary growth driver – and in infrastructure,
where our work in the public and regulated sectors has
longer-term visibility.
Based on current trading patterns, a strong balance sheet, our high-
quality secured order book and visible pipeline of opportunities, our
outlook for 2019 and beyond looks positive. All businesses remain
focused on long-term partnerships, our favoured route to market
with more predictable outcomes. Our regeneration activities are
mostly non-speculative, land option style arrangements, with efficient
capital structures, all underpinned by a long-term visible pipeline.
Residential schemes at our price point have continued to be in
demand during EU negotiations, meeting our expectations across
a broad UK portfolio. With government support for housing, we are
confident that the homes we build will continue to be in demand and
affordable. Should the market change, the majority of our schemes
are subject to economic viability conditions: future phases can be
remodelled or deferred, which together with robust risk and capital
controls would help mitigate negative fluctuations. Construction’s
long-term focus on selectivity is reflected in its outturn margin,
cash and future order book. Fit Out, while more susceptible to
GDP fluctuations, has good visibility of its order book in the earlier
part of 2019.
24
STRATEGIC REPORT
STRATEGIC REPORT
PRINCIPAL RISKS CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
23
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Win in targeted markets
Global and UK economic conditions could potentially impact our longer-term strategy in our markets.
Risk and potential impact
Risk change in reporting period
Mitigating activities
Changes in the economy
There could be fewer or less profitable
opportunities in our chosen markets. Allocating
resources and capital to declining markets or
less attractive opportunities would reduce our
profitability and cash generation.
• The government and cross-party groups
remain committed to investment in areas that
complement our strategy, including housing
and infrastructure. This supports our business
model, which is designed to provide a mix
of earnings across different market cycles.
• Maintaining a high profile and competency
in sectors identified for investment, such as
infrastructure, housing and urban regeneration.
• Monitoring changes in the economy, which
helps us detect shifts in spending and adapt
our strategy if necessary.
• Strategic focus on market spread, geographical
capability and diversification to protect against
the cyclical effect of individual markets.
• Business planning that focuses on markets and
opportunities consistent with our risk appetite.
• High proportion of order book secured with
public sector and regulated entities, via long-
term agreements and with a healthy level
of demand.
• Construction and regeneration divisions
working together, adding value for clients and
offering a scale of service that enables us to
compete in areas with higher barriers to entry.
• Regular monitoring and reporting of financial
performance, work won, prospects and pipeline
of opportunities.
Slight increase
• A no-deal Brexit scenario could influence
consumer confidence, which in turn could
affect the wider housing market and lead
to lower sales volumes. EU exit negotiations
continue to have limited impact in our markets,
but longer-term effects remain difficult
to predict and could affect investor and
consumer confidence.
• Our business operates mainly in the UK,
therefore we have not been required to
consider any changes to our model. Specific
risks include: the potential for increased
material costs as a result of exchange
differences arising from materials imported
from EU countries; potential delays to
construction programmes in importing
materials; and potential skills deficiencies arising
from difficulties in obtaining EU workers within
the supply chain. We have reviewed these
potential impacts and consider that we have
sufficient mitigations in place via contract terms
or allowances that offset increased costs.
• The industry relies on a pool of EU labour to
sustain construction output. To date we have
not experienced any major issues, and consider
this to be a more long-term challenge.
• Opportunities continue to flow in all our
markets and there is high demand for our
development and regeneration schemes
(typically long term in nature) which continue
to benefit from historical investment.
• Competition in construction remains high
against a backdrop of lower growth and rising
inflation. However, a large proportion of our
work and forward order book continues to
be secured via frameworks which typically
includes preferential terms.
• Elsewhere our strategy continues to be
very selective and procurement routes,
margins, contract terms and order book
remain favourable.
• The continued scrutiny of UK construction
balance sheets is a differentiator for us
and continues to underpin our position
in our sector.
STRATEGIC REPORT
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
23
25
STRATEGIC REPORT
PRINCIPAL RISKS CONTINUED
STRATEGIC REPORT
PRINCIPAL RISKS CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
24
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Win in targeted markets
Global and UK economic conditions could potentially impact our longer-term strategy in our markets.
Win in targeted markets continued
Risk and potential impact
Risk change in reporting period
Mitigating activities
Risk and potential impact
Risk change in reporting period
Mitigating activities
Changes in the economy
There could be fewer or less profitable
Slight increase
• A no-deal Brexit scenario could influence
opportunities in our chosen markets. Allocating
consumer confidence, which in turn could
resources and capital to declining markets or
affect the wider housing market and lead
less attractive opportunities would reduce our
to lower sales volumes. EU exit negotiations
profitability and cash generation.
continue to have limited impact in our markets,
Exposure to UK housing market
The UK housing sector is strongly influenced by
government stimulus and consumer confidence.
If mortgage availability and affordability are
reduced this could make existing schemes difficult
to sell and future developments unviable, reducing
profitability and tying up capital.
Poor contract selection
In a volatile market where competition is
high, a division might accept a contract outside
its core competencies or for which it has
insufficient resources.
Failure to understand the project risks may
lead to poor delivery and ultimately result in
reputational damage and loss of opportunities.
• The government and cross-party groups
remain committed to investment in areas that
complement our strategy, including housing
and infrastructure. This supports our business
model, which is designed to provide a mix
of earnings across different market cycles.
• Maintaining a high profile and competency
in sectors identified for investment, such as
infrastructure, housing and urban regeneration.
• Monitoring changes in the economy, which
helps us detect shifts in spending and adapt
our strategy if necessary.
• Strategic focus on market spread, geographical
capability and diversification to protect against
the cyclical effect of individual markets.
• Business planning that focuses on markets and
opportunities consistent with our risk appetite.
• High proportion of order book secured with
public sector and regulated entities, via long-
term agreements and with a healthy level
of demand.
sufficient mitigations in place via contract terms
• Construction and regeneration divisions
or allowances that offset increased costs.
• The industry relies on a pool of EU labour to
sustain construction output. To date we have
working together, adding value for clients and
offering a scale of service that enables us to
compete in areas with higher barriers to entry.
not experienced any major issues, and consider
• Regular monitoring and reporting of financial
performance, work won, prospects and pipeline
of opportunities.
but longer-term effects remain difficult
to predict and could affect investor and
consumer confidence.
• Our business operates mainly in the UK,
therefore we have not been required to
consider any changes to our model. Specific
risks include: the potential for increased
material costs as a result of exchange
differences arising from materials imported
from EU countries; potential delays to
construction programmes in importing
materials; and potential skills deficiencies arising
from difficulties in obtaining EU workers within
the supply chain. We have reviewed these
potential impacts and consider that we have
this to be a more long-term challenge.
• Opportunities continue to flow in all our
markets and there is high demand for our
development and regeneration schemes
(typically long term in nature) which continue
to benefit from historical investment.
• Competition in construction remains high
against a backdrop of lower growth and rising
inflation. However, a large proportion of our
work and forward order book continues to
be secured via frameworks which typically
includes preferential terms.
• Elsewhere our strategy continues to be
very selective and procurement routes,
margins, contract terms and order book
remain favourable.
• The continued scrutiny of UK construction
balance sheets is a differentiator for us
and continues to underpin our position
in our sector.
Slight increase
• Despite Brexit, there continues to be clear
government and cross-party support and
demand for new housing, which supports
our business model and market positioning.
• Our regeneration portfolio is geared to offset
impacts if they arise and/or share risk, but given
our price point and demographics, we believe
that our services will still be in demand despite
market fluctuations.
• Sales volumes, pace and inflation across the
regions have held up during the year in both the
investor and private markets. There has been
some plateauing in the London market but with
signs of stabilisation.
• Our residential portfolio is geographically
spread, affording protection against any
regional variation.
• We are well positioned to support current and
future affordable and regeneration housing,
with high demand across our existing
property portfolio.
• There is high demand for housing on our
regeneration schemes, and we work closely
with local authorities to provide viable
development.
No change
• The majority of our regeneration schemes and
a high proportion of construction activity (order
book and pipeline) is supported by public sector
and regulated clients via framework and joint
venture style arrangements, which we believe
are less likely to be affected in the short or
medium term by any Brexit economic impacts.
• Fit Out is the most vulnerable to any downturn
in the office subsector but currently has good
visibility and order book into 2019 with potential
effects already reflected in current strategy
and forecasting.
• Our forward order book continues to provide
comfort with a high proportion being secured in
limited competition via favourable procurement
routes. It maintains a high proportion of public
sector and framework clients with typically
healthier risk profiles.
• An enhanced understanding of medium-term
pipeline quality, assisted by insights generated
from new analytical software, enables us to
predict trends more accurately and adjust
our strategy in response.
• An increasing proportion of construction
work is being secured via sister company
regeneration schemes, where expertise
provided at an early stage can have the greatest
influence on the likelihood of project success.
• Monitoring key UK statistics, including
unemployment, lending and affordability.
• A residential portfolio that targets and supports
strategic partnerships and the government’s
demand for affordable housing supply.
• Rigorous three-stage approval process
before committing to development schemes.
• A constrained land bank, preferring and
targeting option-type agreements with owners,
that limit and/or defer long-term exposure
and boost return on capital employed.
• Committing only to viable development
schemes, allowing us to maximise our
residential portfolio while responding quickly
to any market changes.
• Largely non-speculative, risk-share development
vehicles, subject to viability conditions that
minimise any negative impact from market
fluctuations.
• Regeneration schemes that typically include a
mix of assets, such as residential, leisure, hotels,
commercial and light industrial, providing some
flexibility through economic cycles.
• High majority of schemes in partnership with
the public sector and in regenerative areas
that attract government funding and support.
• Targeting forward-selling and funded sections
of large-scale residential schemes to
institutional investors.
• Regular forecasting and monitoring of
development pipeline and order book.
• Close and trusted working relationships with
government agents such as Homes England.
• Clear selectivity, strategy and business plan
to target optimal markets, sectors, clients and
projects, which have proven to have delivered
favourable outcomes.
• A strong order book and cash position that
allows us to remain selective when bidding
for contracts.
• Divisions selecting projects according to pre-
agreed types of work, contract size and risk
profile.
• A multi-stage process of bid approval, including
tender review boards, risk-profiling and
sign off by appropriate levels of management.
• Staff planning and profiling to ensure
•
appropriate levels of qualified resource
for future work.
Initiatives to select supply chain partners
who match our expectations in terms of
quality, sustainability and availability.
• Regular reporting on sales, pipeline and
order book, using customer relationship
management software.
• A deliberately large proportion of projects
conducted via framework or joint venture
arrangements with repeat clients who share
our philosophy and values, making predictable
outcomes more likely.
In particular, a significant proportion of our
larger projects continuing to be secured with
long-term clients with whom we have good
relationships and sensible terms.
•
26
STRATEGIC REPORT
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PRINCIPAL RISKS CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
25
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Win in targeted markets continued
Risk and potential impact
Risk change in reporting period
Mitigating activities
Health, safety and environment (HSE)
Health and safety will always feature significantly
in the risk profile of a construction business. We
carry out a significant portion of our work in public
areas and complex environments, requiring strict
observation of Health and Safety Executive
standards. In terms of environmental matters,
our greatest impacts would be in areas of energy
use and waste generated by our activities.
Incidents that cause harm to an individual or the
community could result in legal action, fines, costs
and insurance claims as well as project delays and
damage to reputation. Poor HSE performance
could also affect our ability to secure future work
and achieve targets.
No change
• The Group health and safety forum has focused
on mental health; occupational health; human
factors in site safety; supply chain engagement;
behavioural safety; and shared learning.
• Fit Out successfully trialled new behavioural
safety initiatives that significantly reduced
health and safety risks, such as working at
height and material movement, and is looking
to widen their use.
• Construction & Infrastructure released an online
MIND survey to assess the mental health and
wellbeing of employees. The results helped
form the division’s 2018 mental health strategy
and have been shared with other divisions.
• Health and safety leadership team meetings
were held during the year to discuss safety
matters and trends impacting the business. The
meetings were attended by divisional managing
directors and health and safety directors.
• We have continued to focus on managing
HSE issues to the standards required to
protect individuals, the community and the
environment. We reduced our carbon intensity
by 3% in 2018.
• Board level HSE committee focused on
health and safety culture to drive better
behaviour and performance.
• Quarterly meetings of the Group health and
safety forum where representatives from all
divisions continue to share best practice and
exchange information on emerging risks.
Individuals in each division, and on the Board,
with specific responsibility for HSE matters.
• Communication of each division’s HSE policy
•
to all employees and senior managers
appointed to ensure they are implemented.
• Established safety systems, site visits,
monitoring and reporting procedures including
near-miss and potential hazard reporting.
Fit Out and Construction & Infrastructure
use a health and safety app to improve safety
on sites.
Investigations and root cause analysis of
accidents or incidents and near misses.
Information is shared across the Group.
• New system implemented to monitor high
•
potential incidents.
• Regular HSE training that includes behavioural
change, housekeeping on site and leadership
engagement in driving site standards.
• Major incident management plans and
business continuity plans, periodically
reviewed and tested.
• HSE report to the Board each month, HSE
audits on projects and training schedules and
incident investigation reports if necessary.
• Maintaining our A- position in the CDP (formerly
the Carbon Disclosure Project) index which
places us in the CDP’s leadership band. We
continue to target improvements in carbon
emissions and waste production.
STRATEGIC REPORT
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
25
27
STRATEGIC REPORT
PRINCIPAL RISKS CONTINUED
STRATEGIC REPORT
PRINCIPAL RISKS CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
26
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Win in targeted markets continued
Risk and potential impact
Risk change in reporting period
Mitigating activities
Develop and retain talented people
We recognise that talented, motivated people improve our performance and contribute to growth. Employee surveys show that people
are happy with their places of work, culture and leadership styles.
Risk and potential impact
Risk change in reporting period
Mitigating activities
Failure to attract and retain
talented people
Talented people are needed to provide excellence
in project delivery and customer service.
Skills shortages in the construction industry
remain an issue for the foreseeable future.
Slight decrease
• Our current success is helping us attract and
retain people, reflected in falling voluntary
employee turnover rates and high levels
of applicants.
In divisions whose voluntary employee turnover
is higher, improvements continue to be made
to the working environment and investment
made in technology and leadership training.
• Recent divisional surveys have provided positive
•
reinforcement of our efforts to improve
employee satisfaction.
• Our investment in graduate, trainee and
apprenticeship schemes is well established,
with participants progressing to more senior
positions. Our leadership development
programme continues to be well received.
• Construction & Infrastructure won the ‘Inspiring
Change in the Workplace’ award presented by
the Civil Engineering Contractors Association,
for its drive to promote an inclusive culture.
Initiatives to help improve employees’
wellbeing include financial education and
digital GP programmes.
•
• We partner with organisations such as Women
into Construction and the 5% Club to promote
diversity in our workforce.
• Annual appraisals providing two-way feedback
on performance.
• Training and development plans to build skills
and experience.
• Attractive remuneration packages
benchmarked where possible.
Industry-leading working environments,
technology tools and software to enrich
people’s working experience.
•
• Giving people empowerment and responsibility
together with clear leadership and support.
• Monitoring future skills requirements and
embedding succession plans.
• Debriefs with leavers and joiners to understand
the reasons for their decision.
• Divisional ‘people boards’ that meet twice
a year to review talent in the business.
• Employee engagement surveys.
• Monthly HR reports to the Board including
a report on leavers and joiners.
• Monitoring recruitment.
Health, safety and environment (HSE)
No change
Health and safety will always feature significantly
• The Group health and safety forum has focused
in the risk profile of a construction business. We
on mental health; occupational health; human
carry out a significant portion of our work in public
factors in site safety; supply chain engagement;
areas and complex environments, requiring strict
behavioural safety; and shared learning.
observation of Health and Safety Executive
• Fit Out successfully trialled new behavioural
standards. In terms of environmental matters,
safety initiatives that significantly reduced
our greatest impacts would be in areas of energy
health and safety risks, such as working at
use and waste generated by our activities.
height and material movement, and is looking
Incidents that cause harm to an individual or the
community could result in legal action, fines, costs
and insurance claims as well as project delays and
damage to reputation. Poor HSE performance
could also affect our ability to secure future work
and achieve targets.
to widen their use.
• Construction & Infrastructure released an online
MIND survey to assess the mental health and
wellbeing of employees. The results helped
form the division’s 2018 mental health strategy
and have been shared with other divisions.
• Health and safety leadership team meetings
were held during the year to discuss safety
matters and trends impacting the business. The
meetings were attended by divisional managing
directors and health and safety directors.
• We have continued to focus on managing
HSE issues to the standards required to
protect individuals, the community and the
environment. We reduced our carbon intensity
by 3% in 2018.
• Board level HSE committee focused on
health and safety culture to drive better
behaviour and performance.
• Quarterly meetings of the Group health and
safety forum where representatives from all
divisions continue to share best practice and
exchange information on emerging risks.
•
Individuals in each division, and on the Board,
with specific responsibility for HSE matters.
• Communication of each division’s HSE policy
to all employees and senior managers
appointed to ensure they are implemented.
• Established safety systems, site visits,
monitoring and reporting procedures including
near-miss and potential hazard reporting.
Fit Out and Construction & Infrastructure
use a health and safety app to improve safety
on sites.
•
Investigations and root cause analysis of
accidents or incidents and near misses.
Information is shared across the Group.
• New system implemented to monitor high
potential incidents.
• Regular HSE training that includes behavioural
change, housekeeping on site and leadership
engagement in driving site standards.
• Major incident management plans and
business continuity plans, periodically
reviewed and tested.
• HSE report to the Board each month, HSE
audits on projects and training schedules and
incident investigation reports if necessary.
• Maintaining our A- position in the CDP (formerly
the Carbon Disclosure Project) index which
places us in the CDP’s leadership band. We
continue to target improvements in carbon
emissions and waste production.
28
STRATEGIC REPORT
STRATEGIC REPORT
PRINCIPAL RISKS CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
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MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Disciplined use of capital
Our long-term success depends not only on our disciplined use of capital but also the liquidity of our clients, partners and suppliers,
which could be affected by overtrading in an increasingly uncertain market.
Risk and potential impact
Risk change in reporting period
Mitigating activities
Insolvency of key client, subcontractor,
joint venture (JV) partner or supplier
An insolvency could disrupt project works, cause
delay and incur the costs of finding a replacement,
resulting in bad debt and significant financial loss.
There is a risk that credit checks undertaken in
the past may no longer be valid.
Slight increase
• A high proportion of our current order book is
public sector focused. With commercial clients
we obtain, where necessary, relevant securities
in the form of guarantees, bonds, escrow
and/or favourable payment terms.
• Given recent sector-related issues, some supply
chain partners could overstretch their finances,
leading to underperformance or insolvency.
• We do not employ any form of debtor finance
when paying our supply chain. With this and our
strong balance sheet, our supply chain partners
regard us as dependable in an otherwise
unsettled sector.
• A business strategy focused on the public
sector and commercial clients in sound
market sectors.
• Rigorous due diligence and credit checks
on clients, partners and suppliers.
• Formal, staged approval process before
entering into contracts, supported by tender
review boards.
• Formal JV selection due diligence papers and
approval at Group executive director level.
JV agreements that contain protection in the
event of default by one of the partners.
•
• Working with preferred or approved suppliers
wherever possible, which aids visibility of both
financial and workload commitments.
• Regular meetings with key supply chain
members to exchange feedback and maintain
dialogue, resulting in meaningful relationships
and a greater understanding of their business.
• Monitoring supply chain utilisation to ensure
we do not overstress either their finances or
operational resource.
• Monitoring work in progress (uninvoiced
income), debts and retentions.
Inadequate funding
A lack of liquidity could impact our ability to
continue to trade or restrict our ability to achieve
market growth or invest in regeneration schemes.
No change
• Our average net daily cash continues to be
healthy and clearly indicates the cash-backed
nature of the business.
• Our balance sheet provides certainty for our
clients and supply chain in an increasingly
uncertain market.
• The strength of our balance sheet provides the
opportunity to explore further investment in
regeneration schemes and continue to be
selective in construction.
• Medium-term committed banking facilities
to 2022, which together with our strong
cash position provide significant headroom.
• A Group-led, disciplined allocation process
for significant project-related capital, which
considers 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.
STRATEGIC REPORT
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
27
29
STRATEGIC REPORT
PRINCIPAL RISKS CONTINUED
STRATEGIC REPORT
PRINCIPAL RISKS CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
28
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Disciplined use of capital
Our long-term success depends not only on our disciplined use of capital but also the liquidity of our clients, partners and suppliers,
which could be affected by overtrading in an increasingly uncertain market.
Disciplined use of capital continued
Risk and potential impact
Risk change in reporting period
Mitigating activities
Risk and potential impact
Risk change in reporting period
Mitigating activities
Mismanagement of working capital
Poor management of working capital leads
to insufficient liquidity and funding problems.
we obtain, where necessary, relevant securities
• Rigorous due diligence and credit checks
Insolvency of key client, subcontractor,
Slight increase
joint venture (JV) partner or supplier
An insolvency could disrupt project works, cause
delay and incur the costs of finding a replacement,
resulting in bad debt and significant financial loss.
There is a risk that credit checks undertaken in
the past may no longer be valid.
• A high proportion of our current order book is
public sector focused. With commercial clients
in the form of guarantees, bonds, escrow
and/or favourable payment terms.
• Given recent sector-related issues, some supply
chain partners could overstretch their finances,
leading to underperformance or insolvency.
