Our operational performance

Alan Dunsmore

Chief Executive Officer

2023 was a very successful year, achieving strong revenue and profit growth and moving into next year with a high-quality order book, highlighting the successful evolution and execution of our strategy."

Introduction

2023 was a very successful year, with the Group achieving record revenue, delivering underlying profits of more than £32m and securing a significant value of new, high-quality work. This strong performance reflects the high quality of our operations and highlights the successful evolution of our strategy and the benefits of our significant market sector, geographical and client diversification. This has resulted in a well-balanced Group which has provided us with the resilience to maintain and improve our market positions and expert capabilities and has enabled us to keep growing the business despite the ongoing market headwinds. The Group's strong overall performance is reflected in our high-quality order books of £510m in the UK and Europe and £139m in India.

In 2023, we increased our revenue by 22 per cent to £491.8m (2022: £403.6m) and our underlying profit before tax by 20 per cent to £32.5m (2022: £27.1m). This performance has converted into cash, with operating cash conversion of 145 per cent (2022: (25) per cent), resulting in net funds (on a pre-IFRS-16 basis) at the year-end of £2.7m (2022: net debt of £18.4m). Statutory profit before tax, which includes non-underlying items, was £27.1m (2022: £21.0m), an increase of 29 per cent over the prior year.

In 2023, the Indian joint venture ('JSSL') recorded output of more than 100,000 tonnes, including sub-contracted work, an output equivalent to that of the Group's operations in the UK and Europe and a record for the business. This increased activity is evident in the Group's higher after-tax share of profit of £1.3m (2022: £0.8m), which reflects an increase in revenue and a record EBITDA of £11m. We remain very positive about the long-term trajectory of the market and of the value creation potential of JSSL. Together with our joint venture partner, our plans to secure a plot of land in India to facilitate the future expansion of the business remain well advanced.

Based on the Group's continued progress, our strong balance sheet and confidence in the future prospects of the business, the board is recommending an increase in the final dividend to 2.1p per share, resulting in a total dividend for the year of 3.4p per share (2022: 3.1p per share), an increase of 10 per cent on the prior year.

Strategic update

The Group's well-established strategy is unchanged, focused on growth and diversification, both organic and through selective acquisitions, operational improvements and building further value in JSSL, all of which, in combination, will deliver strong EPS growth. Our clear focus on balance sheet strength and cash generation enables us to continue making the right decisions for the long-term, to maximise our competitive advantage and to best position us in our chosen markets for continued sustainable, long-term growth.

Acquisitions

In April 2023, after the year-end, we completed the acquisition of Voortman Steel Construction Holding B.V. ('VSCH'), an innovative steel construction group based in the Netherlands, for a net consideration of €24m. This provides us with a manufacturing base in Europe to complement our existing European business and will help accelerate our European growth strategy. The acquisition is expected to be earnings enhancing in 2024.

In addition to VSCH's core steel fabrication markets in the Netherlands, we are seeing opportunities for growth through its access to the high growth Dutch electricity distribution sector and capabilities in design and build (turnkey) solutions for simpler structures, a business which is currently in its infancy, serving SMEs and smaller projects. The acquisition also provides us with growth opportunities through access to new European clients, particularly in the industrial, commercial and residential sectors, a platform to broaden our service offering and an ability to grow in different sectors and geographies, enhancing our position as one of Europe's strongest structural steel services groups.

VSCH is renowned in the Netherlands for its in-house knowledge, innovation and expertise. The business is well invested with modern and highly efficient production facilities, co-located with Voortman Steel Machinery Holding B.V. ('VSMH'), a manufacturer of steel fabrication machinery. The acquisition will allow for areas of future collaboration with VSMH including the development of robotic production technology, proprietary fabrication software and bespoke equipment.

Clients

We continue to invest to meet the needs of our clients, building our capabilities and driving efficiency across new and existing facilities, to ensure our growth ambitions are fully supported. We remain focused on providing value added results for our clients whilst balancing time, cost and quality objectives, with an emphasis on building strong and long-standing client partnerships.

