Chief Executive overview
Mouchel has a strong underlying business with good people. Whilst performance was disappointing last year, I’ve already seen enough since I started as Chief Executive in October 2011 to feel confident that we can do much better. There is some hard work ahead, but, based on what I have seen so far, I am excited about the opportunities for Mouchel, the support we can deliver to our clients and the value we can generate for our stakeholders in the longer term.
A variety of factors, both internal and external, have made the past year particularly difficult for Mouchel. The economic downturn and Government steps to reduce public spending have influenced our results for a second year. The business has also suffered from disruption as Mouchel was subject to takeover speculation and refinancing anxieties which have influenced clients’ decisions about awarding us work.
Against this backdrop, Mouchel has failed to fully appreciate the effect of the economic downturn and has failed to fundamentally address some of our declining markets and our associated cost base. In addition, we have failed to accurately forecast performance which has resulted in several downgrades to our/market profit expectations.
To bring about change, we will focus on items under our control, such as service delivery, our client relationships, our cash position, our cost base and the development of our pipeline. We have streamlined our operations in response to the reduced amount of work, but there is much more to be done to ensure that our overhead costs are fit for purpose.
As part of our focus on our core business, the rail and pipeline design businesses were sold in October 2011. However, following a review of our Middle East business, we have decided to keep it as part of Mouchel rather than to proceed with its planned disposal. Given the size and the opportunities for potential growth in the region, particularly for our core Highways business, we plan to retain and grow this market sector. We will also continue to invest in Australasia and to identify other suitable opportunities overseas. Now that we have secured our financial position with our lenders, my focus will turn to a strategic review of Mouchel. We will develop a strategy that will improve our competitive position in the marketplace, but will also plan for future changes in the economy. We will make sure that Mouchel has the agility to react to any given situation – whether it is opportunities as we climb out of recession or further safeguards should prospects not improve for some time. With the continued support of the markets, banks, clients and our staff, I am confident that we will improve the performance of the business significantly.
Introducing Mouchel
Mouchel is an infrastructure and business services group that provides design, managerial, engineering and operational services to support modern society. We work with UK government agencies, local authorities and with industries regulated by government to provide safe and reliable roads, effective and well managed local education and civic infrastructure, clean water and cost-effective energy. Mouchel has helped identify opportunities for government to work more effectively to deliver improved services and has worked in partnership with these same organisations to deliver these more efficiently.
For more than a century, Mouchel has been helping to shape and transform the world we live in. In 1897, Louis Gustave Mouchel first brought the patent for reinforced concrete to the UK and, following its introduction, there were huge strides in engineering as we used our ingenuity to pioneer its use in all aspects of construction, such as the first bridges made out of the material; the first UK skyscraper (the Liver Building built in 1909); the chimneys for Battersea Power Station; and, in the time of
war, floating concrete structures called Mulberry Harbours which helped the D-Day landings.
Today, Mouchel continues to transform society, but in ways that are less visible. Our focus has shifted to bringing innovation and efficiency to the management and operation of assets as well as to the way we deliver support services to public bodies. Through our long-term partnerships with local authorities and Government agencies we have introduced new ways of working which have enhanced customer experience, maximised value for money, and reduced overall costs. In Bournemouth, for example, we are on target to help the Council achieve 40% savings by 2021, which will equate to around £256m over 10 years. Achieving this scale of cost reduction, whilst at the same time maintaining and enhancing frontline services, requires fundamental organisational changes which Mouchel helps to identify and implement.
Mouchel provides services for the broader benefit of society. Our current strategy is to focus on our core public sector markets: Highways, Local Government and Regulated Industries, which will be supported by our Management Consulting business-change expertise. This enables us to build on our market leading positions and our management and technical skills to provide excellence to our clients. These markets offer the Group the potential for sustained organic growth.
Our ability to build long-term partnerships is one of Mouchel’s core strengths and we plan to target, win and deliver long-term integrated contracts, where we can draw together our advisory and consulting skills with project and service delivery. This approach has high barriers to entry and hence fewer competitors and increases long-term business security and profit.
Mouchel’s operations are managed across four business streams: Highways, Government and Business Services, Regulated Industries and Management Consulting. Most of Mouchel’s services are delivered in the UK with only 7% of revenue delivered in Europe, the Middle East and Australia.