• We do not employ any form of debtor finance
when paying our supply chain. With this and our
strong balance sheet, our supply chain partners
regard us as dependable in an otherwise
unsettled sector.
No change
• Overall working capital continues to improve
as a result of the phasing of scheme starts
and completions in regeneration, plus the
continuing benefits from positive cash
generation in construction.
• Our cash position is not supported by any
form of supply chain debtor finance and gives
a clear indication of our health.
• Cash management maintains its positive
momentum in construction due to a
combination of improved returns, and cash
optimisation and conversion.
• Our average net daily cash for the period
underlines our disciplined working capital
management, but there are still areas for
improvement that we are working on.
• Monitoring and management of working
capital with acute focus on any overdue work
in progress, debtors or retentions.
• Reinforcing a culture in the bidding and project
teams of focusing on generating positive
cash outcomes.
• Daily monitoring of cash levels and weekly
cash forecast reports.
• Cash profiling of key construction opportunities
at an early stage to ensure they meet
expectations.
• Efficient management of capital on
regeneration schemes, such as phased scheme
delivery, institutional and government funding
solutions, and forward funding where possible.
Maximise efficiency of resources
Contract terms need to reflect risks arising from the nature and duration of the works.
Projects must be properly resourced to ensure successful delivery for clients.
Risk and potential impact
Risk change in reporting period
Mitigating activities
Mispricing a contract
If a contract is incorrectly costed this could lead to
a reduction in gross margin. It might also damage
the relationship with the client and supply chain.
No change
• Contract procurement routes and terms
have remained favourable, as indicated by
our outturn margins and quality of forward
order book.
• Our continued focus on key sectors means
we have relevant experience when pricing a
project and are less likely to misprice than if
entering new markets or bidding bespoke
procurement products.
• We have maintained our focus on selecting
projects that are right for the business and
match our risk appetite, thus offering a higher
probability of success.
• We continue to secure projects with repeat
clients via negotiation, open book and
framework style arrangements, with limited,
selective open market bids.
• A high proportion of our future pipeline is visible
via our positions on long-term frameworks.
• A well-established bidding process with
experienced estimating teams.
• Robust review of pipeline at key stages, with
rigorous due diligence and risk assessment,
and senior level approval.
• Our order book quality and strong cash position
mean we can remain selective in our bidding.
• A provision, where appropriate, for increases
in costs that hedges against supply chain costs
exposed to fluctuations in exchange rates
or inflation.
• Construction strategy and culture in
prioritising bid selectivity over volume.
• Tender reviews at three key stages of
pre-qualification, pre-tender and final tender
submission, with each stage approved by
senior management via tender review boards.
• Using the tender review process to challenge
and mitigate any impacts of rising supply
chain costs.
• A business strategy focused on the public
sector and commercial clients in sound
market sectors.
on clients, partners and suppliers.
• Formal, staged approval process before
entering into contracts, supported by tender
review boards.
• Formal JV selection due diligence papers and
approval at Group executive director level.
•
JV agreements that contain protection in the
event of default by one of the partners.
• Working with preferred or approved suppliers
wherever possible, which aids visibility of both
financial and workload commitments.
• Regular meetings with key supply chain
members to exchange feedback and maintain
dialogue, resulting in meaningful relationships
and a greater understanding of their business.
• Monitoring supply chain utilisation to ensure
we do not overstress either their finances or
operational resource.
• Monitoring work in progress (uninvoiced
income), debts and retentions.
• Medium-term committed banking facilities
to 2022, which together with our strong
cash position provide significant headroom.
• A Group-led, disciplined allocation process
for significant project-related capital, which
considers 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.
Inadequate funding
No change
A lack of liquidity could impact our ability to
• Our average net daily cash continues to be
continue to trade or restrict our ability to achieve
healthy and clearly indicates the cash-backed
market growth or invest in regeneration schemes.
nature of the business.
• Our balance sheet provides certainty for our
clients and supply chain in an increasingly
uncertain market.
• The strength of our balance sheet provides the
opportunity to explore further investment in
regeneration schemes and continue to be
selective in construction.
30
STRATEGIC REPORT
STRATEGIC REPORT
PRINCIPAL RISKS CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
29
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Maximise efficiency of resources continued
Risk and potential impact
Risk change in reporting period
Mitigating activities
Changes to contracts and
contract disputes
Changes to contracts and contract disputes could lead
to costs being incurred that are not recovered, loss of
profitability and delayed receipt of cash. Ultimately we
may need to resort to legal action to resolve disputes
which can prove costly with uncertain outcomes,
as well as damaging relationships.
No change
• We have continued to develop digital tools
such as change management, a supply
chain portal for facilitating payment, risk
management, and field scheduling and
management, to improve efficiencies.
• Construction’s order book maintains a
greater proportion of repeat work, meaning
we are more likely to achieve sustainable
and predictable outcomes via negotiated
settlement.
• The high proportion of framework related,
two-stage and negotiated work in our current
order book continues to reduce the likelihood
of unforeseen changes and disputes.
• Our digital early warning tools and metrics
continue to develop, flagging potential issues
and enabling intervention much earlier in the
construction cycle.
Poor project delivery
Failure to meet client expectations could incur
costs that erode profit margins, lead to the
withholding of cash payments and impact working
capital. It may also result in reduction of repeat
business and client referrals.
No change
• Early warning tools that flag problems in
project delivery, enabling earlier intervention
and provisioning, have been rolled out
further across Construction.
• Our continued focus on project selectivity
reduces risk in the order book and the
probability of poor performance.
• Various initiatives have been delivered in
Construction that focus on improvements
in product quality, predictability and client
experience.
• There is a stretch in the labour market which
has been manageable in the short term but
would be exacerbated if the government
were unable to secure EU skills mobility.
• Our Perfect Delivery1 initiative and culture
implemented in the construction divisions
is starting to make a significant impact
on outcomes.
• Digital business intelligence enhancements in
Construction continue to develop in our pursuit
of early warning indicators and intervention.
Further tools are being developed and explored
to improve and simplify reporting.
1 Perfect Delivery status is granted to projects that meet all four customer service criteria specified by each division.
• Carrying out work under standard terms
wherever possible.
• Reviewing contract terms at tender stage
and ensuring variations are approved by
the appropriate level of management.
• Well-established systems of measuring and
reporting project progress and estimated
outturns that include contract variations.
• Regular project reviews, including feedback
from peers, to provide positive challenge
around progress and project performance.
• Continued use and development of electronic
dashboards for project management and
commercial metrics designed to highlight
areas of focus and provide early warnings.
• Regular reporting on all projects with
a particular focus on matters likely to
impact on programme, cost and quality.
• Where legal action is necessary, taking
appropriate advice and making suitable
provision for costs.
• Notifying all material disputes to the Board
as they occur.
• Monthly monitoring of financial and operational
performance on projects.
• Use of electronic change control tools to
inform clients and project teams of the status
of the final account and programme at each
stage of construction.
•
Incentivising project teams on Perfect
Delivery1 outcomes to achieve high levels
of client satisfaction.
• Strategic supply chain trading arrangements
to help ensure consistent quality.
• Electronic project management tools which
help improve quality and efficiency.
• Fit Out’s sophisticated initiative to drive client
service continues to differentiate its offering.
• Continued application of early warning tools
to highlight delivery issues.
• An escalation process to ensure senior
management intervention at an early stage
if necessary.
• Formal internal peer reviews that highlight
areas of improvement and share best practice
and ‘lessons learned’ exercises.
• Collection and analysis of client feedback.
• Monthly monitoring of project performance
and electronic dashboards for project
management and commercial metrics.
• Regular formal and informal stakeholder
feedback to ensure our performance is
meeting expectations.
• Regular client satisfaction reviews and
feedback, allowing us to intervene when
required and hone our offering to provide
exceptional outcomes.
STRATEGIC REPORT
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
29
31
STRATEGIC REPORT
PRINCIPAL RISKS CONTINUED
STRATEGIC REPORT
PRINCIPAL RISKS CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
30
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Risk and potential impact
Risk change in reporting period
Mitigating activities
Maximise efficiency of resources continued
No change
Changes to contracts and
contract disputes
Changes to contracts and contract disputes could lead
to costs being incurred that are not recovered, loss of
profitability and delayed receipt of cash. Ultimately we
may need to resort to legal action to resolve disputes
which can prove costly with uncertain outcomes,
as well as damaging relationships.
• We have continued to develop digital tools
• Carrying out work under standard terms
such as change management, a supply
chain portal for facilitating payment, risk
management, and field scheduling and
management, to improve efficiencies.
wherever possible.
• Reviewing contract terms at tender stage
and ensuring variations are approved by
the appropriate level of management.
• Construction’s order book maintains a
• Well-established systems of measuring and
greater proportion of repeat work, meaning
reporting project progress and estimated
we are more likely to achieve sustainable
and predictable outcomes via negotiated
settlement.
• The high proportion of framework related,
outturns that include contract variations.
• Regular project reviews, including feedback
from peers, to provide positive challenge
around progress and project performance.
two-stage and negotiated work in our current
• Continued use and development of electronic
order book continues to reduce the likelihood
dashboards for project management and
of unforeseen changes and disputes.
• Our digital early warning tools and metrics
commercial metrics designed to highlight
areas of focus and provide early warnings.
continue to develop, flagging potential issues
• Regular reporting on all projects with
and enabling intervention much earlier in the
a particular focus on matters likely to
construction cycle.
impact on programme, cost and quality.
• Where legal action is necessary, taking
appropriate advice and making suitable
• Notifying all material disputes to the Board
provision for costs.
as they occur.
• Monthly monitoring of financial and operational
performance on projects.
• Use of electronic change control tools to
inform clients and project teams of the status
of the final account and programme at each
stage of construction.
•
Incentivising project teams on Perfect
Delivery1 outcomes to achieve high levels
of client satisfaction.
• Strategic supply chain trading arrangements
to help ensure consistent quality.
• Electronic project management tools which
help improve quality and efficiency.
• Fit Out’s sophisticated initiative to drive client
service continues to differentiate its offering.
• Continued application of early warning tools
to highlight delivery issues.
• An escalation process to ensure senior
management intervention at an early stage
if necessary.
• Formal internal peer reviews that highlight
areas of improvement and share best practice
and ‘lessons learned’ exercises.
• Collection and analysis of client feedback.
• Monthly monitoring of project performance
and electronic dashboards for project
management and commercial metrics.
• Regular formal and informal stakeholder
feedback to ensure our performance is
meeting expectations.
• Regular client satisfaction reviews and
feedback, allowing us to intervene when
required and hone our offering to provide
exceptional outcomes.
Poor project delivery
No change
Failure to meet client expectations could incur
• Early warning tools that flag problems in
costs that erode profit margins, lead to the
project delivery, enabling earlier intervention
withholding of cash payments and impact working
and provisioning, have been rolled out
capital. It may also result in reduction of repeat
further across Construction.
business and client referrals.
• Our continued focus on project selectivity
reduces risk in the order book and the
probability of poor performance.
• Various initiatives have been delivered in
Construction that focus on improvements
in product quality, predictability and client
experience.
• There is a stretch in the labour market which
has been manageable in the short term but
would be exacerbated if the government
were unable to secure EU skills mobility.
• Our Perfect Delivery1 initiative and culture
implemented in the construction divisions
is starting to make a significant impact
on outcomes.
• Digital business intelligence enhancements in
Construction continue to develop in our pursuit
of early warning indicators and intervention.
Further tools are being developed and explored
to improve and simplify reporting.
1 Perfect Delivery status is granted to projects that meet all four customer service criteria specified by each division.
Pursue innovation
Innovation drives quality, efficiency and competitive advantage and continued investment in technology will improve our delivery and service.
Business continuity depends on secure and resilient IT systems and the persistent threat of cyber-risks continues to present a challenge.
Risk and potential impact
Risk change in reporting period
Mitigating activities
Failure to innovate
A failure to produce or embrace new products
and techniques could diminish our delivery to
clients and reduce our competitive advantage.
It could also make us less attractive to existing
or prospective employees.
Failure to invest in information
technology (IT)
Investment in IT is necessary to meet the future
needs of the business in terms of expected
growth, security and innovation, and enables
its long-term success.
No change
• All divisions have continued to develop
solutions to improve efficiency, client service
and employee satisfaction. Examples range
from safety initiatives, such as dust control
campaigns and the promotion of safe
behaviours on site, to online site access systems
that provide site workers with inductions
and training.
In regeneration, we work with leading
investment partners to create innovative
funding solutions that improve the viability
of schemes and facilitate early engagement.
•
• Our work in regeneration requires us to
consistently evolve market-leading
development structuring that helps unlock
underperforming assets, and continues
to differentiate our offering.
• Our initiatives around quality delivery and
exceptional client experience are not just
founded on process, but are integral to
our cultural approach.
No change
• We completed our data centre migrations
during 2018 as part of an ongoing plan to
ensure the resilience of our IT network.
• All our businesses are investing in significant
new technology to enhance our stakeholder
experience and improve efficiency. We
foresee this trend continuing. Construction
& Infrastructure has invested in new risk
management software and a supply chain
certification and payment portal, with many
more initiatives in the pipeline.
• We have continued to invest in established
information security controls and have
engaged an external security partner
who advises on strategy.
• Our IT team reached an important milestone
in 2018 by achieving ISO 27001 accreditation.
• We are adding construction-specific features
to our recently upgraded financial software.
• We have rolled out endpoint encryption,
active monitoring and threat analysis of
external web-based threats, as well as data
protection and information security training.
• We have migrated our active directory to
Microsoft Azure as part of an estate update that
will include Office 365 and Windows 10. This will
ensure we have the latest business software
and that our data is secure and protected.
• One of our core values is to challenge
the status quo and innovation is strongly
encouraged. New ideas are welcomed from
every employee, partner and supplier, with
an emphasis on efficiency over bureaucracy.
• Our employees enjoy working on high profile,
innovative projects that provide them with
the opportunity to enhance their knowledge
and experience.
Infrastructure works with some of the UK’s
leading companies who encourage innovation
and optimised construction techniques and
share in the risk and reward.
•
• Business and IT come together via forums that
sponsor and promote new innovations across
the business.
• Our involvement in major infrastructure
projects puts us at the forefront of new
innovation in construction, management and
project control techniques. This allows us to
compete in areas with high barrier to entry
while sharing new ideas across the Group.
• A dedicated team focused on providing
a stable and resilient IT environment.
• Continued investment in our core infrastructure
and application service that has allowed us to
introduce new and improved technology into
the business with confidence.
• A centralised IT service that improves efficiency,
oversight, reporting, security and performance,
with divisional resource providing business-
specific product support.
• Group-wide and divisional IT forums that
discuss and report IT strategy and operations.
• A dedicated information security team certified
and accredited by key industry bodies in data
protection and information security.
• Group-wide financial software that provides
a fully integrated construction platform to
manage the project life cycle.
• Group-wide risk and IT security strategies that
address creating awareness, threat alert, risk
and vulnerability prioritisation and response.
• Government-accredited security installations
and certification to hold protectively marked
information, including under the government’s
Cyber Essentials Scheme.
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MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Viability statement
As required by provision C.2.2 of the UK Corporate Governance Code,
the directors have assessed the prospects and financial viability of the
Group and have concluded that they have a reasonable expectation
that the Group will be able to continue in operation and meet its
liabilities as they fall due over the period of the assessment. This
assessment took account of the Group’s current position and the
potential financial and reputational impact of the principal risks
(as set out on pages 22 to 31) on the Group’s ability to deliver the
Company’s business plan. This describes and tests the significant
solvency and liquidity risks involved in delivering the strategic
objectives within our business model. The assessment has been
made using a period of three years commencing on 1 January 2019,
which is consistent with the Group’s budgeting cycle. Most of the
Group’s contracts follow a life cycle of three years or less and the
majority of the Group’s secured and framework order book falls
within this time period.
The directors have compiled cash flow projections on a bottom up
basis incorporating each division’s detailed business plans. At Group
level, the base case financial projections assume modest revenue
growth and an improvement in gross margin.
Operating cash flows are assumed to broadly follow forecast
profitability in the Group’s construction activities, but are much
more independently variable in regeneration, driven by the timing
of construction spend and programmed completions on schemes.
The Group has secured £180m of committed revolving credit facilities
which mature in 2022. Due to the continued strong cash performance
of the Group, the facilities were not utilised in the period; however,
they provide ongoing funding headroom and financial security for the
Group throughout the period reviewed. The Group has no anticipated
defined benefit pension funding requirements.
The impact of a number of downside scenarios on the Group’s
funding headroom (including financial covenants within committed
bank facilities) has been modelled based on the Group’s principal
risks. The scenarios are focused on the risks that are scored as
most likely to occur or that would have the greatest potential severity
should they occur and include declining revenue, failure to improve
gross margin from current levels, a decline in gross margin and
deterioration in working capital, in particular client receivables.
The Board has also considered a range of potential mitigating
actions that may be available if one or more of the scenarios arose.
As required by provision C.2.2 of the UK Corporate Governance Code,
Operating cash flows are assumed to broadly follow forecast
the directors have assessed the prospects and financial viability of the
profitability in the Group’s construction activities, but are much
Group and have concluded that they have a reasonable expectation
more independently variable in regeneration, driven by the timing
that the Group will be able to continue in operation and meet its
of construction spend and programmed completions on schemes.
liabilities as they fall due over the period of the assessment. This
assessment took account of the Group’s current position and the
The Group has secured £180m of committed revolving credit facilities
potential financial and reputational impact of the principal risks
which mature in 2022. Due to the continued strong cash performance
(as set out on pages 22 to 31) on the Group’s ability to deliver the
of the Group, the facilities were not utilised in the period; however,
Company’s business plan. This describes and tests the significant
they provide ongoing funding headroom and financial security for the
solvency and liquidity risks involved in delivering the strategic
Group throughout the period reviewed. The Group has no anticipated
objectives within our business model. The assessment has been
defined benefit pension funding requirements.
made using a period of three years commencing on 1 January 2019,
which is consistent with the Group’s budgeting cycle. Most of the
The impact of a number of downside scenarios on the Group’s
Group’s contracts follow a life cycle of three years or less and the
funding headroom (including financial covenants within committed
majority of the Group’s secured and framework order book falls
bank facilities) has been modelled based on the Group’s principal
within this time period.
risks. The scenarios are focused on the risks that are scored as
most likely to occur or that would have the greatest potential severity
The directors have compiled cash flow projections on a bottom up
should they occur and include declining revenue, failure to improve
basis incorporating each division’s detailed business plans. At Group
gross margin from current levels, a decline in gross margin and
level, the base case financial projections assume modest revenue
deterioration in working capital, in particular client receivables.
growth and an improvement in gross margin.
The Board has also considered a range of potential mitigating
actions that may be available if one or more of the scenarios arose.
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MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Viability statement
Non-financial reporting statement
We aim to comply with the non-financial reporting regulations
contained in sections 414CA and 414CB of the Companies Act 2006,
as shown in the table below. In addition, we publish information
under the CDP (formerly the Carbon Disclosure Project), the Global
Reporting Initiative, and the Financial Reporting Council’s guidance
on the strategic report.
Our due diligence with regard to ‘environmental matters’, ‘employees’
and ‘social matters’ is driven by our Total Commitments, as outlined
on page 3. Our performance against each Total Commitment is set
out in our 2018 responsible business report. Further information
on these matters can be found in the description of our business
model on pages 7 to 9 and our key performance indicators on pages
12 to 13.
Due diligence in
pursuance of policies
Our carbon emissions data is
independently verified by supply
chain risk management company,
Achilles (see page 48).
Outcomes of policies
and impacts of activities
See pages 48 to 49 for
further detail on environmental
matters including our carbon
emissions data.
Related principal risks
See page 26.
A strong performance
in environmental matters
increases our ability to
win work and attract
talented employees.
See page 27.
The Board regularly reviews the
diversity statistics in our ‘people
report’, the level of training
provided and our employee
engagement.
All policies are communicated
to every employee in the Group
and regularly reviewed.
Developing and retaining
talented people is one of our
strategic objectives (see page 11).
A diverse and qualified workforce
helps us achieve two further
strategic objectives: winning
in our target markets and
pursuing innovation.
See pages 3, 8, 10, 12 and 47 to
48 for further detail on how we
protect, develop and engage with
our employees.
Environmental
matters
Employees
Policies
Our environmental policy states
our commitment to minimising the
impact of our activities on the natural
environment and communities
in which we work. Each division
implements ISO 14001 environmental
management systems to ensure that
we protect the natural environment;
reduce waste and energy consumption;
source construction materials
responsibly; minimise disturbance;
and train our employees and
subcontractors on environmental
issues and controls. Our supplemental
timber policy requires timber to be
procured from sustainable sources.
We aim to be an inclusive employer
and have a wide range of policies,
including equal opportunities and
dignity at work; maternity; paternity
and parental leave; adoption; and
family emergency.
Our equal opportunities and dignity at
work policy sets out our commitment
to an open and inclusive culture. Our
ethics policy requires employees to
maintain the highest standards of
integrity and ethics in everything
they do. Our health and safety policy
commits to providing a safe and
healthy working environment.
Our whistleblowing policy sets out
the process for raising concerns and
commits to protecting employees
and others who report, in good faith,
suspected wrongdoing.
Our whistleblowing procedures
are regularly monitored and
reviewed by the audit committee.