Our unique capability to deliver complex design and engineering solutions, our capacity and speed of fabrication and our management of the integrated construction process is vital for our clients and a key differentiator for the Group. This is fundamental to our success and has been critical to securing new work and growing our revenues over recent years. This year we have delivered challenging programmes for clients, reduced costs through both our pre-tender value engineering and also post-award engineering solutions and developed innovative building solutions for temporary works and pre-assembled sections to work in live operating environments. In addition, when market pressures stretched existing budgets or delayed certain construction programmes, our operational delivery capabilities allowed us to help clients deliver changes to these programmes quickly and efficiently, to provide them with problem-solving solutions and to ensure that programme milestones were achieved.

Business and operational improvement

In 2023, the Group launched Project Horizon, our new digitisation project. The objective is to maximise the automation of our estimating, design, production and contract delivery processes to improve client service and deliver efficiency and capacity benefits. Workflows comprise over 100 short, medium and long-term individual projects and initiatives designed to modernise and further standardise processes and systems across the Group. We currently have 14 dedicated colleagues working on the project, which will initially be self-funded through annual savings, with further benefits expected to be realised as more of the identified projects and initiatives are implemented. The project is a long-term initiative that we believe will shape our future as we enhance our systems and leverage digital solutions, to ensure we remain at the forefront of technology and innovation as market leaders in the industry.

As part of Project Horizon, we continued to make good progress with our innovative approach to drawing and design, including the automation of repetitive tasks and the optimisation of engineering software (including the use of engineering apps), which is now being used on an increasing number of construction projects across the Group. Other ongoing initiatives include the digitisation of construction resource tracking and the automation of the quality assurance certification process.

From an operational improvement perspective, initiatives worked on during the year included the continued expansion and automation of our fabrication capability and the ongoing improvements to real-time factory information at our main production facility in Dalton. This included improvements in our paint shops, 'right first time' initiatives to improve overall quality including the targeted reduction of factory and site NCRs (rework items) and drawing office errors, together with ongoing roll out of mobile devices to capture information at the point of use and to provide live information to both operatives and management.

UK and Europe review

The future success of the Group is determined, amongst other things, by the quality of the secured workload and our discipline to maintain risk-based contract selectivity irrespective of economic conditions. The UK and Europe order book at 1 June includes a significant amount of new, high-quality work and stands at £510m (1 November 2022: £464m), including £25m for VSCH, of which £375m is planned for delivery over the next 12 months. This provides us with good earnings visibility for 2024 and beyond. The order book remains well-diversified and contains a good mix of projects across the Group's key market sectors. In terms of geographical spread, 90 per cent of the order book represents projects in the UK, with the remaining 10 per cent representing projects for delivery in Europe and the Republic of Ireland (1 November 2022: 95 per cent in the UK, 5 per cent in Europe and the Republic of Ireland).

As well as our secured workload, we are encouraged by the current level of tendering and pipeline activity across the Group. We are seeing some significant opportunities in the UK and in continental Europe as, despite some current softer market conditions in the distribution sector and delays in client decision-making, many of our chosen markets continue to have a favourable outlook – the Group has a prominent position in market sectors with strong growth potential and is well-positioned to help accelerate the journey to Net Zero. Many of these potential projects play to the Group's core competencies – large complex projects that require high quality, rapid throughput, on-time performance and full co-ordination between stakeholders.

As previously announced, with effect from 1 April 2022, to align our existing businesses more closely with the ten market sectors that we serve and our growing client base, the previous structure of six mainly location-based business units has been streamlined into three new divisions. Under this new divisional structure, we have separated our core construction operations (delivering steel superstructures) into a Commercial and Industrial division and a Nuclear and Infrastructure division, and created a new Modular Solutions division. The Modular Solutions division consists of the growing modular product ranges of Severfield (Products & Processing) ('SPP') and of Construction Metal Forming ('CMF'), our cold rolled steel joint venture business.

Commercial and Industrial

The Commercial and Industrial ('C&I') division brings together the Group's strong capabilities in the industrial and distribution, commercial offices, stadia and leisure, data centres, retail, and health and education market sectors. During the year, we continued to work on the new stadium for Everton F.C., the Co-op Live Arena in Manchester, Pinewood Studios in Shepperton and the Google Headquarters at King's Cross, which is now largely complete. We also started work on the Envision Battery Plant in Sunderland, creating an electric vehicle hub supporting next generation EV production, to help accelerate the transition to Net Zero carbon mobility. Other significant revenue contributing projects include several large distribution facilities in the UK, the ExCel Arena in London and a number of mid-sized office developments, both in the UK and Republic of Ireland (including Wilton Park in Dublin and new developments at King's Cross and Canada Water in London).