Our Highways business is a market leader in the management and operation of highway networks, with an emphasis on the use of technology to achieve customer outcomes. We help clients to deliver improvements throughout the whole life cycle of a road asset, through innovative and thought leading solutions. Our growth in this sector will come from exploiting our leading position to win the next generation of larger central government contracts and the increasing number and size of local government contracts. We will continue to explore opportunities in the Middle East and Australasia.
Mouchel’s Government and Business Services business is one of the UK’s largest providers of outsourced professional and support services to local authorities. We also support other public bodies, including the police and fire and rescue services through long-term strategic transformational partnerships.
Mouchel operates the largest number of local government strategic service-deliver partnerships in the UK and our plans for growth come from extending the number of services we provide to our existing customers and from winning new partnerships. As predicted, we are seeing an increased number of local government partnerships being procured as councils continue to drive for cost reductions and service improvement to deliver better outcomes for the communities they serve. In existing artnerships we are working closely with our customers to help meet their challenging budgets.
Our Regulated Industries business provides a broad range of services to UK utility companies, and other organisations regulated by Government. This includes strategic consultancy, asset maintenance, multidisciplinary design, modelling and a ‘one-stop shop’ of engineering and environmental services. The business also undertakes a number of operational activities including leakage detection.
Following the disposal of our rail and pipeline design businesses, our Regulated Industries business will focus on the water and energy markets, and other specialist areas such as geotechnical and environmental services. Growth will be achieved by building on our strong position of delivering infrastructure projects and single services in order to provide integrated contracts and long-term service partnerships. We are also exploring opportunities for our Regulated Industries business through our joint venture in Australasia.
The Group’s Management Consulting business provides professional services spanning all our markets in areas of business, including transformation, performance improvement, efficiency, cost reduction, and managed services. Clients work in local and central government organisations, health, education, transport and utilities. The Government market for consulting services has substantially declined and it is expected that this reduced market will continue for a considerable time. As part of the strategic review of the business, we plan to look at refocusing the Management Consulting division to concentrate on its core transformational capability, which is integral to our knowledge transfer processes, helping them to win and deliver operational contracts.
To support our plans for growth, we will continue to evolve our operating model and maintain our focus on reducing the direct cost of delivering projects and services and on reducing overheads. We will drive delivery excellence and innovation to ensure that we have the right solutions at the right price for our customers. In summary, we will focus on delivering our promises to our clients and bringing them best practices from across our business and markets.
Performance and business overview
Mouchel has experienced a difficult year in 2010/11 and results have been disappointing. The Group’s revenue fell by 14.7% to £539.6m (excluding exceptional items), while underlying operating profit fell by 61.9% to £15.7m.
Conditions have remained challenging as we continue to be influenced by the Government’s plan, outlined in the 2010 Comprehensive Spending Review (2010 CSR), to rapidly bring down the national deficit by cuts to public spending. Local government, which makes up more than two-thirds of our client base, has been particularly hard hit by the unexpected speed and depths of these cuts. We also haven’t performed as well as we expected in some parts of the business. For example in Management Consulting the market has reduced substantially, with an associated reduction in revenue and profit; in the Middle East we have had difficulties in the delivery of a large contract in the United Arab Emirates (UAE), which is now nearing completion, and there has been a slow down in the Abu Dhabi market, which has resulted in delays to project start dates.
Our post-exceptional results for this year were also hit by an actuarial error which we reported in our trading update on 6 October 2011. The actuarial error was caused by a third party. This meant that a one-off gain on a long-term contract was £4.3m lower than we had previously expected. It was an isolated incident and we do not expect there to be any further impact. We have also increased provisions by a further £5m for contract risks and for project claims to take into account the challenging business environment.
During the course of the year we have pursued measures to help manage the business, including: reorganising our operating structure; implementing cost reduction programmes; controlling capital expenditure; and focusing on our core business, leading to the decision to dispose of our rail and pipeline design businesses. Since the financial year end, we have:
completed the disposal of our pipeline design business, Mouchel Energy Ltd, to Mott MacDonald Ltd for an initial consideration of circa £2.55m in cash; and
completed the sale of Mouchel Rail to Sinclair Knight Merz for £3.4m in cash. Mouchel will retain net realisable assets (principally trade recieveables and unbilled revenue) of a further £2.5m.
We’ve continued to respond to decreased turnover by reducing staff costs. Unfortunately this saving has been more than offset by a reduction in revenue. We refinanced our principal banking facilities in January 2011, and again in November 2011. This refinancing provides the Group with the stability and headroom it requires and ensures that we can continue to compete in our chosen markets.