In 2018, we received 3.64
whistleblowing reports per 1,000
employees against a benchmark
of 2.4, which demonstrates our
culture of openness and trust in
our processes. All concerns were
fully investigated.
We currently run two social
enterprises to provide local
residents with training and
employment opportunities:
BasWorx and All Together
Cumbria. See our 2018
responsible business report
for more information.
More than £345,000 was
donated in the year to charity
by the divisions.
Social matters are not
currently regarded as a
principal risk to the Group.
However, each division carries
out regular risk assessments
to identify those areas of its
business and markets that
may be susceptible to risk,
and embeds appropriate
procedures in day-to-day
operations to manage it.
Social matters
We are committed to providing a
better built environment for all. A large
proportion of our work is for the public
sector and therefore falls under the
Social Value Act 2012.
A core activity of the Group is
regenerating urban areas to
provide mixed-use development
including housing for local
communities.
Our divisions operate corporate
volunteering schemes where
employees are given a day’s paid
leave per year to volunteer with a
registered charity.
Our divisions support requests
for charity donations and offer
financial contributions, employee
time and goods in kind. For
example, project teams are
assisted in restoring disused
community facilities.
34
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MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Human rights
Policies
We are compliant with UK legislation
on human rights, and this is
supplemented by our ethics policy.
Our equal opportunities and dignity
at work policy prohibits harassment,
victimisation and bullying, and our
grievance policy sets out formal
grievance procedures. Our modern
slavery statement is published on
our website.
Due diligence in
pursuance of policies
Adherence to our ethics
and other human rights related
policies is regularly monitored.
Ultimate oversight belongs to
the Board, audit committee and
our Group general counsel.
Outcomes of policies
and impacts of activities
Employees complete an
e-learning module on
modern slavery.
No incidences in the Group of
human rights abuse or modern
slavery have been identified.
Anti-corruption
and anti-bribery
Our ethics policy states that we will
not tolerate any form of bribery
or corruption. In addition, we have
a gifts and hospitality policy that
provides guidance to create
transparency and avoid any risk
of breaching the Bribery Act 2010.
Divisional senior managers
are required to maintain a culture
in which bribery and corruption
are unacceptable. Each division
has its own procedures for
applying the Group’s policies
and managers are required
to be conversant with
government guidance.
Employees complete e-learning
modules on anti-bribery
and corruption as well as
competition law.
No incidences of bribery or
corruption in the Group have
been identified.
Related principal risks
Human rights breaches are
not considered a principal
risk. However, there is a risk
of breach by an overseas
supplier and a risk of people
working on our sites without
the legal right to work in the
UK. We require all suppliers
to comply with legislation
such as the Modern Slavery
Act 2015 and to carry out
checks on rights to work, and
we expect that they require
the same of their supply chain.
We do not regard corruption
and bribery to be a principal
risk to the Group.
Approval of strategic report
This strategic report was approved by the Board and signed on its
behalf by:
John Morgan
Chief Executive
21 February 2019
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35
GOVERNANCE
GOVERNANCE
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MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Governance
Policies
pursuance of policies
and impacts of activities
Related principal risks
Due diligence in
Outcomes of policies
Contents
Board of directors
Group management team
Directors’ and corporate governance report
Remuneration report
36
37
38
59
Human rights
We are compliant with UK legislation
Adherence to our ethics
Employees complete an
on human rights, and this is
and other human rights related
e-learning module on
supplemented by our ethics policy.
policies is regularly monitored.
modern slavery.
Our equal opportunities and dignity
Ultimate oversight belongs to
at work policy prohibits harassment,
the Board, audit committee and
victimisation and bullying, and our
our Group general counsel.
No incidences in the Group of
human rights abuse or modern
slavery have been identified.
grievance policy sets out formal
grievance procedures. Our modern
slavery statement is published on
our website.
Human rights breaches are
not considered a principal
risk. However, there is a risk
of breach by an overseas
supplier and a risk of people
working on our sites without
the legal right to work in the
UK. We require all suppliers
to comply with legislation
such as the Modern Slavery
Act 2015 and to carry out
checks on rights to work, and
we expect that they require
the same of their supply chain.
Anti-corruption
and anti-bribery
Our ethics policy states that we will
Divisional senior managers
Employees complete e-learning
We do not regard corruption
not tolerate any form of bribery
are required to maintain a culture
modules on anti-bribery
and bribery to be a principal
or corruption. In addition, we have
in which bribery and corruption
and corruption as well as
risk to the Group.
a gifts and hospitality policy that
are unacceptable. Each division
competition law.
provides guidance to create
has its own procedures for
transparency and avoid any risk
applying the Group’s policies
of breaching the Bribery Act 2010.
and managers are required
No incidences of bribery or
corruption in the Group have
been identified.
to be conversant with
government guidance.
Approval of strategic report
This strategic report was approved by the Board and signed on its
behalf by:
John Morgan
Chief Executive
21 February 2019
36
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36
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Board of directors
The Board is responsible to all stakeholders for the long-term
success of the Group.
Michael Findlay
Chair
Appointed: October 2016
Committee membership: nomination (Chair)
Skills, competencies and experience
Michael has 28 years of experience in investment banking and has
advised the boards of many leading UK public companies on a wide
range of strategic, finance and governance matters.
Other roles
Michael is chair of Fin Capital Ltd, a non-executive director of The
International Exhibition Co-Operative Wine Society Ltd, and was
appointed non-executive director of Jarrold & Sons Limited in January
2019. Michael was previously the co-head of investment banking for
the UK and Ireland at Bank of America Merrill Lynch and the senior
independent director at UK Mail Group PLC.
John Morgan
Chief Executive
Appointed: October 1994
Skills, competencies and experience
John was appointed as chief executive in November 2012. He
has in-depth knowledge of both the construction and regeneration
markets with significant leadership skills and experience. John
champions the Group’s decentralised business model that empowers
our divisions to challenge the status quo, keep innovating and winning
in their respective markets.
Other roles
John co-founded Morgan Lovell in 1977 which then combined with
William Sindall plc in 1994 to form Morgan Sindall Group plc. He was
formerly chief executive from 1994 to 2000 and executive chair from
2000 to 2012.
Steve Crummett
Finance Director
Appointed: February 2013
Skills, competencies and experience
Steve is a qualified chartered accountant and brings wide-ranging
financial, accounting and UK public company experience.
Other roles
Steve was finance director of Essentra plc from 2008 to 2012,
having previously held senior finance roles with a number of listed
companies. Steve has been chair of the audit committee and a
non-executive director of Consort Medical plc since June 2012.
Malcolm Cooper
Non-executive Director
Appointed: November 2015
Committee membership: audit (Chair); health, safety and
environment; remuneration (Chair from 4 May 2018)
Skills, competencies and experience
Malcolm is a qualified accountant and an experienced FTSE 250
audit committee chair. He has an extensive background in corporate
finance and experience of the property industry.
Other roles
Malcolm is currently senior independent director and audit committee
chair at CLS Holdings plc and non-executive director of MORhomes plc.
His recent executive roles include managing director of National Grid
Property, managing the sale of National Grid’s gas distribution business,
and global tax and treasury director of National Grid. Malcolm was
previously a non-executive director of St William Homes LLP, president
of the Association of Corporate Treasurers and a member of the
Financial Conduct Authority’s Listing Authority Advisory Panel.
Tracey Killen
Non-executive Director
Appointed: May 2017
Committee membership: audit; nomination; remuneration
(Chair from 4 May 2018)
Skills, competencies and experience
Tracey has wide-ranging expertise in the retail sector and extensive
corporate and main board experience, including nominations,
remuneration and corporate responsibility board sub-committees,
the development of strategy and business planning and
corporate governance.
Other roles
Tracey is director of personnel for the John Lewis Partnership.
She is a main board director and a member of the executive team
and leads on shaping and delivering a distinctive and competitive
employment proposition. In addition, as a main board director Tracey
has collective responsibility for the performance of the business and
the effective operation of the Partnership’s unique co-ownership
model. Tracey is chair of the Golden Jubilee Trust for the Partnership,
providing opportunities for partners and charities alike.
David Lowden
Non-executive Director
Appointed: September 2018
Committee membership: audit; nomination; remuneration
Skills, competencies and experience
David is a highly experienced non-executive director, senior
independent director and chair of UK-listed companies. He has
experience in the roles of finance director and chief executive, where
he supported growth and profitability through the efficient design of
business operations and appropriate use of systems and processes.
Other roles
David is chair of the board of FTSE 250 PageGroup plc, having
previously chaired the remuneration committee for three years.
He was appointed as non-executive director of Huntsworth plc
on 1 January 2019 and will become chair on 6 March 2019. David is
currently chair of the audit and risk committee at William Hill plc and
will be stepping down from this role on 4 March. He was formerly
senior independent director of Berendsen, and was chief executive
of Taylor Nelson Sofres plc, having joined as group finance director in
1999. David has spent his career working for a number of companies
in senior finance roles, including as group finance director at Asprey
plc prior to joining Taylor Nelson Sofres.
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GOVERNANCE
GOVERNANCE
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MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Board of directors
Group management team
The Board is responsible to all stakeholders for the long-term
Skills, competencies and experience
success of the Group.
Michael Findlay
Chair
Appointed: October 2016
Committee membership: nomination (Chair)
Skills, competencies and experience
Michael has 28 years of experience in investment banking and has
advised the boards of many leading UK public companies on a wide
range of strategic, finance and governance matters.
Malcolm is a qualified accountant and an experienced FTSE 250
audit committee chair. He has an extensive background in corporate
finance and experience of the property industry.
Other roles
Malcolm is currently senior independent director and audit committee
chair at CLS Holdings plc and non-executive director of MORhomes plc.
His recent executive roles include managing director of National Grid
Property, managing the sale of National Grid’s gas distribution business,
and global tax and treasury director of National Grid. Malcolm was
previously a non-executive director of St William Homes LLP, president
of the Association of Corporate Treasurers and a member of the
Financial Conduct Authority’s Listing Authority Advisory Panel.
Other roles
Michael is chair of Fin Capital Ltd, a non-executive director of The
International Exhibition Co-Operative Wine Society Ltd, and was
appointed non-executive director of Jarrold & Sons Limited in January
Tracey Killen
Non-executive Director
2019. Michael was previously the co-head of investment banking for
Appointed: May 2017
the UK and Ireland at Bank of America Merrill Lynch and the senior
Committee membership: audit; nomination; remuneration
independent director at UK Mail Group PLC.
(Chair from 4 May 2018)
Skills, competencies and experience
John was appointed as chief executive in November 2012. He
has in-depth knowledge of both the construction and regeneration
markets with significant leadership skills and experience. John
champions the Group’s decentralised business model that empowers
our divisions to challenge the status quo, keep innovating and winning
corporate governance.
Other roles
John co-founded Morgan Lovell in 1977 which then combined with
William Sindall plc in 1994 to form Morgan Sindall Group plc. He was
formerly chief executive from 1994 to 2000 and executive chair from
John Morgan
Chief Executive
Appointed: October 1994
in their respective markets.
Other roles
2000 to 2012.
Steve Crummett
Finance Director
Appointed: February 2013
Skills, competencies and experience
Steve is a qualified chartered accountant and brings wide-ranging
financial, accounting and UK public company experience.
Other roles
Steve was finance director of Essentra plc from 2008 to 2012,
having previously held senior finance roles with a number of listed
companies. Steve has been chair of the audit committee and a
non-executive director of Consort Medical plc since June 2012.
Malcolm Cooper
Non-executive Director
Appointed: November 2015
Committee membership: audit (Chair); health, safety and
environment; remuneration (Chair from 4 May 2018)
Skills, competencies and experience
Tracey has wide-ranging expertise in the retail sector and extensive
corporate and main board experience, including nominations,
remuneration and corporate responsibility board sub-committees,
the development of strategy and business planning and
Tracey is director of personnel for the John Lewis Partnership.
She is a main board director and a member of the executive team
and leads on shaping and delivering a distinctive and competitive
employment proposition. In addition, as a main board director Tracey
has collective responsibility for the performance of the business and
the effective operation of the Partnership’s unique co-ownership
model. Tracey is chair of the Golden Jubilee Trust for the Partnership,
providing opportunities for partners and charities alike.
David Lowden
Non-executive Director
Appointed: September 2018
Committee membership: audit; nomination; remuneration
Skills, competencies and experience
David is a highly experienced non-executive director, senior
independent director and chair of UK-listed companies. He has
experience in the roles of finance director and chief executive, where
he supported growth and profitability through the efficient design of
business operations and appropriate use of systems and processes.
Other roles
David is chair of the board of FTSE 250 PageGroup plc, having
previously chaired the remuneration committee for three years.
He was appointed as non-executive director of Huntsworth plc
on 1 January 2019 and will become chair on 6 March 2019. David is
currently chair of the audit and risk committee at William Hill plc and
will be stepping down from this role on 4 March. He was formerly
senior independent director of Berendsen, and was chief executive
of Taylor Nelson Sofres plc, having joined as group finance director in
1999. David has spent his career working for a number of companies
in senior finance roles, including as group finance director at Asprey
plc prior to joining Taylor Nelson Sofres.
The executive directors are supported by the Group management
team, which meets regularly to discuss strategic and operational
matters affecting the Group as a whole.
John Morgan
Chief Executive
See page 36 for biography.
Steve Crummett
Finance Director
See page 36 for biography.
Clare Sheridan
Company Secretary
Clare has been with the Group for more than 20 years, and was
appointed company secretary in 2014 having previously been deputy
company secretary. She is a member of the Group’s risk, and health,
safety and environment committees; director of the captive insurance
company; and trustee of the pension scheme. Clare is a qualified
chartered secretary.
Andy Saul
Group Commercial Director
Andy joined the Group in January 2014. He was previously managing
director of Bullock Construction from 2010 to 2013. Prior to that Andy’s
career included 20 years with Kier Group, culminating in the role
of commercial director at Kier’s construction division where he had
overall responsibility for the commercial and procurement functions.
Pat Boyle
Managing Director, Construction
Pat holds overall responsibility for Construction & Infrastructure’s
construction business. A member of the Chartered Institute of
Building, he joined the Group in 2014 from Lend Lease, where he
was most recently head of their public sector construction division.
Prior to this, Pat held various wide-ranging senior level roles within
Laing O’Rourke, including regional director, group HR director and
managing director of Select Plant Hire.
Simon Smith
Managing Director, Infrastructure
Simon is a chartered quantity surveyor with 30 years’ multi-sector
experience. He joined the Group in 2011 and was appointed as
managing director of Construction & Infrastructure’s infrastructure
business in 2017. Simon holds overall responsibility for the
infrastructure business which includes aviation, rail, highways,
nuclear, energy and water. In addition, Simon has responsibility
for our in-house plant and engineering businesses.
Martin Lubieniecki
Managing Director, Design
Martin joined the Group in October 2015 from Colliers International
where he was the UK chief operating officer. Prior to this he had been
the EMEA chief operating officer for CB Richard Ellis, bringing over 15
years’ property professional services experience to the Group. Martin’s
early career started at PricewaterhouseCoopers and McKinsey before
taking senior roles at Sears Group and Hilton International. Martin is
a qualified chartered accountant.
Chris Booth
Managing Director, Fit Out
Chris has overall responsibility for the Fit Out division, including the
Overbury and Morgan Lovell brands. Chris joined Overbury in 1994,
progressing through divisional management (1998-2003) to become
managing director of Overbury in 2003. He was appointed to the Fit
Out divisional board as chief operating officer in 2010 and managing
director in 2013.
Alan Hayward
Managing Director, Property Services
Alan joined the Group in August 2017 with over 15 years’ experience
in the sector. His previous roles included positions both as finance
director and managing director in national building, infrastructure
and facilities management businesses. Alan has experience across
a range of sectors including defence, health, corporate and housing.
Steve Coleby
Managing Director, Partnership Housing
Steve joined the Group in April 2018, bringing with him a wealth
of knowledge and experience in construction, and has focused on
developing a clear strategy for Partnership Housing. Previously Steve
spent 25 years at Laing O’Rourke, including as commercial director
of its £2.5bn European hub, managing director of UK infrastructure,
and managing director of its UK construction business. Steve holds
an RICS fellowship.
Matt Crompton
Managing Director, Urban Regeneration
Matt joined the Group when we acquired Muse Developments
from AMEC in July 2007, where he started in 1990 as a senior
development surveyor. Matt is responsible for the division’s activities
in the Northern region. He is also on the board of English Cities
Fund (ECf), a £100m mixed-use regeneration vehicle owned by Muse
Developments, Legal & General and Homes England. His earlier career
included development positions at both London & Metropolitan and
Chestergate Seddon.
Wes Erlam
Managing Director, Investments
Wes joined the Group in May 2008 to work for Urban Regeneration
as a development manager. Having spent 10 years with the division
and progressing to development director, he moved across to the
board of Investments in April 2018, and became managing director
in 2019. Wes is responsible for overseeing Investments’ development
and capital activities. He is a chartered surveyor with over 20 years’
experience in land, development and mixed-use regeneration.
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Directors’ and corporate
governance report
This report explains our approach to governance in practice and
the work the Board has done throughout the year. It also includes
reports from each of the committee chairs which provide detail
on key matters addressed by the committees during the year.
Governance framework
The Board is responsible to all stakeholders, including our shareholders,
for the approval and delivery of our strategic objectives to ensure
the Group’s long-term success. Responsibility for developing and
implementing our strategy and commercial objectives is delegated to
the chief executive who is supported by the finance director and Group
management team. The Board is our principal decision-making body,
and in line with the UK Corporate Governance Code1, delegates certain
roles and responsibilities to its various committees. The committees
assist the Board by fulfilling their delegated responsibilities, focusing
on specific activities throughout the year, reporting to the Board
on decisions and actions taken, and making any necessary
recommendations in line with their terms of reference. The terms
of reference of each committee comply with the provisions of the
Corporate Governance Code.
Day-to-day management of the Group is delegated to the executive
directors, who are supported by the Group management team (see
page 37 for details of the members). The Group management team
meets regularly to consider operational matters affecting the Group
as a whole, including risk, health, safety and environment, strategy,
the Group budget and our responsible business strategy. We also
have several forums with representatives from across the divisions.
These include a health and safety forum, HR forum and commercial
directors’ forum. Each forum meets on a regular basis, focuses on
specific topics, and acts as a channel for sharing ideas and best
practice. The forums assist the Board and Group management team
in ensuring that good governance is adopted at all levels throughout
the Group. There is a clear division of responsibilities between the
running of the Board and the executive running of the business
(see page 39). The Board has identified certain matters that are
only for its decision-making which are set out in a formal schedule
(see panel on page 39).
Culture
Our culture is fundamental to the successful delivery of our strategic
objectives. We are committed to being a responsible business and
conducting all of our activities to the highest standards of integrity and
honesty, in an open and ethical way. To support this, the Board ensures
that the tone is set from the top and our governance framework includes
clear policies for all employees on the Group’s expected standards and the
restrictions on which certain authority is delegated. This ensures that the
overall approach to governance is Board-led while at the same time
supporting our philosophy of decentralisation which gives our divisions
the autonomy to develop initiatives to meet their own markets. Ensuring
that each of our divisions supports the Group-led training and specific
training relevant to their employees, empowers them to work together
in a way that positively impacts on productivity and performance. The
executive directors ensure that our core values are embedded
throughout the Group by meeting regularly with all divisions,
attending and participating in their employee conferences and running
sessions at the leadership development programme, where participants
are asked to consider what the core values mean for them individually
and for the Group as a whole.
The Board regularly monitors various indicators of our culture which
include our health and safety performance, matters raised through
our independent ‘raising concerns’ (whistleblowing) hotline, employee
turnover and stakeholder engagement (see pages 10, 43 and 54). Our
measures for ensuring good corporate governance practice across the
Group include regular internal audit reviews, encouraging employees
to speak up and taking appropriate action where behaviour does not
meet expectations.
1 As a UK premium-listed company, we have adopted a governance structure based on the
principles of the UK Corporate Governance Code (the Corporate Governance Code) published
in April 2016, which is available on the Financial Reporting Council’s website at frc.org.uk. Further
details of how we have applied the Corporate Governance Code’s principles and complied with
its provisions are set out in this report and the remuneration report.
The Board considers that it, and the Company, were compliant throughout the accounting period
with the main principles and relevant provisions of the Corporate Governance Code applicable to
premium-listed companies.
The Board also notes that the FRC published a new UK Corporate Governance Code in July 2018
which applies to accounting periods of the Company beginning on or after 1 January 2019. The
Board has been taking the necessary steps to ensure that the Group is able to discharge its
obligations under the new Corporate Governance Code effectively.
Our governance framework
Board
Executive directors
Board committees
Executive committees
Group
management
team
Risk committee
Audit
Health,
safety and
environment
Nomination
Remuneration
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MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Directors’ and corporate
governance report
This report explains our approach to governance in practice and
the work the Board has done throughout the year. It also includes
reports from each of the committee chairs which provide detail
on key matters addressed by the committees during the year.