The C&I order book at 1 June of £372m (1 November 2022: £308m) includes a significant amount of new work which we have secured over recent months. This includes Sunset Studios in Hertfordshire, a large data centre in London, two large commercial office developments in London, together with various industrial and distribution facilities in the UK. Most of our work is derived through either negotiated, framework or two-stage bidding procurement processes, in line with the risk profile of the work being undertaken.

Despite some ongoing softness in the distribution sector and delays in client decision-making, we continue to be encouraged by the current level of tendering and pipeline activity across the Group, seeing some significant opportunities both in the UK and in continental Europe, supported by the acquisition of VSCH. These include data centres, stadia and leisure projects, commercial offices, film studios and projects in support of a low-carbon economy such as battery plants, energy efficient buildings and manufacturing facilities for renewable energy.

In the UK and EU, we are seeing a new wave of opportunities for battery gigafactories to support domestic zero carbon vehicle production, with a number of facilities currently being planned or considered. Furthermore, the UK's emergence as a major hub for film, television, advertising and gaming production is also leading to an increase in demand for film and TV studios. Demand for data centres in the UK and EU is also expected to continue, fuelled by cloud computing, smartphones and artificial intelligence, together with the continued post-pandemic trend for remote working. The Group's manufacturing scale, speed of construction and on-time delivery capabilities, leaves us well-positioned to win work from such projects, all of which are likely to be designed in steel.

Nuclear and Infrastructure

The Nuclear and Infrastructure ('N&I') division encompasses the Group's market-leading positions in the nuclear (new build, decommissioning and defence), power and energy, transport (road and rail) and process industries sectors. During the year, we continued to work on several HS2 bridge packages for the Balfour Beatty and EKFB (Effage Kier) consortia, together with road and rail bridges including the A1 Birtley to Coalhouse and A46 Binley bridges and the M42 junction 6 and M25 junction 28 road improvement schemes. From a nuclear perspective, ongoing contracts include work at Hinkley Point and some large projects at Sellafield and in Berkshire for AWE.

The N&I order book at 1 June was £133m (1 November 2022: £151m) of which 47 per cent represents transport infrastructure (1 November 2022: 52 per cent) and 47 per cent represents nuclear projects (1 November 2022: 46 per cent). Notable recent awards include some new bridge projects reflecting investment in infrastructure by Highways England and Network Rail, and a large secondary steelwork package for General Electric at Hinkley Point. This involves a unique flat pack delivery system for the steelwork (access platforms and mechanical handling steel for the two turbines at Hinkley), greatly reducing site storage space while providing greater cost and programme certainty. Our nuclear business has also recently been selected as one of two 'key delivery partners' to deliver structural steelwork with an estimated value of c.£250m at Sellafield as part of the long-term Programme and Project Partners ('PPP') framework.

As part of the Autumn Statement in November 2022, the UK Government reconfirmed its commitment to deliver major infrastructure projects, highlighting investment in infrastructure and sustainability, as central to boosting growth and productivity. Despite the expected delays to some aspects of the Road Investment Strategy and HS2, which the government confirmed in March 2023, the Autumn Statement reaffirmed its commitment to deliver Sizewell C, HS2 to Manchester and core Northern Powerhouse rail links as set out in the £650 billion National Infrastructure Strategy ('NIS') from 2020.

The Group is well-placed to meet this demand for ongoing state-backed investment, including a growing focus on infrastructure which can mitigate the impacts of climate change and deliver energy security. These requirements dictate a significant transition in national energy infrastructure including renewable electricity generation and storage, nuclear power (including small modular reactors ('SMRs')) and several other new energy supply initiatives. We have already secured some significant road and rail bridge awards, new nuclear and rail electrification work and we continue to make good progress with several other similar opportunities in the pipeline. In general, we remain well-positioned to win work in the transport, nuclear and power and energy sectors sector given our in-house expertise and unmatched scale and capability to deliver major infrastructure projects, together with the high entry barriers for competitors.