The Group has made an excellent start in developing its business in Australasia in joint venture with Downer, a leading construction company in Australia and New Zealand. The joint venture has won a further two contracts this year, taking the total to three highway maintenance contracts with Main Roads Western Australia (worth £126m to Mouchel over five years) and is now pursuing opportunities on the East Coast of Australia. We are actively looking to strengthen the joint venture and our broader relationship with Downer.
Our new 10-year incremental partnership contract with Bournemouth Council (worth £148m over 10 years) commenced on 1 December 2010 and we have been encouraged over the year by seeing other local authorities preparing for similar service transformation, outsourcing and partnerships with the private sector. Our five-year extension to our business process outsourcing (BPO) partnership with Middlesbrough Council (worth circa £70m to the Group) commenced in June 2011. This extension provides improved profitability and reduced risk compared with the first 10 years of the contract.
Further strategic wins during the year include:
a contract with the Highways Agency (HA), in joint venture with Thales, to run the National Traffic Information Service (NTIS). This seven-year contract (worth £28.5m to Mouchel over the period) is central to the HA’s role of managing traffic and making the most efficient use of the existing road network; and
two major highway design and infrastructure planning contracts in Saudi Arabia.
Order book
The Group’s order book stood at £1.4bn at 31 July 2011 (excluding the rail and pipeline design businesses), compared with £1.8bn the previous year. This drop in part reflects our reduced ability to secure new orders from December 2010 to April 2011, when we were subject to a number of approaches from companies wishing to acquire Mouchel. The ‘offer period’ proved to be a disruption to our staff and to our clients. Uncertainty over the Group’s finances has caused additional difficulties. Despite the reduction in bidding activity during the ‘offer period’, the order book provides good visibility of the Group’s forward workload. We have secured nearly £220m of new contracts and extensions during the year.
Pipeline
Our pipeline, which includes only tenders where we have been shortlisted to bid, together with contract extensions, stood at £2.2bn at 31 July 2011 (not including the rail and pipeline design businesses) (2010: £2.2bn). However, our pipeline is under pressure due to the difficulty in securing new large local government contracts in our current financial position. Nevertheless, we are still winning substantial business from our existing clients and seeing the number of opportunities in our core markets beginning to rise. In the wake of the 2010 CSR, a number of local authorities are now coming to market for ‘long and large’ bundled service partnerships with the private sector. Given the scale of these opportunities, we are focusing only on those where we believe that we have competitive advantage.
Following its review by the Department for Transport, we have now moved into the final stages of the Sheffield PFI highways maintenance contract tender, where we are, working with Carillion, one of two remaining bidders. We are also bidding for highway maintenance contracts in Scotland and recently have been shortlisted for the HA’s Asset Support Contract for Area 10 in the North West of England. We are currently tracking additional prospects worth £1.0bn, which fall outside our bidding pipeline as shortlists of suppliers have not been drawn up.
Outlook
The outlook for Mouchel is challenging in the short term. Our revenue is likely to be under continuing pressure as a result of uncertainty last year arising from our financial position and takeover approaches which is adversely affecting our ability to win new business. The economic environment is also putting pressure on margins across our markets as clients continue to face cutbacks in spending. Our new lending facilities give Mouchel the necessary stability we need whilst we restructure our balance sheet in the first half of 2012. But the facility also has associated costs. As a result of all of the above the Board’s expectations for the outcome for 2012, compared with the current year, are significantly reduced.
I joined Mouchel as Chief Executive with the aim of putting this business back on a firm footing, so we can move forward with the confidence to deliver on behalf of all our stakeholders. I will be looking at the Group’s business and strategy over the coming months and will focus on cash, our costs and our customers. I will be reviewing every aspect of Mouchel, including the markets we operate in, our operating model and our management structure. I will be looking aggressively at our cost base and particularly at our supporting functions and our central overheads. I will give an update to the market as quickly as possible, and expect to conclude by the time we announce our interim results in March 2012.
I know that Mouchel has good core businesses and is operating in markets with strong long-term growth prospects. We employ thousands of talented and dedicated members of staff who help to transform client organisations and to deliver excellent services to the public. We provide the very services our clients need in this climate – to help them to maintain, or improve, outputs whilst lowering their costs. We now have a management team that will make the same changes in-house.
The new management team will take firm and decisive action to meet the challenges we face. This team will work closely with all stakeholders to reduce debt, to restore stability and to return Mouchel to growth.
On behalf of the Board
Grant Rumbles
Group Chief Executive
29 November 2011