Culture
Our culture is fundamental to the successful delivery of our strategic
objectives. We are committed to being a responsible business and
conducting all of our activities to the highest standards of integrity and
honesty, in an open and ethical way. To support this, the Board ensures
that the tone is set from the top and our governance framework includes
Governance framework
The Board is responsible to all stakeholders, including our shareholders,
clear policies for all employees on the Group’s expected standards and the
for the approval and delivery of our strategic objectives to ensure
restrictions on which certain authority is delegated. This ensures that the
the Group’s long-term success. Responsibility for developing and
overall approach to governance is Board-led while at the same time
implementing our strategy and commercial objectives is delegated to
supporting our philosophy of decentralisation which gives our divisions
the chief executive who is supported by the finance director and Group
the autonomy to develop initiatives to meet their own markets. Ensuring
management team. The Board is our principal decision-making body,
that each of our divisions supports the Group-led training and specific
and in line with the UK Corporate Governance Code1, delegates certain
training relevant to their employees, empowers them to work together
roles and responsibilities to its various committees. The committees
in a way that positively impacts on productivity and performance. The
assist the Board by fulfilling their delegated responsibilities, focusing
executive directors ensure that our core values are embedded
on specific activities throughout the year, reporting to the Board
throughout the Group by meeting regularly with all divisions,
on decisions and actions taken, and making any necessary
attending and participating in their employee conferences and running
recommendations in line with their terms of reference. The terms
sessions at the leadership development programme, where participants
of reference of each committee comply with the provisions of the
are asked to consider what the core values mean for them individually
Corporate Governance Code.
and for the Group as a whole.
Day-to-day management of the Group is delegated to the executive
The Board regularly monitors various indicators of our culture which
directors, who are supported by the Group management team (see
include our health and safety performance, matters raised through
page 37 for details of the members). The Group management team
our independent ‘raising concerns’ (whistleblowing) hotline, employee
meets regularly to consider operational matters affecting the Group
turnover and stakeholder engagement (see pages 10, 43 and 54). Our
as a whole, including risk, health, safety and environment, strategy,
measures for ensuring good corporate governance practice across the
the Group budget and our responsible business strategy. We also
Group include regular internal audit reviews, encouraging employees
have several forums with representatives from across the divisions.
to speak up and taking appropriate action where behaviour does not
These include a health and safety forum, HR forum and commercial
meet expectations.
directors’ forum. Each forum meets on a regular basis, focuses on
specific topics, and acts as a channel for sharing ideas and best
practice. The forums assist the Board and Group management team
in ensuring that good governance is adopted at all levels throughout
the Group. There is a clear division of responsibilities between the
running of the Board and the executive running of the business
(see page 39). The Board has identified certain matters that are
only for its decision-making which are set out in a formal schedule
premium-listed companies.
(see panel on page 39).
1 As a UK premium-listed company, we have adopted a governance structure based on the
principles of the UK Corporate Governance Code (the Corporate Governance Code) published
in April 2016, which is available on the Financial Reporting Council’s website at frc.org.uk. Further
details of how we have applied the Corporate Governance Code’s principles and complied with
its provisions are set out in this report and the remuneration report.
The Board considers that it, and the Company, were compliant throughout the accounting period
with the main principles and relevant provisions of the Corporate Governance Code applicable to
The Board also notes that the FRC published a new UK Corporate Governance Code in July 2018
which applies to accounting periods of the Company beginning on or after 1 January 2019. The
Board has been taking the necessary steps to ensure that the Group is able to discharge its
obligations under the new Corporate Governance Code effectively.
Our governance framework
Board’s key roles and responsibilities
Chair1
• leads our Board and is responsible for its effectiveness;
• is responsible for setting agendas for Board meetings and for
timely dissemination of information to the Board, in consultation
with the chief executive, finance director and company secretary;
• facilitates contributions from all directors; and
• ensures effective communication with our shareholders and
other stakeholders.
Chief executive1
• develops and implements the Group strategy and commercial
objectives as approved by the Board;
• leads the Group management team;
• ensures the Company’s core values and culture are embedded
throughout the Group; and
• together with the nomination committee is responsible for
ensuring that an orderly succession planning process is in place
for the Board; and
• leads the appraisal of the chair’s performance with the non-
executive directors.
Non-executive directors
• constructively challenge the executive directors in all areas
and help develop proposals on strategy;
• monitor delivery of the strategy within the risk and control
framework set by the Board;
• satisfy themselves on the integrity of the financial information
and the effectiveness of financial controls and risk management
systems; and
• are responsible for determining appropriate levels of
• promotes and conducts the affairs of the Company to the highest
remuneration for the executive directors.
standards of integrity, probity and corporate governance.
Finance director
• manages the Group’s financial affairs;
• oversees the Group’s relationship with investors and analysts; and
• supports the chief executive in the implementation and
Company secretary
• acts as secretary to the Board and its committees, ensuring sound
information flows to the Board and between senior management
and the non-executive directors;
• is responsible for advising the Board on corporate governance
achievement of Group strategy.
matters;
Senior independent director
In addition to his responsibilities as a non-executive director,
the senior independent director:
• supports the chair in the delivery of his objectives;
• is available to shareholders should they have a concern which
has not been resolved through the chair or chief executive or
for which contact through those channels is not appropriate;
• facilitates a comprehensive induction for newly appointed
directors tailored to individual requirements;
• is responsible for compliance with Board procedures;
• coordinates the performance evaluation of the Board; and
• provides advice and services to the Board.
1 There is a clear division of responsibilities between the chair and the chief executive,
which is set out in writing and agreed by the Board.
Leadership
The Board’s role
Our Board is responsible for ensuring the sound running of the
Group for all our stakeholders in accordance with best practice
corporate governance. The Board ensures we have an appropriate
governance structure to facilitate effective, entrepreneurial and
prudent management that can deliver the long-term success of the
Group. As outlined above and demonstrated in our strategic report,
our core values and Total Commitments are at the heart of everything
we do and define the qualities which underpin our culture, values
and ethics.
The Board’s key responsibilities include:
• setting the strategic direction and governance framework of the Group;
• ensuring that the necessary financial, technical and human
resources are in place;
• establishing and embedding our culture, values and ethics to
ensure that the appropriate corporate governance structure is in
place to prevent misconduct and breach of ethical practices; and
• reporting to shareholders on its stewardship of the Group.
The Board monitors and reviews all significant aspects of the
Group’s activities, including overall internal control and risk
management systems and succession planning, and oversees
the executive management.
Formal schedule of matters reserved for the Board
There are documented processes in place regarding the Board’s
activities; matters specifically reserved for its decision-making;
the role of and authority delegated to the chief executive; the
accountability of the chief executive for that authority; and
guidance on managing the relationship between the Board
and the chief executive. These processes are reviewed annually.
A summary of the matters required to be brought to the Board’s
attention are:
• strategy;
• risk management and internal controls;
• structure and capital;
• financial reporting and controls;
• communication, including ensuring a satisfactory dialogue
with shareholders;
• Board membership and other key appointments;
• approval of any conflicts of interest;
• remuneration for the executive directors;
• delegation of authority including the Group's delegated
authorities process; and
• corporate governance matters including a review of the
effectiveness of the Board and its committees.
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A formal programme of meetings is put in place each year to ensure
that the Board is able to allocate sufficient time to each of the matters
reserved for its decision-making. The programme allows the Board to
plan its meetings while being sufficiently flexible to allow items to be
added should they arise. This enables Board members to use their
time together more effectively. The Board’s key activities in 2018 are
set out below. There is a process in place whereby key matters can
be escalated to the Board outside of the formal programme of
meetings and the executive management keeps the Board updated
with interim Board reports in between the scheduled meetings.
Key activities in 2018
Strategy
• comprehensively reviewed progress against strategy; and
• attended presentations from each divisional managing director
on their strategic plans.
Risk management and internal controls
• reviewed and monitored the Group’s safety performance;
• reviewed and approved the risk appetite of the Group;
• reviewed the appropriateness of the Group’s risk management
framework; and
• reviewed the Group’s cyber security arrangements.
Board effectiveness
• reviewed the effectiveness of the Board, the Board’s committees
and each individual director;
• reviewed the composition and skills required of the Board; and
• appointed a new non-executive director, David Lowden.
Performance management
• set the Group budget and tracked performance against agreed KPIs;
• monitored market trends, supported by comparative data and
customer insight;
• approved all financial results statements and dividend payments;
and
• assessed the going concern and longer-term viability of the Group.
Culture and values
• reviewed the Group’s gender pay gap data and report;
• discussed divisional initiatives to improve diversity and inclusion
within their businesses, including a ‘People Framework’ approved
by the nomination committee (see page 45);
• increased its focus on the non-executives’ engagement with the
divisions; and
• reviewed the Group’s performance against our Total Commitments.
Governance
• approved the Group’s statement of compliance in accordance with
the Modern Slavery Act;
• reviewed and reconfirmed the Group’s tax strategy; and
• reviewed the schedule of matters reserved for the Board.
In addition to the seven formal meetings held during the year, the
Board meets informally several times a year to allow the directors to
spend more time together and discuss specific areas of the business
with the Group management team and other senior executives, as
set out below.
Strategy day
Every October the Board holds a strategy day to review the Group’s
five-year strategic plan and the divisional strategic plans and priorities.
In 2018, the chair, chief executive and non-executive directors each
met with managing directors of the divisions prior to the strategy day
to discuss their divisional strategic plans with them in detail. At the
October strategy meeting, the non-executive directors each provided
the Board with a summary of their observations and opinions on the
divisional plans.
The Board also reviewed the Group’s risk appetite at the strategy
meeting, to ensure that our risk appetite remains appropriate to our
strategy. As part of the review, the Board appraised a number of key
topics aligned to our strategy, by considering the level of the Group’s
current risk appetite for each topic against the current residual and
emerging risks, and whether any additional actions were necessary
as a result.
The risk appetite will be formally reviewed each year as part of the
strategy plan review.
Divisional meetings
Prior to the review of each division’s strategic plan, the chair and
the non-executive directors each made visits to the division whose
strategic plan they would be reviewing. These visits included meeting
with various employees from the division as well as making site
visits to at least one project.
In June and October 2018, the Board held an evening reception
with the directors and senior management teams of Investments
and Partnership Housing. These events allowed the non-executive
directors to meet operational managers and discuss a range of
topics in a less formal setting.
Senior management team conference
The chair and one of the non-executive directors attended our
senior management conference in October, which gave them the
opportunity to meet around 80 managers from across the Group
and gain insight into how best practice is shared between the
divisions. The 2018 conference focused on considering future
strategic opportunities for the Group and how to exploit technology,
including examples from each of the divisions of innovative
approaches being undertaken to future proof their business.
Additionally, the conference attendees made a site visit to our
regeneration project in Salford.
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A formal programme of meetings is put in place each year to ensure
In addition to the seven formal meetings held during the year, the
that the Board is able to allocate sufficient time to each of the matters
Board meets informally several times a year to allow the directors to
reserved for its decision-making. The programme allows the Board to
spend more time together and discuss specific areas of the business
plan its meetings while being sufficiently flexible to allow items to be
with the Group management team and other senior executives, as
added should they arise. This enables Board members to use their
set out below.
time together more effectively. The Board’s key activities in 2018 are
set out below. There is a process in place whereby key matters can
be escalated to the Board outside of the formal programme of
meetings and the executive management keeps the Board updated
with interim Board reports in between the scheduled meetings.
Key activities in 2018
Strategy
on their strategic plans.
• comprehensively reviewed progress against strategy; and
• attended presentations from each divisional managing director
divisional plans.
Risk management and internal controls
• reviewed and monitored the Group’s safety performance;
• reviewed and approved the risk appetite of the Group;
• reviewed the appropriateness of the Group’s risk management
framework; and
• reviewed the Group’s cyber security arrangements.
Strategy day
Every October the Board holds a strategy day to review the Group’s
five-year strategic plan and the divisional strategic plans and priorities.
In 2018, the chair, chief executive and non-executive directors each
met with managing directors of the divisions prior to the strategy day
to discuss their divisional strategic plans with them in detail. At the
October strategy meeting, the non-executive directors each provided
the Board with a summary of their observations and opinions on the
The Board also reviewed the Group’s risk appetite at the strategy
meeting, to ensure that our risk appetite remains appropriate to our
strategy. As part of the review, the Board appraised a number of key
topics aligned to our strategy, by considering the level of the Group’s
current risk appetite for each topic against the current residual and
emerging risks, and whether any additional actions were necessary
as a result.
The risk appetite will be formally reviewed each year as part of the
Board effectiveness
• reviewed the effectiveness of the Board, the Board’s committees
and each individual director;
• reviewed the composition and skills required of the Board; and
• appointed a new non-executive director, David Lowden.
strategy plan review.
Divisional meetings
Performance management
• set the Group budget and tracked performance against agreed KPIs;
• monitored market trends, supported by comparative data and
visits to at least one project.
Prior to the review of each division’s strategic plan, the chair and
the non-executive directors each made visits to the division whose
strategic plan they would be reviewing. These visits included meeting
with various employees from the division as well as making site
• approved all financial results statements and dividend payments;
customer insight;
and
• assessed the going concern and longer-term viability of the Group.
Culture and values
• reviewed the Group’s gender pay gap data and report;
• discussed divisional initiatives to improve diversity and inclusion
within their businesses, including a ‘People Framework’ approved
by the nomination committee (see page 45);
• increased its focus on the non-executives’ engagement with the
• reviewed the Group’s performance against our Total Commitments.
divisions; and
Governance
• approved the Group’s statement of compliance in accordance with
the Modern Slavery Act;
• reviewed and reconfirmed the Group’s tax strategy; and
• reviewed the schedule of matters reserved for the Board.
In June and October 2018, the Board held an evening reception
with the directors and senior management teams of Investments
and Partnership Housing. These events allowed the non-executive
directors to meet operational managers and discuss a range of
topics in a less formal setting.
Senior management team conference
The chair and one of the non-executive directors attended our
senior management conference in October, which gave them the
opportunity to meet around 80 managers from across the Group
and gain insight into how best practice is shared between the
divisions. The 2018 conference focused on considering future
strategic opportunities for the Group and how to exploit technology,
including examples from each of the divisions of innovative
approaches being undertaken to future proof their business.
Additionally, the conference attendees made a site visit to our
regeneration project in Salford.
Spread of key activities in the year
February (B)
• 2017 results and
dividend approved.
May (B)
• Annual general meeting.
June (B)
• Review of Group’s
modern slavery statement;
• Payment practices update;
and
• Property Services
business update.
August (B)
• Half year results and
interim dividend approved.
September (B)
• Divisional strategy reviews
and Board evaluation
results review.
October (B)
• Group strategy meeting
and risk appetite review.
November
• Reception for financial
December (B)
• 2019 budget approved.
analysts and institutional
investors with senior
management from across
the Group.
B = Board meeting
Attendance
Attendance of individual directors who held office during 2018 at scheduled Board and committee meetings is set out below. Sufficient time
is given at the end of each meeting for the chair to meet privately with the senior independent director and non-executive directors to discuss
any matters.
The chair met formally with the non-executive directors on seven occasions in the year without the executive directors present. No material
issues were raised at any of these meetings.
Total number of meetings
Michael Findlay1
John Morgan
Steve Crummett
Malcolm Cooper
Tracey Killen2
David Lowden3
Patrick De Smedt
Simon Gulliford4
Board
Audit
environment Nomination Remuneration
Health,
safety and
7
7
7
7
7
6
2
7
1
3
35
35
3
2
1
3
1
4
35
4
3
3
35
35
3
2
1
3
1
2
25
25
15
2
1
1
2
1
1 Michael Findlay attended all Board and nomination committee meetings during the year, and was also present at all meetings of the remuneration and audit committees and three meetings of the
HSE committee.
2 Tracey Killen was unable to attend the December meetings due to personal reasons. Tracey’s non-attendance was approved by the Board as a whole.
3 David Lowden was appointed as a director on 10 September 2018. He attended all Board and committee meetings following his appointment.
4 Simon Gulliford resigned as a director on 4 May 2018. Simon was unable to attend one Board and one committee meeting prior to his resignation due to a prior commitment relating to another
appointment. He missed the HSE committee meeting that took place prior to his resignation, due to sickness.
5 Attended by invitation.
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Effectiveness
Ongoing training and development
Training on the role and responsibilities of directors is offered
on appointment and subsequently as necessary.
Composition
As at the date of this report, the Board consists of the chair, two
executive directors and three non-executive directors. Biographical
details of each of the directors are given on page 36. David Lowden
will be standing for election at the 2019 annual general meeting
(AGM) as this is the first AGM following his appointment. Patrick
De Smedt retired from the Board with effect from 31 December 2018
and therefore will not offer himself for re-election. In accordance with
the Corporate Governance Code, all of the other directors will stand
for re-election at the forthcoming AGM.
As at the date of David Lowden’s appointment, both he and
Patrick De Smedt were non-executive directors of PageGroup plc.
Notwithstanding this relationship, and in view of Patrick’s planned
departure from the Group shortly following David’s appointment,
the Board determined David to be independent. All of the non-
executive directors are considered by the Board to be independent
in character and judgement and as at the date of this report, no
cross directorships exist between any of the directors. Individually,
each director acts in a way they consider will promote the long-term
success of the Group for the benefit of, and with regard to, the
interests of its various stakeholders.
See the nomination committee report on pages 44 to 46 for
further information.
Development, information and support
Newly-appointed directors receive a detailed information pack
describing our values and culture, as well as governance matters
relevant to the Group. They also participate in a comprehensive and
tailored induction programme which includes visits to our divisions
and meetings with senior divisional management. Following David
Lowden’s appointment to the Board in September 2018, his induction
programme contained each of these elements, as detailed below.
Induction of David Lowden
David’s induction included the following:
• Documentation pack containing information on:
– the Group, including risks, procedures relating to delegation
and limits of authority, and banking facilities;
– the Board;
– Group and divisional strategic plans;
– Board committees;
– compliance matters including conflicts of interest, the Market
Abuse Regulation and Bribery Act guidance; and
– Group policies.
• One-to-one meetings with:
– executive directors;
– the chair;
– the company secretary; and
– divisional managing directors.
• Visits/meetings as follows:
– various meetings with the divisional management directors
and their teams at their offices; and
– visits to a number of divisional projects.
This includes:
• briefing papers;
• divisional visits;
• strategic planning and review;
• one-to-one meetings with management;
• e-learning; and
• external seminars.
The chair reviews on an annual basis each of the director’s training
undertaken and any development needs.
The regular presentations from management and informal meetings
included in the Board programme increase the non-executive directors’
understanding of the Group and of construction and regeneration.
The company secretary provided updates to the Board during the
year on relevant governance matters, and on new legislation and
its impact on the Company. This included further information on
compliance with the General Data Protection Regulation and payment
practices reporting obligation and the new Corporate Governance
Code. The audit committee regularly considers new accounting
developments through presentations from management and the
external auditor.
All Board members completed the Group’s e-learning modules
issued during 2018 on the General Data Protection Regulation and
the Market Abuse Regulation, and refresher e-learning on anti-bribery
and corruption (with the exception of David Lowden who completed
full modules on all three subjects). Further details can be found
on page 54.
There are agreed procedures by which directors are able to take
independent professional advice, at the expense of the Company,
on matters relating to their duties. The directors also have access
to the advice and services of the company secretary, who attends
all Board and committee meetings.
Conflicts of interest
The Board has an agreed approach for dealing with the directors’
conflicts of interest duties under the Companies Act 2006.
Responsibility for authorising conflicts of interest in accordance with
the Company’s articles of association (‘the Articles’) is included in the
schedule of matters reserved for the Board. In December 2017, the
Board undertook its annual review of the potential conflict matters,
following this review, the Board confirmed that it was aware of no
situations that may or did give rise to conflicts with the interests
of the Company other than those that may arise from directors’
other directorships as disclosed on page 36.
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MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
See the nomination committee report on pages 44 to 46 for
external auditor.
further information.
Effectiveness
Composition
As at the date of this report, the Board consists of the chair, two
executive directors and three non-executive directors. Biographical
details of each of the directors are given on page 36. David Lowden
will be standing for election at the 2019 annual general meeting
(AGM) as this is the first AGM following his appointment. Patrick
De Smedt retired from the Board with effect from 31 December 2018
and therefore will not offer himself for re-election. In accordance with
the Corporate Governance Code, all of the other directors will stand
for re-election at the forthcoming AGM.
As at the date of David Lowden’s appointment, both he and
Patrick De Smedt were non-executive directors of PageGroup plc.
Notwithstanding this relationship, and in view of Patrick’s planned
departure from the Group shortly following David’s appointment,
the Board determined David to be independent. All of the non-
executive directors are considered by the Board to be independent
in character and judgement and as at the date of this report, no
cross directorships exist between any of the directors. Individually,
each director acts in a way they consider will promote the long-term
success of the Group for the benefit of, and with regard to, the
interests of its various stakeholders.
Development, information and support
Newly-appointed directors receive a detailed information pack
describing our values and culture, as well as governance matters
relevant to the Group. They also participate in a comprehensive and
tailored induction programme which includes visits to our divisions
and meetings with senior divisional management. Following David
Lowden’s appointment to the Board in September 2018, his induction
programme contained each of these elements, as detailed below.
Induction of David Lowden
David’s induction included the following:
• Documentation pack containing information on:
– the Group, including risks, procedures relating to delegation
and limits of authority, and banking facilities;
– the Board;
– Group and divisional strategic plans;
– Board committees;
– compliance matters including conflicts of interest, the Market
Abuse Regulation and Bribery Act guidance; and
– Group policies.
• One-to-one meetings with:
– executive directors;
– the chair;
– the company secretary; and
– divisional managing directors.
• Visits/meetings as follows:
– various meetings with the divisional management directors
and their teams at their offices; and
– visits to a number of divisional projects.
