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Focusing on clear financial KPIs

We are a financially focused business. We monitor and challenge financial performance at all levels to probe the health and progress of our businesses and promote accountability. As well as profitability, we use a range of financial measures at Group level. Collectively they form an integral part of the way we build consistent, long term value for our shareholders.

Our principal financial KPIs

Aim Progress  
  2009 2008

Earnings per share

Achieve long term steady growth in EPS

 38.75p 33.26p

Operating margins

Maintain and strengthen margins

 13.31% 13.15%

Free cash flow

Maintain strong free underlying cash flow

 £280m £219m

Return on capital employed (ROCE)

Achieve ROCE which exceeds our cost of capital

 20.6% 20.3%

Economic profit

Achieve steadily increasing economic profit

 £162m £139m

Gearing – interest cover

Maintain an efficient capital structure, with relatively low gearing

 10.9x 7.4x

Capital expenditure

Keep at or below 4% of revenue

 2.5% 3.5%

We focus particularly on KPIs in 7 areas and these remain our priorities for 2010:

Earnings per share (EPS)

  • Underlying earnings per share (p)*

  • Annual growth: 17%
  • 5 year compound growth: 17%
Underlying earnings per share (p)chart
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*excluding intangible amortisation, non-cash impact of mark to market £10m (2008), £40m (2009). movement on financial instruments, loss on disposal of business and exceptional costs relating to the Arch cru funds.

Aim: to achieve long term growth in EPS.

Long term growth in EPS is a fundamental driver to increasing shareholder value. Board Directors’ long term incentive schemes have EPS targets to align their interests with those of our shareholders.

Progress: In 2009, underlying earnings per share grew by 17% to 38.75p (2008: 33.26p).

Operating margin

  • Underlying operating margin %*

  • Annual increase: 16pts
Underlying operating margin (%) chart
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*excluding intangible amortisation, non-cash impact of mark to market £10m (2008), £40m (2009). movement on financial instruments, loss on disposal of business and exceptional costs relating to the Arch cru funds.

Aim: to maintain and strengthen margin.

We constantly monitor operating margins and manage operating costs to keep the business efficient and cost effective.

Progress: In 2009, we continued our long term trend of steadily improving underlying operating margin with an annual increase of 16 basis points (bpts) to 13.31% (2008: 13.15%).

Cash flow

Aim: to maintain strong operating and free cash flow. We generate a predictable and consistent cash flow.

Progress: In 2009, we generated excellent cash flow with £437m generated by operations, representing an operating profit to cash conversion rate of 122% (2008: 122%). Our underlying free cash flow, defined as operating cash flow less capital expenditure, interest and taxation, increased by 28% to £280m (2008: £219m).

Our success reflects the strength of our business model and management approach, including: securing timely payment terms; focusing on cash generation; providing valued services and maintaining an efficient finance function.

  • Cash flow from operating activities (£m)

  • Annual growth: 11%
  • 5 year compound growth: 17%
Cash flow from operating activities (£m) chart

Exceptional additional pension contribution £50m (2004), £10m (2008), £40m (2009).

View textual description

  • Free cash flow (£m)

  • Annual growth: 28%
  • 5 year compound growth: 21%
Free cash flow (£m) chart

Exceptional additional pension contribution £50m (2004), £10m (2008), £40m (2009).

View textual description

Economic profit

Aim: achieve steadily increasing Group economic profit. We are focused on delivering value for our shareholders.

An effective way of measuring this is to assess whether our after tax returns are sufficient to cover the returns required from all our capital providers (Weighted Average Cost of Capital – WACC). Group economic profit allows us to assess whether the return generated on the average capital base is sufficient to meet the base return requirements of our investors (debt and equity). Positive economic profit therefore means that we have created value above this base level.

Progress: In 2009, we achieved positive economic profit of £162m (2008: £139m).

  • Group economic profit

  • Annual increase: 17%
  • 5 year compound growth: 25%
Group economic profit chart

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  2004 2005 2006 2007 2008 2009
Underlying operating profit (£m) 156* 183 225 271 321 358
Average capital (£m) 696 776 880 998 1,155 1,271
Tax (%) 28.1 27.7 27.7 27.7 27.0 26.8
WACC (est %) 8.5 8.2 8.4 8.6 8.2 7.9
Capital charge (£m) (59) (64) (74) (86) (95) (100)
Tax (£m) (44) (51) (62) (75) (87) (96)
Economic profit (£m) 53 68 89 110 139 162

*excluding exceptional items

Return on capital employed (ROCE)

  • Net return on capital (%)

  • 2009: 20.6%
Net return on capital (%) chart
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Aim: steadily increasing ROCE which exceeds our cost of capital.

This ensures that we add shareholder value over the long term. In recent years we have successfully widened the margin between the cost of our capital and the returns we generate by investing it.

In the chart on the left the weighted average cost of capital (WACC) indicates the return that could be expected from the capital invested in the business. It is calculated by weighting the cost of our debt andequity financing in line with the amounts of debt and equity that we use to finance our activities. We have calculated our WACC assuming a risk free rate of 3.97%, an equity risk premium of 6.95% and a Beta of 0.69.

Progress: During 2009, our post tax return on average capital employed improved to 20.6% (2008: 20.3%). This compares to our estimated WACC which is 7.9%.

Gearing

Aim: maintain a conservative and efficient capital structure, with a relatively low level of gearing.

It is important for our clients that we are a low risk, stable partner, particularly where we are delivering large scale operations on their behalf and even more so during the current volatile economic conditions. The Group has substantial headroom to take on further debt if necessary, as indicated by the interest cover ratio and net debt to earnings before interest, tax, depreciation and amortisation and Arch cru costs (underlying EBITDA). However, we would be unlikely to incur borrowings which would reduce interest cover below 7 times.

Progress: Group interest cover for the year ended 31 December 2009 was 10.9 times.

Balance sheet gearing

  2009 2008
Net debt    
Bond debt (£m)** 582 679
Bank facilities drawn/(deposit) (£m) (182) (87)
Loan notes (£m) 3 4
Bank term loan (£m) 200 –
Other 2 –
Total net debt (£m) 605 596
Interest cover 10.9x 7.4x
Net debt to EBITDA 1.5 1.6

**Underlying net debt after impact of currency and interest swaps.

Debt profile: We have substantial headroom to take advantage of opportunities to add value to shareholders as they arise. Following repayment of £100m in June 2009, we have £579m of private placement debt which matures between 2012 and 2018. Alongside this we have raised a £200m bank term loan maturing in July 2011 and have an unused revolving credit facility of £245m maturing in December 2011.See note 23 and note 26.

Capital expenditure

  • Capex as % of turnover

  • 2009: 2.5%
Capex as % of turnover chart
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Aim: keep capital expenditure (capex) at or below 4% of revenue.

This helps us to focus investment on the opportunities that generate greatest shareholder value and avoid tying up too much capital in long term projects.

Progress: In 2009, we met this objective, with net capex at 2.5% of annual revenue. We believe capex at or below 4% is sustainable for the foreseeable future. There are currently no indications of significant capex requirements in our business forecasts or bid pipeline. But we would not rule out the possibility of exceeding 4% if we saw an exceptional opportunity to use our financial strength as a competitive advantage.

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