Ongoing training and development
Training on the role and responsibilities of directors is offered
on appointment and subsequently as necessary.
This includes:
• briefing papers;
• divisional visits;
• strategic planning and review;
• one-to-one meetings with management;
• e-learning; and
• external seminars.
The chair reviews on an annual basis each of the director’s training
undertaken and any development needs.
The regular presentations from management and informal meetings
included in the Board programme increase the non-executive directors’
understanding of the Group and of construction and regeneration.
The company secretary provided updates to the Board during the
year on relevant governance matters, and on new legislation and
its impact on the Company. This included further information on
compliance with the General Data Protection Regulation and payment
practices reporting obligation and the new Corporate Governance
Code. The audit committee regularly considers new accounting
developments through presentations from management and the
All Board members completed the Group’s e-learning modules
issued during 2018 on the General Data Protection Regulation and
the Market Abuse Regulation, and refresher e-learning on anti-bribery
and corruption (with the exception of David Lowden who completed
full modules on all three subjects). Further details can be found
on page 54.
There are agreed procedures by which directors are able to take
independent professional advice, at the expense of the Company,
on matters relating to their duties. The directors also have access
to the advice and services of the company secretary, who attends
all Board and committee meetings.
Conflicts of interest
The Board has an agreed approach for dealing with the directors’
conflicts of interest duties under the Companies Act 2006.
Responsibility for authorising conflicts of interest in accordance with
the Company’s articles of association (‘the Articles’) is included in the
schedule of matters reserved for the Board. In December 2017, the
Board undertook its annual review of the potential conflict matters,
following this review, the Board confirmed that it was aware of no
situations that may or did give rise to conflicts with the interests
of the Company other than those that may arise from directors’
other directorships as disclosed on page 36.
Board evaluation
The 2017 evaluation involved a review of the Board’s effectiveness
and that of the audit, nomination and remuneration committees to ensure
that the Board and its committees operate as effectively as possible. The
review provided recommendations of areas of focus to improve the
effectiveness of the Board. In 2018, the Board acted on each of the
recommendations made. The 2018 evaluation process is described below:
2018 evaluation process
Evaluation questionnaire developed based on the key areas of
focus agreed following the 2017 evaluation process.
Questionnaire circulated and responses collated and analysed by
the chair and company secretary.
Results reported to the Board.
Discussion held by the whole Board and agreement of areas of focus.
Chair reviewed with each director the contributions they had made.
The results of the 2018 Board evaluation confirmed that the Board
and its committees1 had acted on and implemented the various
actions resulting from the 2017 evaluation. Following a discussion
on the 2018 results and feedback, it was agreed that the Board would
consider various key topics for short training sessions prior to Board
meetings to support further the continuing training and development
of directors. It was agreed that these sessions would focus on:
• risk management;
• corporate governance;
• long-term investor and shareholder trends; and
• business environment.
Training sessions have been scheduled through 2019 as part
of the Board calendar. In addition, Mercer | Kepler, the Group’s
remuneration advisers, attended the remuneration committee
meeting in December 2018 to discuss changes under the new
Corporate Governance Code in respect of remuneration and the
implications for the Group. It was agreed that the 2019 Board
evaluation would be undertaken internally and the chair and company
secretary would prepare a new three-year Board evaluation proposal
with a range of topics for the focus of the review for discussion by
the Board.
The chair provided feedback to each executive and non-executive
director on their individual contributions to the Board, reviewed with
each of them the training they had undertaken during the year, and
considered development priorities individually tailored to each director’s
experience and role. The senior independent director reviewed the
chair’s performance with the other directors and subsequently met him
to provide feedback. Overall, no significant issues were highlighted in
the feedback given to each director and the chair.
1 An evaluation of the HSE committee was due to take place in 2018 but due to further changes
of membership, the Board has postponed the evaluation until 2019.
Shareholder engagement
Relations with shareholders
The Board recognises its responsibility to our shareholders and
wider stakeholders. Further information can be found in our
strategic report on page 10.
Engagement
The chair and the non-executive directors are available to meet
with shareholders to listen to their views. The chair met with the
governance team at Standard Life Aberdeen in April to discuss
performance; key audit topics and audit tender; Board succession
planning; gender pay gap; and a brief discussion on remuneration.
No issues arose from the meeting.
The executive directors undertake a programme of regular
communication with institutional shareholders and analysts covering
the Company’s activities, performance and strategy. In particular,
presentations are made to institutional investors and analysts
following the announcements of the full year and half year
results. Written feedback from these meetings and presentations
is distributed to all members of the Board. In addition, feedback and
reports from Institutional Shareholder Services (ISS), the Investment
Association (IA) and Pensions & Investment Research Consultants
(PIRC) are circulated to the Board ahead of the AGM each year.
Senior management forum
A reception for financial analysts and institutional investors was held
in November 2018 providing an opportunity for them to meet with
senior management from across the Group.
AGM
The 2019 AGM of the Company will be held at the offices of Jefferies
International Limited, Vintners Place, 68 Upper Thames Street, London
EC4V 3BJ on Wednesday 8 May 2019 at 10.00am. The formal notice
convening the AGM, together with explanatory notes, can be found in
the separate circular accompanying this document and is available on
our website. Shareholders will also find enclosed with this document
a form of proxy for use in connection with the meeting.
We encourage all shareholders to use the AGM as an opportunity for
effective communication with the Company. The AGM also provides
a valuable opportunity for the Board to communicate with private
shareholders. Shareholders are invited to ask questions related to
the business of the meeting and have the opportunity to meet all the
directors informally.
All directors normally attend the AGM; however, Simon Gulliford did
not attend the 2018 AGM due to his retirement. All serving directors
plan to attend the 2019 AGM. Shareholders unable to attend are
encouraged to vote using the proxy form mailed to them or sent
electronically as detailed in the notice of meeting.
As in previous years, at the forthcoming AGM each of the resolutions
put to the meeting will be taken by voting on a poll. The directors
believe that a poll vote is more representative of shareholders’ voting
intentions because shareholder votes are counted according to the
number of shares held and all votes tendered are taken into account.
The results of voting at general meetings, including proxy directions
to withhold votes, are published on our website.
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Nomination
committee report
Chair’s overview
During 2018, succession planning and the composition of the Board
and its committees remained a key focus. In addition, as the Group
continues to pursue its strategy of construction and regeneration, we
recognise that talented and motivated people improve our performance
and reputation and attracting them is key to our future success. The
committee also has oversight of employee development and succession
planning for the wider Group, including steps taken to ensure that we
are an employer of choice for prospective candidates.
Highlights of the committee’s activities included:
• the appointment by the Board, on the committee’s
recommendation, of David Lowden as an independent non-
executive director;
• approval of David Lowden as senior independent director from
1 January 2019 following the departure of Patrick De Smedt;
• approval of the appointment of Malcolm Cooper as chair of the HSE
committee in May 2018 following the resignation of Simon Gulliford;
• consideration and approval of a ‘People Framework’ to help drive
improvements in inclusivity across the Group and to reduce the
Group’s gender pay gap; and
• consideration of executive succession planning.
The committee also considered progress against the
recommendations and priorities from the 2017 Board evaluation
review. We are pleased to report that the Board has acted on and
implemented the various actions resulting from the 2017 evaluation
and has made further recommendations following the 2018 Board
evaluation on the continuing training and development of directors.
Members during the year
Michael Findlay (Chair)
Malcolm Cooper
Tracey Killen
David Lowden (from 10 September 2018)
Patrick De Smedt (until 31 December 2018)
Simon Gulliford (until 4 May 2018)
Responsibilities
The nomination committee is responsible for establishing a formal,
rigorous and transparent procedure for the appointment of new
directors to the Board. In addition, the committee has a wider
responsibility to keep under review the future leadership needs
of the Company, both executive and non-executive, to ensure our
continued ability to deliver our strategy.
Michael Findlay chairs the committee but is not permitted to chair
meetings where his own succession and performance are discussed.
Biographies for each member of the committee are set out on page 36.
The committee’s detailed responsibilities include:
• reviewing the structure, size and composition of the Board;
• making recommendations to the Board for any changes considered
necessary;
• approving the description of the role and capabilities required for
a particular appointment;
• satisfying itself with regard to succession planning for the Board
and senior management, taking into account the challenges and
opportunities facing the Group and future skills and expertise
needed on the Board, including development and training; and
• ensuring suitable candidates for the Board are identified and
recommended for appointment, giving due regard to the benefits
of diversity, including gender, ethnicity, and cognitive diversity.
The committee’s terms of reference are available on our website.
Activities during the year
In 2018 the committee met three times and details of attendance at
meetings are disclosed on page 41. More information relating to our
strategic objective of developing people is included in our strategic report.
In addition to the highlights outlined in the chair’s overview, the committee:
• considered and reviewed the 2018 Board evaluation process
and oversaw the internal evaluation of the Board. See page 43 for
further details;
• considered the overall structure and balance of the Board;
• reviewed succession planning for the divisional management teams
and senior talent development;
• oversaw employee development and succession planning for the
wider Group; and
• reviewed and updated the committee’s terms of reference.
John Morgan and Steve Crummett are not members of the
committee although they are invited to attend meetings.
Effectiveness
Succession planning
Board
The Board takes succession planning for its members seriously.
We believe we have a good balance and diversity among our
non-executive directors with each of them having highly relevant
skills, derived from serving in a range of executive and non-executive
positions throughout their careers.
During the year, following the resignation of Simon Gulliford as
a non-executive director, the committee considered the skills,
experience and time commitment required for the non-executive
role, and the length and tenure of the existing non-executive directors
in determining the right profile of candidate to be appointed.
The committee appointed a sub-committee consisting of the chair and
the chief executive to manage the recruitment of a new non-executive.
Following a review of potential headhunters, the sub-committee
appointed Russell Reynolds Associates (formerly the Zygos Partnership)
to assist with this process. The sub-committee identified a shortlist of
candidates from a selection of individuals suggested by Russell Reynolds
Associates and, following meetings with each of these candidates,
identified a further shortlist for the other Board members to meet.
After completing this comprehensive process, the Board was delighted to
appoint David Lowden as a non-executive director, which took effect from
10 September 2018. David’s extensive commercial, marketing and financial
experience gained through his previous roles, together with his experience
as a non-executive director and former CEO of Taylor Nelson Sofres, will be
of great benefit to the Board and its committees. David became a member
of the audit, nomination and remuneration committees following his
appointment. He was appointed as the senior independent director with
effect from 1 January 2019. Russell Reynolds Associates does not provide
any other services to, or have any connection with, the Company.
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MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Nomination
committee report
Chair’s overview
During 2018, succession planning and the composition of the Board
and its committees remained a key focus. In addition, as the Group
continues to pursue its strategy of construction and regeneration, we
recognise that talented and motivated people improve our performance
and reputation and attracting them is key to our future success. The
committee also has oversight of employee development and succession
planning for the wider Group, including steps taken to ensure that we
are an employer of choice for prospective candidates.
Highlights of the committee’s activities included:
• the appointment by the Board, on the committee’s
recommendation, of David Lowden as an independent non-
executive director;
• approval of David Lowden as senior independent director from
1 January 2019 following the departure of Patrick De Smedt;
• approval of the appointment of Malcolm Cooper as chair of the HSE
committee in May 2018 following the resignation of Simon Gulliford;
• consideration and approval of a ‘People Framework’ to help drive
improvements in inclusivity across the Group and to reduce the
Group’s gender pay gap; and
• consideration of executive succession planning.
• satisfying itself with regard to succession planning for the Board
and senior management, taking into account the challenges and
opportunities facing the Group and future skills and expertise
needed on the Board, including development and training; and
• ensuring suitable candidates for the Board are identified and
recommended for appointment, giving due regard to the benefits
of diversity, including gender, ethnicity, and cognitive diversity.
The committee’s terms of reference are available on our website.
Activities during the year
In 2018 the committee met three times and details of attendance at
meetings are disclosed on page 41. More information relating to our
strategic objective of developing people is included in our strategic report.
In addition to the highlights outlined in the chair’s overview, the committee:
• considered and reviewed the 2018 Board evaluation process
and oversaw the internal evaluation of the Board. See page 43 for
further details;
• considered the overall structure and balance of the Board;
• reviewed succession planning for the divisional management teams
and senior talent development;
• oversaw employee development and succession planning for the
wider Group; and
• reviewed and updated the committee’s terms of reference.
John Morgan and Steve Crummett are not members of the
committee although they are invited to attend meetings.
The committee also considered progress against the
recommendations and priorities from the 2017 Board evaluation
review. We are pleased to report that the Board has acted on and
implemented the various actions resulting from the 2017 evaluation
and has made further recommendations following the 2018 Board
evaluation on the continuing training and development of directors.
Effectiveness
Succession planning
Board
Members during the year
Michael Findlay (Chair)
Malcolm Cooper
Tracey Killen
David Lowden (from 10 September 2018)
Patrick De Smedt (until 31 December 2018)
Simon Gulliford (until 4 May 2018)
Responsibilities
The nomination committee is responsible for establishing a formal,
rigorous and transparent procedure for the appointment of new
directors to the Board. In addition, the committee has a wider
responsibility to keep under review the future leadership needs
of the Company, both executive and non-executive, to ensure our
continued ability to deliver our strategy.
Michael Findlay chairs the committee but is not permitted to chair
meetings where his own succession and performance are discussed.
Biographies for each member of the committee are set out on page 36.
The committee’s detailed responsibilities include:
• reviewing the structure, size and composition of the Board;
• making recommendations to the Board for any changes considered
• approving the description of the role and capabilities required for
necessary;
a particular appointment;
The Board takes succession planning for its members seriously.
We believe we have a good balance and diversity among our
non-executive directors with each of them having highly relevant
skills, derived from serving in a range of executive and non-executive
positions throughout their careers.
During the year, following the resignation of Simon Gulliford as
a non-executive director, the committee considered the skills,
experience and time commitment required for the non-executive
role, and the length and tenure of the existing non-executive directors
in determining the right profile of candidate to be appointed.
The committee appointed a sub-committee consisting of the chair and
the chief executive to manage the recruitment of a new non-executive.
Following a review of potential headhunters, the sub-committee
appointed Russell Reynolds Associates (formerly the Zygos Partnership)
to assist with this process. The sub-committee identified a shortlist of
candidates from a selection of individuals suggested by Russell Reynolds
Associates and, following meetings with each of these candidates,
identified a further shortlist for the other Board members to meet.
After completing this comprehensive process, the Board was delighted to
appoint David Lowden as a non-executive director, which took effect from
10 September 2018. David’s extensive commercial, marketing and financial
experience gained through his previous roles, together with his experience
as a non-executive director and former CEO of Taylor Nelson Sofres, will be
of great benefit to the Board and its committees. David became a member
of the audit, nomination and remuneration committees following his
appointment. He was appointed as the senior independent director with
effect from 1 January 2019. Russell Reynolds Associates does not provide
any other services to, or have any connection with, the Company.
David Lowden
Succession planning in action
February – March 2018
Following the resignation
of Simon Gulliford, and
having considered the
existing skills and
experience on the Board,
a candidate profile was
drafted and Russell
Reynolds Associates
was appointed to identify
a shortlist of potential
candidates.
May – July 2018
Candidates were
interviewed by the
chair and chief executive,
and a selection of
shortlisted candidates
were interviewed by
all the other Board
members.
14 August 2018
Appointment of David
Lowden to the Board,
audit, nomination
and remuneration
committees announced,
effective 10 September.
September 2018
David began his
formal induction
programme (see page
42 for further details).
1 January 2019
David succeeded
Patrick De Smedt
as senior independent
director.
As part of the Board evaluation process undertaken during the year,
the Board reviewed the skills needed to deliver our Group strategy
and whether the Board had all the appropriate skills. A similar process
was undertaken as part of the Board’s succession plan review. The
committee also considered the overall structure and balance of the
Board, including the length of tenure of the non-executive directors
(see table below). The committee keeps the composition of the Board
under continuous review and is satisfied that as at the year end,
notwithstanding the departure of Patrick De Smedt, who had served
on the Board for nine years, and after taking into consideration the
experience of the remaining directors, the Board has the required
balance of skills and that appropriate succession plans are in place
across the Group for future Board appointments.
Our non-executive directors’ tenure on the Board as at the year end
was as follows:
Board tenure non-executive
Number
Percentage
< 1 year
1 to 2 years
2 to 3 years
1
1
2
25
25
50
Wider Group
Developing and retaining talented people are key to providing
excellence in project delivery and customer service as outlined in
our strategic report on pages 7 to 8 and 11, and in our 2018 responsible
business report. We have an overarching leadership development
programme in place which provides core and consistent leadership
training for senior employees across the Group. During 2018, the
committee reviewed the succession plans for the executive directors
and the Group management team, as well as the divisional succession
and senior talent development plans which each of our divisions has
continued to work on during the year. Each of our divisions uses
succession and development planning tools most appropriate to the
size and requirements of its business. In addition, each division has
its own training programmes incorporating both technical and broader
business training specific to the division’s and employees’ requirements.
These training programmes range from apprenticeships for different
skills to supporting employees through professional qualifications.
Where practically possible, each division considers existing employees
for new roles and development opportunities and in 2018, 9% of
employees across the divisions were promoted internally.
Diversity
In 2017, the Board adopted a diversity policy which sets out its
commitment to inclusivity and equal opportunity within the Board
and among all employees in the Group. Female representation on
the Board in 2018 was 14%, increasing to 17% at the end of the year
following the departure of Patrick De Smedt. As set out in its diversity
policy, the Board ensures that the selection processes for the Board
will provide access to a diverse range of candidates. Appointments
will be made on merit and without resorting to quotas, but with due
regard for the benefits of diversity on the Board, including gender.
We believe that a diverse workforce reflecting different skills and
experience at all levels is critical for innovation and enables us to
benefit from the broadest range of ideas and expertise. This supports
our strategic objectives of winning work in our targeted markets and
pursuing innovation. Our review of the Group’s gender pay gap in the
latter part of 2017 provided an opportunity for us to consider our
approach to inclusion in a fresh light.
As part of the Board’s ongoing commitment to providing leadership
on inclusion, in early 2018 following discussion and agreement with
the Group HR forum, the committee approved the Group’s People
Framework in order to implement a range of activities to help drive
improvements in inclusivity and diversity, and further reduce the
Group’s gender pay gap over the course of the next few years. While
the purpose of the framework is to drive improvements in inclusivity,
it is focused on activities that will benefit all employees and not just
specific groups, to ensure we attract and retain the best talent with
the skills required.
We continue to include a ‘people report’ in the Board meeting papers,
covering key statistics and details of activities undertaken by each division
to improve inclusivity and diversity in line with the People Framework.
These included activities to broaden the range of skills, industry
experience, gender, race, disability, age, nationality and other
attributes which can enhance the contribution of the divisions and the
Group as a whole. The committee was pleased that our largest division,
Construction & Infrastructure, won the ‘Inspiring Change in the Workplace’
award at the 2018 Inspiring Change Awards organised by CECA (Civil
Engineering Contractors Association). The award recognised the division’s
drive to promote an inclusive culture where every employee feels valued.
Further information on the activities in this area can be found in our 2018
responsible business report.
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As part of the Board’s diversity policy we are also committed to
giving full and fair consideration to applications for employment
made by disabled people and supporting any of our employees who
become disabled while working for the Group. This includes making
adjustments to roles and responsibilities and providing training to
ensure disabled employees are treated fairly and have opportunities
for promotion and career development.
Health, safety
and environment
committee report
At the February 2019 Board meeting, the Board reviewed the results
of the Group’s gender pay gap. In 2018 our median gender pay gap
remained relatively unchanged at 32.0% (2017: 31.0%); we did not
expect the figures to change quickly. We are pleased that we are
continually seeing an increase in the number of women joining
the Group, and our focus over the coming years is to ensure that
appropriate career progression routes and support are in place, as
this will not only retain them, but also help reduce our pay gap. The
Board is satisfied that the results are not due to any equal pay issues
within the Group, but are attributable to the lack of women in senior
positions. See our strategic report on page 3 and our 2018 responsible
business report for further information.
BOARD
(%)
17
SENIOR MANAGEMENT (GMT)1
(%)
17
Men: 5
Women: 1
Men: 10
Women: 2
83
83
WIDER EMPLOYEES
(%)
23
Men: 4,743
Women: 1,448
77
Men
Women
Numbers are based on 6,206 employees at 31 December 2018.
1 John Morgan and Steve Crummett are included in both the Board and senior management numbers.
Since the year end, the gender ratio of the GMT has changed to one woman (8%) and 11 men (92%).
2019 priorities
During 2019, the committee will continue to focus on:
• succession planning for the Board and senior management;
• reviewing succession planning in the divisional management teams
to ensure there is a diverse pipeline for succession; and
• reviewing progress against our activities to further improve
inclusivity and diversity across the Group.
Michael Findlay
Chair of the nomination committee
21 February 2019
Chair’s overview
Protecting people and keeping them safe is one of the Group’s
Total Commitments to being a responsible business (see page 3),
and in 2018 monitoring the Group’s safety performance remained
a key focus for the committee.
Highlights of the committee’s activities included:
• reviewing and approving the Group’s health and safety framework;
• monitoring and reviewing the Group’s responsible business strategy;
• monitoring the Group’s performance against our Total
Commitments; and
• site visits to a Construction & Infrastructure project in Slough,
a Fit Out project in London and a Partnership Housing project
in Salisbury.
Members during the year
Malcolm Cooper (Chair from 4 May 2018)
Andy Saul
Clare Sheridan
Simon Gulliford (until 4 May 2018)
Responsibilities
The committee is responsible for the following:
• assisting the Board in fulfilling its oversight responsibilities in
relation to health, safety and environment (HSE) matters and
making recommendations to the Board for any changes
considered necessary;
• assisting the Board in reviewing our Group strategy with respect
to HSE matters;
• receiving reports on any major HSE incidents and ensuring that all
actions required by the report are appropriately implemented in
a timely manner;
• reporting to the Board on development trends and forthcoming
legislation in relation to HSE matters which may be relevant to
the Group;
• monitoring our Group health and safety strategy and regulatory
environmental obligations (including CRC (carbon reduction
commitment) compliance) and how compliance with these and
with applicable laws and regulations is ensured across the Group;
• receiving and reviewing periodic HSE reports of the Group’s
performance; and
• reviewing our responsible business strategy and performance
against our Total Commitments.
The principal purpose of the committee is to focus on our health and
safety culture by challenging each of the divisions to seek continual
improvement in managing and reducing the number of safety
incidents and driving better behaviour and performance. It also aims
to support the Group health and safety forum and divisional health
and safety teams.
The committee’s terms of reference, setting out its duties, are available
on our website.
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As part of the Board’s diversity policy we are also committed to
giving full and fair consideration to applications for employment
made by disabled people and supporting any of our employees who
become disabled while working for the Group. This includes making
adjustments to roles and responsibilities and providing training to
ensure disabled employees are treated fairly and have opportunities
for promotion and career development.
Health, safety
and environment
committee report
At the February 2019 Board meeting, the Board reviewed the results
of the Group’s gender pay gap. In 2018 our median gender pay gap
remained relatively unchanged at 32.0% (2017: 31.0%); we did not
expect the figures to change quickly. We are pleased that we are
continually seeing an increase in the number of women joining
the Group, and our focus over the coming years is to ensure that
appropriate career progression routes and support are in place, as
this will not only retain them, but also help reduce our pay gap. The
Board is satisfied that the results are not due to any equal pay issues
within the Group, but are attributable to the lack of women in senior
positions. See our strategic report on page 3 and our 2018 responsible
business report for further information.
Chair’s overview
Protecting people and keeping them safe is one of the Group’s
Total Commitments to being a responsible business (see page 3),
and in 2018 monitoring the Group’s safety performance remained
a key focus for the committee.
Highlights of the committee’s activities included:
• reviewing and approving the Group’s health and safety framework;
• monitoring and reviewing the Group’s responsible business strategy;
• monitoring the Group’s performance against our Total
Commitments; and
• site visits to a Construction & Infrastructure project in Slough,
a Fit Out project in London and a Partnership Housing project
in Salisbury.
Members during the year
Malcolm Cooper (Chair from 4 May 2018)
Andy Saul
Clare Sheridan
Simon Gulliford (until 4 May 2018)
Responsibilities
The committee is responsible for the following:
• assisting the Board in fulfilling its oversight responsibilities in
relation to health, safety and environment (HSE) matters and
making recommendations to the Board for any changes
• assisting the Board in reviewing our Group strategy with respect
considered necessary;
to HSE matters;
• receiving reports on any major HSE incidents and ensuring that all
actions required by the report are appropriately implemented in
• reporting to the Board on development trends and forthcoming
legislation in relation to HSE matters which may be relevant to
a timely manner;
the Group;
• monitoring our Group health and safety strategy and regulatory
environmental obligations (including CRC (carbon reduction
commitment) compliance) and how compliance with these and
with applicable laws and regulations is ensured across the Group;
• receiving and reviewing periodic HSE reports of the Group’s
performance; and
• reviewing our responsible business strategy and performance
against our Total Commitments.
The principal purpose of the committee is to focus on our health and
safety culture by challenging each of the divisions to seek continual
improvement in managing and reducing the number of safety
incidents and driving better behaviour and performance. It also aims
to support the Group health and safety forum and divisional health
and safety teams.
on our website.
The committee’s terms of reference, setting out its duties, are available
Numbers are based on 6,206 employees at 31 December 2018.
1 John Morgan and Steve Crummett are included in both the Board and senior management numbers.
Since the year end, the gender ratio of the GMT has changed to one woman (8%) and 11 men (92%).
2019 priorities
During 2019, the committee will continue to focus on:
• succession planning for the Board and senior management;
• reviewing succession planning in the divisional management teams
to ensure there is a diverse pipeline for succession; and
• reviewing progress against our activities to further improve
inclusivity and diversity across the Group.
Michael Findlay
Chair of the nomination committee
21 February 2019
Activities during the year
The committee has an annual work plan, developed from its terms
of reference, which is reviewed annually and includes standing items
considered at each meeting together with any additional matters the
committee has decided to focus on. The divisional managing directors
are responsible for HSE issues within their respective divisions and for
providing the committee with information for its consideration at each
meeting. Monthly monitoring and reporting to the Board includes a
report from the Group commercial director on the Group’s performance
in relation to health and safety matters as well as a verbal report from
the HSE committee chair following each meeting. Further details are
included in the chief executive’s statement on page 4 and the risk
review on page 26.
Overall, the committee is encouraged by the continued improvement
in the Group’s accident frequency rate in 2018 (see page 12). While
we aim to minimise the risks of accidents, any accidents that do
regrettably occur are thoroughly investigated, and any major incidents
are reported to the Board. In December 2018, Construction &
Infrastructure was fined £100,000 in respect of an accident that took
place in 2017 at the King’s Troop Royal Horse Artillery, during which
a worker suffered a right-hand amputation. The court recognised that
the division had pleaded guilty at the first opportunity to having failed
to prevent access to a dangerous part of machinery, as well as the
division’s safety record going back over 40 years. We deeply regret this
serious injury and continue to challenge our divisions to seek ongoing
improvements in eliminating injuries in our work.
In 2018, the committee met four times to review our strategy with
respect to HSE matters and carried out three site visits. Details of
attendance at meetings are disclosed on page 41. Although not a
member of the committee, Michael Findlay attends the meetings
on a regular basis and attended three meetings during 2018.
During 2018, the committee reviewed each division’s activities to
target its three biggest health and safety risks, additional reporting on
high potential incidents and activities undertaken to share learning
as relevant with other divisions to further drive improvements in
safety performance.
A summary of the committee’s other principal activities in 2018 is
as follows:
• reviewed divisional health and safety performance during the year;
• continued to monitor and review performance against the health
and safety framework;
• reviewed our environmental reports;
• monitored our performance as a Group against HSE targets and
KPIs; and
• reviewed our performance against our Total Commitments.
Health and safety framework
Each division sets its own strategy and targets in order to focus on areas
that are relevant to its business within an overarching framework. At the
end of 2017, the framework was reviewed and updated by our health
and safety forum, a focus group whose members include health and
safety representatives from across the divisions, and approved by the
HSE committee in early 2018. During the year, the committee monitored
and reviewed each division’s progress against the health and safety
framework, which covered three key strategic areas: severity of high
potential incidents, mental health and wellbeing, and for each division
to identify and target three of its biggest health and safety risks. In 2019,
the health and safety framework will continue its focus on high potential
incidents, and mental health and wellbeing. However, for 2019, the
framework has been updated for the divisions to focus on innovative
ways to further improve health and safety, with a particular focus on
each of their top three risks.
Safety
We are committed to achieving a continuing reduction in the number
of incidents on sites and to protecting those who work on and visit
our projects. We have well-established safety systems designed to
minimise the risks of HSE incidents, including tool box talks, detailed
method statements, health and safety briefings at induction, site
visits, detailed investigation of all incidents, and regular training and
updates. In order to maintain an effective safety culture, our divisions
regularly review and enhance these systems as well as addressing
behavioural factors which can cause injuries.
We are very pleased that our divisions have received a number
of awards during the year in recognition of the work and initiatives
being carried out. Further information about these awards, as well
as new safety initiatives, can be found in our 2018 responsible
business report.
Site visits
As mentioned in the 2017 annual report, on 30 January 2018 the
committee made an unannounced visit to the Construction &
Infrastructure ice arena project in Slough. The project completed
in early 2018 and included the refurbishment and refit of the
existing building and ice pad and an extension added to house a
reception/café/gym and climbing wall area. The committee met with
the project manager and the health and safety manager to discuss the
site in general and focus on health and safety arrangements. Overall,
the committee was satisfied with the health and safety arrangements
on site, and identified and fed back on a couple of areas that could be
improved in terms of tidiness while working.
In March 2018, the committee visited the Royal Dutch Shell office
refurbishment in London’s South Bank to follow up on Fit Out’s trials
being carried out in conjunction with behavioural consultants to
help increase health, safety and wellbeing awareness on this site. The
committee was pleased with the interventions being made as part of
the initiative, and with the positive culture on site in relation to health
and safety. During the study, the levels of unsafe behaviours reduced
by 82% for working at height and by 93% for material movements in
just 12 weeks. The committee was pleased to learn that in August
2018 Fit Out won the Health, Safety & Wellbeing Initiative of the Year
award at the Association for Project Safety’s National CDM Awards in
recognition of this work.
In September 2018, the committee visited a Partnership Housing
project being undertaken for the Defence Infrastructure Organisation
to provide housing on three sites on Salisbury Plain. The committee
met with the project manager and safety team at the Ludgershall site,
undertook an extensive review of the project and site at Bulford, and
finished with a visit to the site office at Larkhill where groundworks
were being undertaken. In summary, the committee found the sites
were being operated safely and were well presented and tidy, with
good storage facilities and waste being managed and segregated.
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Health and wellbeing
The committee reviewed management plans and actions to improve
health and wellbeing across the Group. All employees have access
to an employee assistance programme that provides confidential
counselling and support on a variety of issues. In June, a digital GP
service was made available to all employees to help them get quicker
and more convenient access to a medical professional.
During the year, each of the divisions continued to drive its focus on
occupational health, particularly mental health and wellbeing. These
initiatives included mental health and wellbeing training, publishing
mental health and wellbeing standards/policies, making available
a range of awareness materials, participating in mental health
awareness week and various training sessions and education around
occupational health, particularly respiratory disorders. Further
information can be found in the 2018 responsible business report.
An independent personal financial education programme was rolled
out across the Group during the year as part of our mental wellbeing
initiative. This programme is provided by an independent third party
and is not affiliated to any financial product.
Environment
We are committed to reducing energy consumption across the
Group and in our supply chain. During the year, the committee
reviewed the Group’s performance in reducing our environmental
impact. Highlights of our activities in 2018 included:
• rolling out science-based targets across the Group with the first
data being collected from 1 January 2019;
• retaining our A- score in the CDP index;
• decreasing our carbon intensity by 3%;
• reducing construction waste by 11% to 88,255 tonnes
(2017: 99,704 tonnes);
• diverting 95% of total waste from landfill (2017: 89%);
• diverting 94% of construction waste from landfill (2017: 96%); and
• developing a Carbon Calculator for roll out during the first quarter
of 2019, to help us to manage our carbon emissions.
Managing waste
Our total waste produced in 2018 increased by 32% to 907,539
tonnes (2017: 687,803 tonnes). However, our waste intensity (total
waste produced per £m of revenue) has increased at the lower rate
of 24% to 305.4. We seek to carefully manage and reduce the level
of waste produced on our sites where possible.
WASTE INTENSITY
Managing our emissions
Our greenhouse gas (GHG) emissions have been calculated based on
the ISO 14064-1:2006 standard. Emissions reported correspond with
our financial year and include all areas for which we have operational
control in the UK, excluding joint ventures. The materiality threshold
has been set at a Group level of 5% with all operations estimated to
contribute more than 1% of the total emissions included. No material
emissions have been omitted from this report.
Emissions have been calculated using data gathered for the
recertification audit of the Group’s energy data by supply chain
risk management company, Achilles, under its Certified Emissions
Measurement and Reduction Scheme (CEMARS). Emission factors
are from the Department for Environment, Food & Rural Affairs
(Defra) conversion factor guidance current for the year reported.
All data has been verified by Achilles.
Emissions are predominantly from bulk fuel used on sites, our vehicle
fleet and electricity use. Our target is to reduce our absolute emissions
by 26% by 2020 from a baseline of the data set as at 31 December
2010. Our Group director of sustainability and procurement is
responsible for the delivery of this target.
GHG EMISSIONS CO2e TONNES
Scope 1 – operation
of facilities
Scope 2 – indirect
emissions (purchased
energy)
Scope 3 – indirect
emissions (related
activities)
2018
2017
2016
baseline
2010
baseline
19,934
19,559
17,201
33,357
3,632
5,337
6,935
25,288
5,863
3,548
6,634
5,097
Total emissions
29,429
28,444
30,770
63,742
Since 2010 we have significantly reduced our Scope 1 and Scope 2
emissions, and future improvements in these emission scopes are
likely to be marginal. The level of our Scope 1 emissions is impacted
by the type of work we undertake. Our 2018 data includes the
A1 Leeming to Barton and A6 motorway projects for the first time,
as they are no longer joint ventures. These two projects alone
account for 1,350 tonnes of CO2e, and if stripped out, a like-for-like
comparison with 2017 would show a reduction of total emissions,
at 28,050 tonnes.
2018
2017
2016
Total waste produced (tonnes)
907,539 687,803
860,209
Waste intensity
Revenue
305.4
246.3
335.8
£2,972m £2,793m £2,562m
We are continuing to investigate ways to reduce our carbon
emissions, and believe we can make the biggest impact going forward
by reducing our Scope 3 emissions. We will therefore be working
closely with our supply chain to reduce these emissions as part of
the rollout of our science-based targets.
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Health and wellbeing
Managing our emissions
The committee reviewed management plans and actions to improve
Our greenhouse gas (GHG) emissions have been calculated based on
health and wellbeing across the Group. All employees have access
the ISO 14064-1:2006 standard. Emissions reported correspond with
to an employee assistance programme that provides confidential
our financial year and include all areas for which we have operational
counselling and support on a variety of issues. In June, a digital GP
control in the UK, excluding joint ventures. The materiality threshold
service was made available to all employees to help them get quicker
has been set at a Group level of 5% with all operations estimated to
and more convenient access to a medical professional.
contribute more than 1% of the total emissions included. No material
emissions have been omitted from this report.
During the year, each of the divisions continued to drive its focus on
occupational health, particularly mental health and wellbeing. These
Emissions have been calculated using data gathered for the
initiatives included mental health and wellbeing training, publishing
recertification audit of the Group’s energy data by supply chain
mental health and wellbeing standards/policies, making available
risk management company, Achilles, under its Certified Emissions
a range of awareness materials, participating in mental health
Measurement and Reduction Scheme (CEMARS). Emission factors
awareness week and various training sessions and education around
are from the Department for Environment, Food & Rural Affairs
occupational health, particularly respiratory disorders. Further
(Defra) conversion factor guidance current for the year reported.
information can be found in the 2018 responsible business report.
All data has been verified by Achilles.
An independent personal financial education programme was rolled
Emissions are predominantly from bulk fuel used on sites, our vehicle
out across the Group during the year as part of our mental wellbeing
fleet and electricity use. Our target is to reduce our absolute emissions
initiative. This programme is provided by an independent third party
by 26% by 2020 from a baseline of the data set as at 31 December
and is not affiliated to any financial product.
2010. Our Group director of sustainability and procurement is
Environment
We are committed to reducing energy consumption across the
Group and in our supply chain. During the year, the committee
reviewed the Group’s performance in reducing our environmental
impact. Highlights of our activities in 2018 included:
• rolling out science-based targets across the Group with the first
data being collected from 1 January 2019;
• retaining our A- score in the CDP index;
• decreasing our carbon intensity by 3%;
• reducing construction waste by 11% to 88,255 tonnes
(2017: 99,704 tonnes);
• diverting 95% of total waste from landfill (2017: 89%);
• diverting 94% of construction waste from landfill (2017: 96%); and
• developing a Carbon Calculator for roll out during the first quarter
of 2019, to help us to manage our carbon emissions.
Managing waste
Our total waste produced in 2018 increased by 32% to 907,539
tonnes (2017: 687,803 tonnes). However, our waste intensity (total
waste produced per £m of revenue) has increased at the lower rate
of 24% to 305.4. We seek to carefully manage and reduce the level
of waste produced on our sites where possible.
responsible for the delivery of this target.
GHG EMISSIONS CO2e TONNES
2018
2017
baseline
baseline
2016
2010
19,934
19,559
17,201
33,357
3,632
5,337
6,935
25,288
Scope 1 – operation
of facilities
Scope 2 – indirect
emissions (purchased
energy)
Scope 3 – indirect
emissions (related
activities)
Total emissions
29,429
28,444
30,770
63,742
5,863
3,548
6,634
5,097
Since 2010 we have significantly reduced our Scope 1 and Scope 2
emissions, and future improvements in these emission scopes are
likely to be marginal. The level of our Scope 1 emissions is impacted
by the type of work we undertake. Our 2018 data includes the
A1 Leeming to Barton and A6 motorway projects for the first time,
as they are no longer joint ventures. These two projects alone
account for 1,350 tonnes of CO2e, and if stripped out, a like-for-like
comparison with 2017 would show a reduction of total emissions,
WASTE INTENSITY
at 28,050 tonnes.
Total waste produced (tonnes)
907,539 687,803
860,209
2018
2017
2016
We are continuing to investigate ways to reduce our carbon
305.4
246.3
335.8
emissions, and believe we can make the biggest impact going forward
by reducing our Scope 3 emissions. We will therefore be working
closely with our supply chain to reduce these emissions as part of
£2,972m £2,793m £2,562m
the rollout of our science-based targets.
Waste intensity
Revenue
CARBON INTENSITY
2018
2017
2016
baseline
2010
baseline
Audit committee report
Total emissions (CO2e
tonnes)
29,429
28,444
30,770
63,742
Accountability
Carbon intensity
9.9
10.2
12.0
30.3
Revenue
£2,972m
£2,793m £2,562m
£2,102m
While our total tonnes of CO2e has increased from 28,444 tonnes to
29,429, our carbon intensity (GHG emissions per £m of revenue) has
reduced by 3%.
As part of our introduction of science-based targets, from 1 January
2019, we will be reporting against a 2016 baseline year. Further details
on our environmental performance and new targets are contained in
our 2018 responsible business report.
Responsible business strategy
The committee monitored the Group’s performance in the year
against our Total Commitments. Overall, this performance was
positive, although further work is needed to embed the use of
Local Multiplier 3 (LM3) for assessing the social value contribution
made on our projects. In 2018, in conjunction with Simetrica, we
developed a social value bank that will enable us to measure the
value of economic, social and environmental wellbeing generated
from our activities. The social value bank will be rolled out across the
Group in early 2019 (see our 2018 responsible business report for
more information).
The committee reviewed our responsible business strategy to
ensure that our Total Commitments remain relevant and appropriate,
and confirmed that the Group would adopt six UN Sustainable
Development Goals that most closely align to our Total Commitments
and where we can have the greatest impact. The committee also
reviewed the way we measure our performance, and our 2018
responsible business report details the KPIs and targets that we will
be reporting against from 2019. The report also includes details of
those issues identified as material by both internal and external
stakeholders following our 2018 materiality survey.
Looking ahead
In 2019, the committee will:
• continue to challenge the divisions to seek further reductions in the
number of safety incidents;
• review the divisions’ data in respect of high potential incidents;
• review actions needed to protect employees’ health and wellbeing;
• review our performance against our Total Commitments;
• review our responsible business strategy and health and safety
policy framework; and
• undertake site visits to a couple of projects.
Malcolm Cooper
Chair of the health, safety and environment committee
21 February 2019
Chair’s overview
During 2018, the committee’s key focus has been on the integrity of
the Group’s:
• financial reporting;
• process of risk management and internal controls; and
• compliance with new legislation.
I am pleased to report that no issues in respect of the Group’s
integrity have been identified by the committee during the year.
The Board evaluation for 2018 included an evaluation of the
audit committee. Overall the committee is considered to be
operating effectively.
All committee members during the year and up to the date of this
report are or were independent non-executive directors in accordance
with the Corporate Governance Code, and the committee as a whole
has the competence, diverse skills and experience relevant to the
sector. Biographies of members are set out on page 36. Malcolm
Cooper, the chair of the committee, is a qualified accountant and
experienced FTSE 250 audit committee chair and continues to have
recent and relevant financial experience for the audit committee of
a company in the construction and regeneration sectors.
Members during the year
Malcolm Cooper (Chair)
Tracey Killen
David Lowden (from 10 September 2018)
Patrick De Smedt (until 31 December 2018)
Simon Gulliford (until 4 May 2018)
Other regular attendees:
• chair of the Board;
• finance director;
• company secretary;
• Group head of finance and reporting;
• Group head of audit and assurance; and
• representatives from the external auditor.
Responsibilities
In summary, the committee is responsible for reviewing and
monitoring:
• the integrity of the financial statements;
• the Group’s internal financial controls and internal control and risk
management systems;
• the work and findings of internal and external audit;
• the effectiveness of the Group’s internal and external audit
functions; and
• that appropriate arrangements are in place for the proportionate
and independent investigation of any concerns that are raised by
employees in connection with improprieties.
The committee is also responsible for the oversight and appointment
of the external auditor. The formal role of the committee, which was
reviewed during 2018, is set out in the terms of reference which are
available on our website.
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Activities during the year
February
August
December
Full year results review.
Half year results review.
Reviewed Group and divisional risk registers
including the Group’s principal risks.
Undertook fair, balanced and
understandable review of the 2017
annual report.
Half year review of the impact of the
new accounting standards adopted from
1 January 2018.
Reviewed effectiveness of the Group’s
risk management and internal controls.
Reviewed effectiveness of the external
auditor including an evaluation of
performance during the 2017 audit.
Reviewed Group and divisional risk registers
including the Group’s principal risks.
Reviewed fraud and bribery prevention
measures and details of any matters arising
from the raising concerns reporting lines.
Reviewed effectiveness of the Group’s
internal financial controls and internal audit.
Reviewed effectiveness of the Group’s risk
management and internal controls.
Reviewed significant accounting
judgements for the 2018 audit.
Reviewed fraud and bribery prevention
measures and details of any matters arising
from the raising concerns reporting lines.
Discussed the 2018 audit plan with the
external auditor.
Reviewed the committee’s terms
of reference.
Reviewed the Group’s business continuity
and incident management plan.
Reviewed fraud and bribery prevention
measures and details of any matters arising
from the raising concerns reporting lines.
Approved the 2019 internal audit plan.
The committee held three scheduled meetings during the year, of
which further detail is set out in the table above. Details of attendance
at meetings are disclosed on page 41. The regular attendees listed on
the previous page also attended each meeting. There is a formal agenda
for each meeting to ensure that the committee covers all elements
of its remit and the meetings are scheduled in line with the Company’s
financial reporting timetable. The chair of the audit committee met
with the finance director and the external audit partner individually
during the year. In addition, the committee held discussions at the end
of each meeting with the external auditor and the Group head of audit
and assurance, without the management team present. No matters
of significance were raised during any of these discussions. The
committee’s authorities and calendar of work remain in line with
the requirements of the Corporate Governance Code, having regard
to the recommendations of the Financial Reporting Council in its
guidance on audit committees.
At the meeting in February 2019, the committee reviewed the going
concern and viability assessment and approved the audit fee for
the year ended 31 December 2018. Further information on the work
of the committee during the year, including full descriptions of the
risk management and internal control processes are set out on the
following pages.
Financial and business reporting
The committee’s detailed review of the year end position by reference
to the year end accounts assisted the Board in making the going
concern statement set out on page 21. In line with provision C.2.2
of the Corporate Governance Code, the committee considered and
approved the key assumptions in the long-term viability statement
(see page 32 for further information).
Fair, balanced and understandable assessment
One of the key compliance requirements of the Corporate
Governance Code is for the Board to confirm that the annual report
and financial statements (‘the annual report’), taken as a whole, is fair,
balanced and understandable and provides the information necessary
for shareholders to assess the Company’s position and performance,
business model and strategy (see the strategic report from pages 1 to
34). To enable the Board to make this declaration, a formal review is
embedded in the year end process to ensure the committee and the
Board as a whole have access to all relevant information and, in
particular, management papers on significant issues faced by the
Group. The committee receives a paper from the company secretary
detailing the approach taken in preparing the annual report. The
committee and the Board as a whole receive drafts of the annual
report in sufficient time to facilitate their review and enable them to
challenge the disclosures where necessary. In addition, the Group’s
external auditor reviews the consistency between the narrative
reporting of the annual report and the financial statements.
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Activities during the year
February
August
December
Full year results review.
Half year results review.
Reviewed Group and divisional risk registers
including the Group’s principal risks.
Undertook fair, balanced and
Half year review of the impact of the
Reviewed effectiveness of the Group’s
understandable review of the 2017
new accounting standards adopted from
risk management and internal controls.
annual report.
1 January 2018.
Reviewed effectiveness of the external
Reviewed Group and divisional risk registers
Reviewed fraud and bribery prevention
auditor including an evaluation of
performance during the 2017 audit.
including the Group’s principal risks.
measures and details of any matters arising
from the raising concerns reporting lines.
Reviewed effectiveness of the Group’s
Reviewed effectiveness of the Group’s risk
Reviewed significant accounting
internal financial controls and internal audit.
management and internal controls.
judgements for the 2018 audit.
Application of accounting policies, judgements
and estimates
In carrying out its duties, the committee is required to assess whether
suitable accounting policies have been adopted and to challenge the
robustness of significant judgements and estimates reflected in the
financial results. This process involves reviewing relevant papers
prepared by the finance team in support of the policies adopted
and judgements and estimates made and confirm that they remain
appropriate for the Group (see table below).
These papers are discussed with the finance director, the external
auditor and, where appropriate, the Group head of audit and
assurance. In addition, the committee reviews the year end report
to the audit committee from the external auditor based on the
work it performed and findings from the annual audit.
Set out below are what we consider to be the key accounting matters
which required the exercise of judgement during the year. These are
all considered to be recurring matters.
Issue
Basis of assurance
Conclusion
Contract revenue, margin, receivables
and payables
The recognition of revenue and margin
on long-term contracts in the financial
statements, and the associated contract
receivables and payables, require
management to make estimates.
In addition to updates on the key contract
issues at Board meetings, at which
management identify any significant
differences in contract valuations that exist
with either client or supplier, the committee
has reviewed the status of these key contract
issues at each audit committee meeting.
Based on its review and discussions
with the management team and external
auditor, the committee concluded that
the treatment of contract revenue, margin,
receivables and payables in the financial
statements is appropriate.
Reviewed fraud and bribery prevention
Discussed the 2018 audit plan with the
Reviewed the committee’s terms
measures and details of any matters arising
external auditor.
of reference.
from the raising concerns reporting lines.
Impairment of goodwill
The value of goodwill is supported by a
value-in-use model prepared by the
management team. This is based on cash
flows extracted from the Group budget
and strategic plan, which have both been
approved by the Board. The committee
reviewed and challenged the management
team on the assumptions used in the
value-in-use model.
Based on its review and discussion with
the management team and the external
auditor, the committee was satisfied that
the value of goodwill is appropriate.
Valuation of shared equity receivables
The valuation of shared equity receivables is
reliant upon the assumptions made by the
management team and the accompanying
valuation model.
Key assumptions include the discount rate,
redemption rates and house price inflation.
The committee reviewed and challenged
the management team on the supporting
assumptions used in the valuation of shared
equity loan receivables.
Based on its review and discussion with
the management team and the external
auditor, the committee was satisfied
that the supporting assumptions used
remain appropriate.
Auditor
External auditor’s independence and effectiveness
The committee oversees the Company’s relationship with the external
auditor. To ensure that the external auditor remains independent
of the Company it carries out an annual assessment of the auditor’s
independence along with an appraisal of its qualifications, expertise
and resources. To fulfil these obligations, the committee reviewed the
external auditor’s presentation of its policies and safeguards to ensure
its continued independence within the meaning of all regulatory
and professional requirements and that the objectivity of the audit
engagement partner and audit staff had not been impaired. In addition,
key members of the audit team rotate off the Company’s audit after a
specific period of time. Makhan Chahal was appointed as the lead audit
engagement partner with effect from the Company’s 2017 audit.
Makhan is a senior audit partner with over 20 years’ experience, and
leads Deloitte LLP’s business, infrastructure and professional services
audit team. These policies and safeguards, together with the Company’s
own policies on engaging the external auditor for non-audit work and
employment by the Company of former employees of the external
auditor, enabled the committee to confirm that it was satisfied with
Deloitte LLP’s continued independence and objectivity.
As part of its responsibility for assessing the effectiveness of the external
audit, the committee discussed the external audit plan at the committee
meeting held in August 2018 and reviewed progress against the audit
plan at the meeting held in December 2018, noting at that time the
scope of work to be undertaken and the key audit matters being
addressed by the external auditor. At the meeting prior to the
announcement of the full year results, the committee reviewed the
ternal auditor’s fulfilment of the agreed audit plan and the key areas of
audit focus as described in the independent auditor’s report on
pages 76 to 83. In addition, the internal evaluation of the external audit
process was undertaken with the assistance of the Group head of audit
and assurance and senior members of the Company’s and the divisions’
finance teams. The feedback, which covered matters including the
quality of the process, the adequacy of resources employed by the
external auditor, its communication skills and its objectivity and
independence, was then reviewed by the committee as part of its
assessment of the external auditor’s effectiveness. No issues arose in
the course of these reviews which impacted the effectiveness of the
external auditor.
Reviewed the Group’s business continuity
Reviewed fraud and bribery prevention
and incident management plan.
measures and details of any matters arising
from the raising concerns reporting lines.
Approved the 2019 internal audit plan.
The committee held three scheduled meetings during the year, of
which further detail is set out in the table above. Details of attendance
at meetings are disclosed on page 41. The regular attendees listed on
the previous page also attended each meeting. There is a formal agenda
for each meeting to ensure that the committee covers all elements
of its remit and the meetings are scheduled in line with the Company’s
financial reporting timetable. The chair of the audit committee met
with the finance director and the external audit partner individually
during the year. In addition, the committee held discussions at the end
of each meeting with the external auditor and the Group head of audit
and assurance, without the management team present. No matters
of significance were raised during any of these discussions. The
committee’s authorities and calendar of work remain in line with
the requirements of the Corporate Governance Code, having regard
to the recommendations of the Financial Reporting Council in its
guidance on audit committees.
At the meeting in February 2019, the committee reviewed the going
concern and viability assessment and approved the audit fee for
the year ended 31 December 2018. Further information on the work
of the committee during the year, including full descriptions of the
risk management and internal control processes are set out on the
following pages.
Financial and business reporting
The committee’s detailed review of the year end position by reference
to the year end accounts assisted the Board in making the going
concern statement set out on page 21. In line with provision C.2.2
of the Corporate Governance Code, the committee considered and
approved the key assumptions in the long-term viability statement
(see page 32 for further information).
Fair, balanced and understandable assessment
One of the key compliance requirements of the Corporate
Governance Code is for the Board to confirm that the annual report
and financial statements (‘the annual report’), taken as a whole, is fair,
balanced and understandable and provides the information necessary
for shareholders to assess the Company’s position and performance,
business model and strategy (see the strategic report from pages 1 to
34). To enable the Board to make this declaration, a formal review is
embedded in the year end process to ensure the committee and the
Board as a whole have access to all relevant information and, in
particular, management papers on significant issues faced by the
Group. The committee receives a paper from the company secretary
detailing the approach taken in preparing the annual report. The
committee and the Board as a whole receive drafts of the annual
report in sufficient time to facilitate their review and enable them to
challenge the disclosures where necessary. In addition, the Group’s
external auditor reviews the consistency between the narrative
reporting of the annual report and the financial statements.
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Reappointment of external auditor
Deloitte LLP has been the Company’s auditor since the Group was
established from the reverse takeover of William Sindall plc in 1994
and the audit has not been put out for tender since that time. There
are no contractual obligations which restrict the committee’s choice
of external auditor. The committee has noted the requirements of
the Competition & Markets Authority 2014 Order and The Statutory
Auditors and Third Country Auditors Regulations 2016 that all public
interest entities are required to conduct an auditor tender at least
every 10 years and to rotate their auditors after at least 20 years. As
indicated in last year’s report, while not subject to the provisions set
out within the Corporate Governance Code for FTSE 350 companies,
having taken into account the formal regulatory tender requirements
that form part of UK law, the committee confirmed that the Group
intends to put the external audit contract out to tender during 2020 to
take effect from the conclusion of the 2020 financial year end. Any firm
appointed by the directors during 2020 would then be subject to
reappointment by the shareholders at the AGM in 2021. Having regard
to the considerations referred to above, the committee has satisfied
itself that Deloitte LLP, the external auditor, remains independent
and effective.
The committee has recommended to the Board that a resolution
proposing the reappointment of Deloitte LLP as external auditor
be put to shareholders at the forthcoming AGM.
Policy on the auditor providing non-audit services
The Company’s policy on the engagement of the external auditor
for non-audit related services which applied during the 2018 financial
year complies with the FRC’s Revised Ethical Standard.
The Company’s policy is designed to ensure that the provision
of non-audit services does not impair the external auditor’s
independence or objectivity or create a conflict of interest. The policy
applies to the Company and all its wholly-owned subsidiaries and
provides guidance on the type of work that is acceptable or prohibited
for the external auditor to undertake, and the process to be followed
for approval. The categories of services that are prohibited are in line
with the legislation and preclude Deloitte LLP from providing certain
services, such as valuation work and preparing accounting records
and financial statements. For other services not falling within the
prohibited services list, the external auditor is eligible for selection
by the Company provided that its skills and experience make it
competitive and the most appropriate supplier of these services.
Permitted services can be carried out by the external auditor subject
to the advance approval of the finance director or, if the fees for such
services exceed a threshold of £50,000, the advance approval of the
audit committee chair. In addition, Deloitte LLP has its own safeguards
in place to confirm that non-audit work prohibited by the FRC’s Ethical
Standard is not provided to the Group or Company.
The committee monitors compliance with the Company’s policy
throughout the year and during 2018 Deloitte LLP did not provide any
non-audit services that required the approval of the committee. The
fees for non-audit services during the year are set out in note 3 to
the consolidated financial statements on page 101 and total £6,000
(0.7% of the audit fee) for work in respect of the half year.
Risk management and internal controls
The Board has reserved for itself specific responsibility for formulating
the Group’s risk appetite and risk management strategy, and for
reviewing the system of internal controls and monitoring their
effectiveness. The Board fulfils this obligation by agreeing the strategy,
setting delegated authorities and approving appropriate policies and
procedures which are then cascaded throughout the Group. In 2018,
the Board reviewed its appetite and approach to risk, including
whether or not a formal risk appetite framework was appropriate.
Following this review, a formal framework in respect of each key risk
was adopted in order to achieve greater scrutiny of the nature and
extent of the risks the Board was willing to take in order to achieve
the Group’s long-term strategic objectives and performance, and
to ensure that the appropriate culture and reward systems are
embedded throughout the Group to mitigate against these risks
increasing outside the tolerance levels set within the framework.
Certain responsibilities for risk management and internal controls
have been delegated to the audit committee as outlined below and
in the risk review on pages 22 to 31. We also have a risk committee
that meets twice a year and assists the Board and audit committee in
monitoring risk management and internal control. The risk committee
ensures that both inherent and emerging risks across the business
are properly identified and managed, approving new standards and
processes where any weaknesses are considered to exist, and ensures
that clear procedures are in place to elevate risks to the Board.
The risk management process and the system of internal controls
were in place for the whole year and up to the date of approval of the
annual report. They accord with the FRC’s risk management guidance
for directors and with the Corporate Governance Code.
The committee has conducted a review of the effectiveness of the
system of internal controls for the year ended 31 December 2018 and
for the period to the date of this report. The process included a review
of the relationship between the internal and external audit function,
a formal review of the Group risk register, and a review of the results
of internal audit work and the overall effectiveness of the process.
Risk management process
The risk management system is designed to identify principal risks
attached to our Group strategy and objectives as well as the root
cause for each risk, and to confirm the internal controls in place to
mitigate the risk and any further actions required. This process
includes the identification and assessment of the key environmental,
social and corporate governance risks facing the business. The
executive directors met regularly with the divisions throughout
the year to discuss matters relating to strategy, financial and
operational performance, and risk. Internal control and risk
management processes are embedded in the operations of
each division. At each Board meeting, the Board considers:
• how effectively the risks have been assessed and the principal
risks determined;
• how they have been managed or mitigated;
• whether necessary actions are being taken promptly to address
any significant failings or weaknesses; and
• whether the causes of the failing or weakness indicate poor decision
making, a need for more extensive monitoring or a reassessment of
the effectiveness of management’s ongoing processes.
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Reappointment of external auditor
Risk management and internal controls
Deloitte LLP has been the Company’s auditor since the Group was
The Board has reserved for itself specific responsibility for formulating
established from the reverse takeover of William Sindall plc in 1994
the Group’s risk appetite and risk management strategy, and for
and the audit has not been put out for tender since that time. There
reviewing the system of internal controls and monitoring their
are no contractual obligations which restrict the committee’s choice
effectiveness. The Board fulfils this obligation by agreeing the strategy,
of external auditor. The committee has noted the requirements of
setting delegated authorities and approving appropriate policies and
the Competition & Markets Authority 2014 Order and The Statutory
procedures which are then cascaded throughout the Group. In 2018,
Auditors and Third Country Auditors Regulations 2016 that all public
the Board reviewed its appetite and approach to risk, including
interest entities are required to conduct an auditor tender at least
whether or not a formal risk appetite framework was appropriate.
every 10 years and to rotate their auditors after at least 20 years. As
Following this review, a formal framework in respect of each key risk
indicated in last year’s report, while not subject to the provisions set
was adopted in order to achieve greater scrutiny of the nature and
out within the Corporate Governance Code for FTSE 350 companies,
extent of the risks the Board was willing to take in order to achieve
having taken into account the formal regulatory tender requirements
the Group’s long-term strategic objectives and performance, and
that form part of UK law, the committee confirmed that the Group
to ensure that the appropriate culture and reward systems are
intends to put the external audit contract out to tender during 2020 to
embedded throughout the Group to mitigate against these risks
take effect from the conclusion of the 2020 financial year end. Any firm
increasing outside the tolerance levels set within the framework.
appointed by the directors during 2020 would then be subject to
reappointment by the shareholders at the AGM in 2021. Having regard
Certain responsibilities for risk management and internal controls
to the considerations referred to above, the committee has satisfied
have been delegated to the audit committee as outlined below and
itself that Deloitte LLP, the external auditor, remains independent
in the risk review on pages 22 to 31. We also have a risk committee
and effective.
that meets twice a year and assists the Board and audit committee in
monitoring risk management and internal control. The risk committee
The committee has recommended to the Board that a resolution
ensures that both inherent and emerging risks across the business
proposing the reappointment of Deloitte LLP as external auditor
are properly identified and managed, approving new standards and
be put to shareholders at the forthcoming AGM.
processes where any weaknesses are considered to exist, and ensures
Policy on the auditor providing non-audit services
The Company’s policy on the engagement of the external auditor
for non-audit related services which applied during the 2018 financial
year complies with the FRC’s Revised Ethical Standard.
The Company’s policy is designed to ensure that the provision
of non-audit services does not impair the external auditor’s
independence or objectivity or create a conflict of interest. The policy
applies to the Company and all its wholly-owned subsidiaries and
provides guidance on the type of work that is acceptable or prohibited
for the external auditor to undertake, and the process to be followed
for approval. The categories of services that are prohibited are in line
with the legislation and preclude Deloitte LLP from providing certain
services, such as valuation work and preparing accounting records
that clear procedures are in place to elevate risks to the Board.
The risk management process and the system of internal controls
were in place for the whole year and up to the date of approval of the
annual report. They accord with the FRC’s risk management guidance
for directors and with the Corporate Governance Code.
The committee has conducted a review of the effectiveness of the
system of internal controls for the year ended 31 December 2018 and
for the period to the date of this report. The process included a review
of the relationship between the internal and external audit function,
a formal review of the Group risk register, and a review of the results
of internal audit work and the overall effectiveness of the process.
Risk management process
and financial statements. For other services not falling within the
The risk management system is designed to identify principal risks
prohibited services list, the external auditor is eligible for selection
attached to our Group strategy and objectives as well as the root
by the Company provided that its skills and experience make it
cause for each risk, and to confirm the internal controls in place to
competitive and the most appropriate supplier of these services.
mitigate the risk and any further actions required. This process
Permitted services can be carried out by the external auditor subject
includes the identification and assessment of the key environmental,
to the advance approval of the finance director or, if the fees for such
social and corporate governance risks facing the business. The
services exceed a threshold of £50,000, the advance approval of the
executive directors met regularly with the divisions throughout
audit committee chair. In addition, Deloitte LLP has its own safeguards
the year to discuss matters relating to strategy, financial and
in place to confirm that non-audit work prohibited by the FRC’s Ethical
operational performance, and risk. Internal control and risk
Standard is not provided to the Group or Company.
management processes are embedded in the operations of
each division. At each Board meeting, the Board considers:
The committee monitors compliance with the Company’s policy
• how effectively the risks have been assessed and the principal
throughout the year and during 2018 Deloitte LLP did not provide any
risks determined;
non-audit services that required the approval of the committee. The
• how they have been managed or mitigated;
fees for non-audit services during the year are set out in note 3 to
• whether necessary actions are being taken promptly to address
the consolidated financial statements on page 101 and total £6,000
any significant failings or weaknesses; and
(0.7% of the audit fee) for work in respect of the half year.
• whether the causes of the failing or weakness indicate poor decision
making, a need for more extensive monitoring or a reassessment of
the effectiveness of management’s ongoing processes.
In addition, the Board devoted time during some of the scheduled
Board meetings to consider specific commercial issues which at the
time represented the greatest risks to the achievement of our
objectives and the mitigating actions in place to address them.
During the year, the Board undertook a detailed review of, and agreed its
appetite for, risk in respect of key issues impacting the business. As part of
the review the Board has confirmed metrics that it will use to determine
whether or not the level of risk is increasing or decreasing. The Board will
review its risk appetite each year as part of its strategic review.
Further details of our approach to risk and the principal risks identified
facing the Group are highlighted in the risk review on pages 22 to 31.
The system is designed to manage rather than eliminate the risk of
failure to achieve certain business objectives due to circumstances
which may reasonably be foreseen, and can only provide reasonable
assurance against material misstatement or loss. Overall, the
committee considers that the Group’s risk profile is continuing to
improve due to our strong cash performance, strengthened balance
sheet and the resolution of older contract issues.
System of internal controls
The system of internal controls, which includes financial, operational
and compliance controls, is based on a process of identifying,
evaluating and managing risks. The committee assesses the
effectiveness of the internal controls system on an ongoing basis.
The key features of our system of internal controls are as follows:
Group structure
The Group consists of six divisions, each with its own management
board with authority and responsibility for managing its division.
This authority is set within a framework of overarching Group policies,
reporting lines and detailed delegated authorities which ensure that
decisions and approvals are made at the appropriate level. While
responsibility for managing each division is delegated to its
management Board as far as practicable, responsibility for certain
of the Group’s key functions, including tax, treasury, internal audit,
IT, pensions and insurance, is retained at Company level.
Financial reporting system
The Board recognises that an essential part of the responsibility for
running a business is the effective safeguarding of assets, the proper
recognition of liabilities and the accurate reporting of profits. The
Company has internal control and risk management systems in place
in relation to its financial reporting process and the Group’s process
for preparing the consolidated accounts.
We have a comprehensive budgeting and forecasting system which is
regularly reviewed and updated, together with a management reporting
system established in each division for monthly reporting to the Board.
In addition, the annual internal audit plan includes financial reviews to
validate the integrity of the divisions’ management accounts.
Investment and capital expenditure
There are detailed procedures and defined levels of authority,
depending on the value and/or nature of the investment or contract,
in relation to corporate transactions, investment, capital expenditure,
significant cost commitments and asset disposals.
Tender, project selection and contract controls
Individual tenders are subject to detailed review with approvals
required at relevant levels and at various stages from commencement
of the bidding process through to contract award. As part of this
process, the financial standing of both clients and key subcontractors
is assessed. In addition, robust procedures exist to manage the
ongoing risks associated with contracts, with monthly reviews of
each contract’s performance.
Working capital
We continually monitor current and forecast cash and working
capital balances through a regime of daily and monthly reporting.
Internal audit
The Group head of audit and assurance is responsible for managing
the internal audit function, overseeing the divisional heads of internal
audit and assisting with risk management practices. During the year,
the Group head of audit and assurance met separately with the chair
of the committee and has direct access to him whenever required. No
new matters or issues were raised by the internal audit team directly
to the committee that had not already been reported to the
committee by the executive directors.
The committee is responsible for approval in advance of the plans
of the internal audit function:
• an audit plan for each year is drawn up following a review of the
divisional and Group risk registers and discussion with the
management team and the committee to ensure it is aligned to
the principal risks of the Group, focusing predominantly on areas
of key risks and materiality;
• internal audit and assurance work carried out in 2018 included
operational, project and financial reviews across the Group and
the results of these reviews were recorded in audit reports and
presented to the committee; and
• the status of agreed management actions to address identified
operational weaknesses is actively tracked through to
implementation.
At each meeting, the committee receives a report on the internal
controls framework and the internal audit activities. In 2018 the
committee received information on and reviewed the work carried
out by the internal audit teams, management’s response to the
reports and any key trends that emerged during the year.
The Group head of audit and assurance also reports to the Board
monthly on a range of performance metrics, including the current
status of agreed audit actions and progress against the annual
audit plan.
The internal audit process is supplemented by a rolling programme
of peer group reviews in Construction & Infrastructure and
Partnership Housing, which assist in the professional development
of the individual employees concerned while providing a mechanism
for the cross-fertilisation of ideas and dissemination of best practice.
These peer group reviews are overseen by the divisional heads of
internal audit and tracking of agreed management actions is included
in the overall internal audit process.
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E-learning
During the year, we rolled out a General Data Protection Regulation
e-learning module to all employees as well as two e-learning modules
relating to the Market Abuse Regulation. The market abuse e-learning
was split into two modules, the first being an in-depth training module
for the Board and another more general overview for all employees
in the Group.
In addition to this, a tax-related e-learning module, ‘anti-facilitation of
tax evasion (AFTE) process’, was sent to selected employees across the
Group who are primarily responsible for tax compliance. New joiners
are invited to complete relevant e-learning modules as part of their
induction. Those yet to complete a module are sent a reminder email
or called by their line manager to check on their progress. We aim to
launch refresher training periodically and, as mentioned in last year’s
report, in early 2018, we issued refresher training on anti-bribery and
corruption, one of the e-learning modules released in 2016. Future
plans for e-learning include a module on the Group’s insurances
and refresher training on competition law in early 2019.
Modern slavery
The Board reviewed and approved the Group’s modern slavery
statement in respect of the 2017 financial year. The statement
is available on our website and explains the actions taken to
ensure that we do not undertake activities or engage suppliers
or subcontractors who undertake activities that may be in breach
of the Modern Slavery Act.
In our 2018 statement, to be published in the first half of 2019,
we will report against the following KPIs:
• employee training levels;
• activities that we undertake to support the Gangmasters Labour
Abuse Authority Construction panel;
• our evaluation of the impact of the BES 6002 Ethical Labour
Sourcing standard on the Group;
• implementation of ISO 20400:2017 – sustainable procurement;
• the development of our online due diligence questionnaire; and
• investigations undertaken into reports of modern slavery and
remedial actions taken in response.
Malcolm Cooper
Chair of the audit committee
21 February 2019
The committee assesses annually the effectiveness of the internal
audit function and reviews and confirms that the internal audit team
is staffed appropriately and operating effectively.
In its annual assessment the audit committee:
• met with the Group head of audit and assurance separately without
management present to discuss the effectiveness of the internal
audit function;
• reviewed and assessed the audit plan; and
• assessed the role and effectiveness of the internal audit function
in the overall context of the Company’s risk management system
and whether the function is able to continue to meet the needs
of the Group.
The results of the latest assessment were reviewed by the committee
in December 2018 and it was satisfied that the internal audit team
remained independent, was operating effectively, and that the risk
to their independence and objectivity was low.
Business conduct and ethics
Raising concerns procedures
Our procedures are supported by the operation of an independent
whistleblowing hotline which can be accessed in four ways: by
telephone, via an app, through a website or by sending an email. This
enables employees across the Group and other workers on our sites
to report concerns anonymously and in confidence. The existence of
the various reporting mechanisms is covered with all employees on
induction and is publicised via the Company’s and divisions’ intranets
and on notice boards in offices and on sites. Occasionally reports are
also made directly to the chief executive or to the managing directors
of the divisions. Reports of concerns raised are presented to the
committee at each meeting, together with the results of investigations
and any follow-up actions. Any significant matter arising from a call
would be brought to the attention of the committee without delay,
although no such matters arose during the year. Since the Group’s
e-learning compliance programme began in October 2016, use of
the hotline has grown considerably. There is a purposeful link in all
e-learning to the hotline and the imagery around the hotline has been
refreshed and widely distributed, with posters placed throughout the
business and included in internal newsletters and on intranets. Of the
total calls made to the hotline in 2018, 48% related to human resource
matters and 10% to health and safety. All reports were investigated.
During 2018, the Board reviewed the Group’s whistleblowing
procedures to assess how easy it is for people to raise issues and how
any issues raised are subsequently investigated and followed up to
ensure that the reviews undertaken are independent and appropriate.
Following this review, the Board is satisfied that with the wide variety
of ways in which a call can be logged, the whistleblowing hotline
provides an easily accessed resource with no obstacles for those
who wish to raise a concern and that calls can be made anonymously
if the caller does not wish to be identified.
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The committee assesses annually the effectiveness of the internal
audit function and reviews and confirms that the internal audit team
E-learning
is staffed appropriately and operating effectively.
In its annual assessment the audit committee:
• met with the Group head of audit and assurance separately without
management present to discuss the effectiveness of the internal
in the Group.
During the year, we rolled out a General Data Protection Regulation
e-learning module to all employees as well as two e-learning modules
relating to the Market Abuse Regulation. The market abuse e-learning
was split into two modules, the first being an in-depth training module
for the Board and another more general overview for all employees
audit function;
• reviewed and assessed the audit plan; and
• assessed the role and effectiveness of the internal audit function
in the overall context of the Company’s risk management system
and whether the function is able to continue to meet the needs
of the Group.
The results of the latest assessment were reviewed by the committee
in December 2018 and it was satisfied that the internal audit team
remained independent, was operating effectively, and that the risk
to their independence and objectivity was low.
In addition to this, a tax-related e-learning module, ‘anti-facilitation of
tax evasion (AFTE) process’, was sent to selected employees across the
Group who are primarily responsible for tax compliance. New joiners
are invited to complete relevant e-learning modules as part of their
induction. Those yet to complete a module are sent a reminder email
or called by their line manager to check on their progress. We aim to
launch refresher training periodically and, as mentioned in last year’s
report, in early 2018, we issued refresher training on anti-bribery and
corruption, one of the e-learning modules released in 2016. Future
plans for e-learning include a module on the Group’s insurances
and refresher training on competition law in early 2019.
Business conduct and ethics
Raising concerns procedures
Modern slavery
Our procedures are supported by the operation of an independent
The Board reviewed and approved the Group’s modern slavery
whistleblowing hotline which can be accessed in four ways: by
statement in respect of the 2017 financial year. The statement
telephone, via an app, through a website or by sending an email. This
is available on our website and explains the actions taken to
enables employees across the Group and other workers on our sites
ensure that we do not undertake activities or engage suppliers
to report concerns anonymously and in confidence. The existence of
or subcontractors who undertake activities that may be in breach
the various reporting mechanisms is covered with all employees on
of the Modern Slavery Act.
induction and is publicised via the Company’s and divisions’ intranets
and on notice boards in offices and on sites. Occasionally reports are
In our 2018 statement, to be published in the first half of 2019,
also made directly to the chief executive or to the managing directors
we will report against the following KPIs:
of the divisions. Reports of concerns raised are presented to the
• employee training levels;
committee at each meeting, together with the results of investigations
• activities that we undertake to support the Gangmasters Labour
and any follow-up actions. Any significant matter arising from a call
Abuse Authority Construction panel;
would be brought to the attention of the committee without delay,
• our evaluation of the impact of the BES 6002 Ethical Labour
although no such matters arose during the year. Since the Group’s
Sourcing standard on the Group;
e-learning compliance programme began in October 2016, use of
• implementation of ISO 20400:2017 – sustainable procurement;
the hotline has grown considerably. There is a purposeful link in all
• the development of our online due diligence questionnaire; and
e-learning to the hotline and the imagery around the hotline has been
• investigations undertaken into reports of modern slavery and
refreshed and widely distributed, with posters placed throughout the
remedial actions taken in response.
business and included in internal newsletters and on intranets. Of the
total calls made to the hotline in 2018, 48% related to human resource
matters and 10% to health and safety. All reports were investigated.
During 2018, the Board reviewed the Group’s whistleblowing
procedures to assess how easy it is for people to raise issues and how
any issues raised are subsequently investigated and followed up to
ensure that the reviews undertaken are independent and appropriate.
Following this review, the Board is satisfied that with the wide variety
of ways in which a call can be logged, the whistleblowing hotline
provides an easily accessed resource with no obstacles for those
who wish to raise a concern and that calls can be made anonymously
if the caller does not wish to be identified.
Malcolm Cooper
Chair of the audit committee
21 February 2019
Other statutory information
The directors have pleasure in submitting their annual report and
accounts for the Company together with the consolidated financial
statements of the Group for the year ended 31 December 2018.
The strategic report is presented on pages 1 to 34 inclusive. The
directors’ report required under the Companies Act 2006 (‘the Act’)
comprises the directors’ and corporate governance report and the
remuneration report, together with explanatory notes incorporated
by reference.
The Board has chosen, in accordance with section 414C (11) of the
Act, to include in the strategic report the following information that
it considers to be of strategic importance that would otherwise be
required to be disclosed in the directors’ report:
• employment policies, employee consultation and involvement;
• additional details within the non-financial reporting statement of
the Group’s approach to diversity and inclusion and environmental,
social and governance disclosures;
• the likely future developments in the business of the Group; and
• details of research and development activities.
There were no significant events since the balance sheet date. The
management report as required by the Financial Conduct Authority’s
(FCA’s) Disclosure and Transparency Rules (Rule 4.1) comprises the
strategic report which includes the principal risks to our business.
Directors
Biographical details and details of Board changes during the year are
shown earlier in the directors’ and corporate governance report. The
directors of the Company who served during the year are shown on
page 64 of the remuneration report and further details of directors’
contracts, remuneration and interests in shares of the Company are
also given in the remuneration report.
The rules regarding the appointment and removal of directors are
contained in the Company’s articles of association (‘the Articles’).
The Articles require each director to submit themselves for election
by shareholders at the first AGM after their appointment, and
for re-election every three years thereafter. Notwithstanding
the provisions in the Articles, in accordance with the Corporate
Governance Code, all directors retire and, assuming they wish to
continue to stand, offer themselves for election or re-election at
the Company’s AGM.
Powers of directors
Subject to the Articles, the Act and any directions given by the
Company by special resolution, the business of the Company will
be managed by the Board who may exercise all the powers of the
Company, whether relating to the management of the business or not.
In particular, the Board may exercise all the powers of the Company
to borrow money, to mortgage or charge any of its undertaking,
property, assets (present and future) and uncalled capital and to
issue debentures and other securities and to give security for any
debt, liability or obligation of the Company or of any third party.
Directors’ indemnities
The Articles entitle the directors of the Company to be indemnified,
to the extent permitted by the Act and any other applicable legislation,
out of the assets of the Company in the event that they suffer any loss
or incur any liability in connection with the execution of their duties as
directors. Neither the indemnity nor any applicable insurance provides
cover in the event that a director (or officer or company secretary as
the case may be) is proved to have acted fraudulently or dishonestly.
In addition, and in common with many other companies, the Company
had during the year and continues to have in place directors’ and
officers’ liability insurance in favour of its directors and other officers
in respect of certain losses or liability to which they may be exposed
due to their office. The insurance is categorised as a ‘qualifying
third-party indemnity provision’ for the purposes of the Act and will
continue in force for the purposes of the Act and for the benefit of
directors (or officers or company secretary as the case may be) on
an ongoing basis.
The Company also had and continues to have in place a pension
trustee liability insurance policy in favour of the trustees of The
Morgan Sindall Retirement Savings Plan (‘The Retirement Plan’) in
respect of certain losses or liabilities to which they may be exposed
due to their office. This constitutes a ‘qualifying pension scheme
indemnity provision’ for the purposes of the Act.
Articles of association
The Company’s constitution, known as the Articles, is essentially
a contract between the Company and its shareholders, governing
many aspects of the management of the Company. The Articles may
be amended in accordance with the provisions of the Act by way of
special resolution by the Company’s shareholders. The Company’s
current Articles are available on our website.
Capital structure
During the year 737,734 ordinary shares were allotted to satisfy
amounts under the Group’s savings-related share option plan.
As at 31 December 2018 the issued ordinary share capital totalled
45,461,416 shares of 5p each. Further details on the issued share
capital is shown in note 22 to the consolidated financial statements.
Power to issue and allot shares
At each AGM the Board seeks authorisation from its shareholders
to allot shares. The directors were granted authority at the AGM
on 4 May 2018 to allot relevant securities up to a nominal amount
of £745,457. That authority will apply until the conclusion of this year’s
AGM or close of business on 4 August 2019, whichever is the earlier,
and a resolution to renew the authority will be proposed at this year’s
AGM, as explained further in the notice to shareholders accompanying
this annual report.
Special resolutions will also be proposed to renew the directors’ power
to make non-pre-emptive issues for cash, as explained in the notice
to the shareholders accompanying this annual report. The Board
confirms that the Company has not used this authority in the last
three years and there are no immediate plans to make use of
this provision.
56
GOVERNANCE
OTHER STATUTORY INFORMATION CONTINUED
GOVERNANCE
DIRECTORS’ AND CORPORATE GOVERNANCE REPORT CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
56
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Rights and obligations attaching to shares
Subject to applicable statutes, shares may be issued with such rights
and restrictions as the Company may by ordinary resolution decide
or (if there is no such resolution or so far as it does not make specific
provision) as the Board as defined in the Company’s Articles may
decide. Subject to the Articles, the Act and other shareholders’ rights,
unissued shares are at the disposal of the Board.
Subject to the Act, if at any time the share capital of the Company is
divided into different classes of shares, the rights attached to any class
of shares may be varied with the written consent of the holders of
not less than 75% in nominal value of the issued shares of that class
(calculated excluding any shares held as treasury shares), or with the
sanction of a special resolution passed at a separate general meeting
of the holders of those shares.
The rights conferred upon the holders of any shares shall not, unless
otherwise expressly provided in the rights attaching to those shares,
be deemed to be varied by the creation or issue of further shares
ranking pari passu with them.
Voting
Subject to any other provisions of the Articles, every member present
in person or by proxy at a general meeting has, upon a show of hands,
one vote and, upon a poll, one vote for every share held by them. In
the case of joint holders of a share, the vote of the senior holder who
tenders a vote, whether in person or by proxy, shall be accepted to the
exclusion of the votes of the other joint holders and, for this purpose,
seniority shall be determined by the order in which the names stand
in the register of members in respect of the joint holding (the first-
named being the most senior).
No member shall be entitled to vote at any general meeting in respect
of any share held by them if any call or other sum then payable by
them in respect of that share remains unpaid or if a member has been
served with a restriction notice (as defined in the Articles) after failure
to provide the Company with information concerning interests in
those shares required to be provided under the Act.
No person has any special rights of control over the Company’s share
capital and the directors are not aware of any agreements between
holders of shares which may result in restrictions on voting rights.
Restriction on transfer of shares
There are no restrictions on the transfer of securities in the
Company, except:
• that certain restrictions may, from time to time, be imposed by
laws and regulations (for example, insider trading laws); and
• pursuant to the Listing Rules of the FCA whereby certain
employees of the Company require its approval to deal in the
Company’s shares.
The Company is not aware of any agreements between holders of
securities that may result in restrictions on the transfer of securities
or voting rights.
Purchase of own shares
At the AGM on 4 May 2018, a resolution was passed giving the
directors authority to make market purchases of Company shares
up to 4,472,743 shares of 5p each at a maximum price based on
the market price of a share at the relevant time, as set out in the
resolution. No purchases of shares were made during the year
pursuant to this authority. The authority expires on the date of this
year’s AGM or close of business on 4 August 2019, whichever is earlier.
A resolution to renew this authority will be proposed at this year’s
AGM, as explained further in the notice to shareholders accompanying
this annual report.
Dividends and distributions
The Company may, by ordinary resolution, from time to time, declare
dividends not exceeding the amount recommended by the Board.
Subject to the Act, the Board may pay interim dividends, and also any
fixed rate dividend, whenever the financial position of the Company,
in the opinion of the Board, justifies its payment.
An interim dividend of 19.0p was paid on 29 October 2018 and
the directors recommend a final dividend of 34.0p, making a total
for the year of 53.0p. Further details can be found in note 7 to the
consolidated financial statements on page 103. Subject to shareholder
approval at the 2019 AGM, the final dividend will be paid on
20 May 2019 to shareholders on the register at close of business
on 26 April 2019.
The Board may withhold payment of all or any part of any dividends
or other monies payable in respect of the Company’s shares from
a person with a 0.25% interest if such a person has been served with
a restriction notice (as defined in the Articles) after failure to provide
the Company with information concerning interests in those shares
required to be provided under the Act. Other than as referred to
under ‘Morgan Sindall Group Employee Benefit Trust’ below, during
the year there were no arrangements under which a shareholder
has waived or agreed to waive any dividends nor any agreement
by a shareholder to waive future dividends.
Morgan Sindall Group Employee Benefit Trust
In November 2018, Butterfield Trust (Guernsey) Limited retired as
Trustee of the Morgan Sindall Group Employee Benefit Trust and
Zedra Trust Company (Guernsey) Limited (Zedra) were appointed as
replacement Trustee. Zedra, as Trustee of the Trust, holds shares on
trust for the benefit of the employees and former employees of the
Group and their dependants that have not been exercised or vested.
The voting rights in relation to these shares may be exercised by the
Trustee and there are no restrictions on the exercise of the voting of,
or the acceptance of any offer relating to, those shares. The Trust
agreed to waive its right to both the final and interim dividends
payable in 2018 which equated to 1.5% of the total dividend paid.
Details of the shares so held may be found in the consolidated
financial statements on page 88.
GOVERNANCE
OTHER STATUTORY INFORMATION CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
56
57
GOVERNANCE
GOVERNANCE
DIRECTORS’ AND CORPORATE GOVERNANCE REPORT CONTINUED
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
57
MORGAN SINDALL GROUP PLC ANNUAL REPORT 2018
Subject to the Act, if at any time the share capital of the Company is
A resolution to renew this authority will be proposed at this year’s
divided into different classes of shares, the rights attached to any class
AGM, as explained further in the notice to shareholders accompanying
Name of holder
Total voting
rights 1
% of total
voting
rights 2
Direct or
indirect
holding
Substantial shareholdings
As at 31 December 2018, the following information has been
disclosed to the Company under the FCA’s Disclosure Guidance
and Transparency Rules (DTR 5), in respect of notifiable interests
in the voting rights in the Company’s issued share capital:
Subject to any other provisions of the Articles, every member present
consolidated financial statements on page 103. Subject to shareholder
the Company.
Standard Life Aberdeen plc
6,022,361
13.27
Indirect
J O Hambro Capital Management
Group Ltd
Numis Nominees (Client) Limited
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