Modular Solutions

The Modular Solutions (‘SMS’) division consists of the growing modular product ranges of SPP based in Sherburn and of CMF, our cold rolled steel joint venture business based in Wales. We continue to be the only hot rolled steel fabricator in the UK to have a cold rolled manufacturing capability. The division has been awarded ‘Fit for Nuclear’ and certain Network Rail accreditations which, together with an expanding client base and our previous record in modular construction, we believe will help us to achieve our future growth aspirations. The SMS division consists of three main business areas:

In 2023, we have maintained our focus on growing our Severstor product ranges, which attract higher margins. We continue to make significant progress in growing our revenues and client base. We have secured repeat orders from several blue-chip clients in the power, rail and oil and gas sectors as well as continuing to develop our growing pipeline of opportunities, including in growth areas such as renewable energy and data storage.

For supply chain, we see opportunities to supply the modular sector with steel sub-assemblies and systems for temporary accommodation and other buildings, and factory-built houses. These opportunities are being driven by the market growth in the supply of modular buildings for education and healthcare and for modular homes. To this end, to complement our hot-rolled capability, we have continued to develop CMF’s cold-rolled product range which now includes load bearing frame and deck profiles, purlins and side rail systems, supported by the business’s new manufacturing facility in South Wales which is now operational. As the modular market matures, clients are seeking greater scale, reliability and quality in the supply chain, all of which Severfield can offer, to ensure that its market share is maintained and increased in line with market growth.

For our higher margin Rotoflo products, we have an established foothold in the UK water treatment sector and have continued to develop the overseas footprint of the business, aided by our sales manager in India. We have quickly established a presence in the Indian paint manufacturing sector, where we see some potentially interesting opportunities. Future growth markets also include chemical processing, food processing and waste-water treatment in the UK, US, India and Australia.

General market conditions

Inflationary pressures and supply issues for both us and our clients have continued to present challenges throughout the year. Rising steel prices, supply constraints on certain materials and increased energy and labour costs have continued to drive upward pressure on total build costs, which in turn has placed increased strain on the supply chain. Towards the end of the financial year there were signs that some of these headwinds were starting to ease, with inflation falling in certain areas.

We are continuing to manage these pressures well and the Group’s scale, financial and operational strengths and disciplined processes have helped to ensure that we have not experienced any significant disruption or material impact to profitability. For existing projects, any additional costs have generally been offset by a combination of operating efficiencies, higher selling prices, forward purchasing and contractual protection as steel remains largely a pass-through cost for the Group. For steel, we also benefit from relationships with supply chain partners in the UK and continental Europe, reducing the risk of interruptions to the Group’s steel supply.

India review

In 2023, JSSL recorded a record output of more than 100,000 tonnes, including sub-contracted work, which is an output equivalent to that of the Group’s operations in the UK and Europe. This increased activity is evident in the Group’s higher after-tax share of profit of £1.3m (2022: £0.8m). The improved performance reflects an increase in revenue of 37 per cent to £137.7m (2022: £100.3m) and an improved operating margin of 6.3 per cent (2022: 5.2 per cent). Financing expenses of £5.1m (2022: £3.3m) are higher than the previous year, as a result of an increase in borrowings, partly driven by the impact of inflation on working capital, and in the cost of letters of credit which are linked to higher steel prices. These higher financing costs result in JSSL’s operating profit of £8.7m (2022: £5.2m), which has increased by 67 per cent year-on-year, reducing to a profit before tax of £3.6m (2022: £1.9m).

Notwithstanding some current market pressures in India, JSSL has continued to win new work, resulting in a strong order book of £139m at 1 June 2023 (1 November 2022: £143m). In terms of mix, 55 per cent of the order book represents higher margin commercial work, with the remaining 45 per cent representing industrial projects (1 November 2022: commercial work of 36 per cent, industrial work of 64 per cent).

Following JSSL’s continued successful recovery from the effects of COVID-19, which is reflected in its record EBITDA for 2023 of £11m, we have revalidated our Indian business plan. This process has reaffirmed the numerous growth opportunities that were identified pre-pandemic, including those in new and existing market sectors, and the significant value creation potential of JSSL. In conjunction with JSW, our joint venture partner, our plans to secure a plot of land in India to facilitate the future expansion of the business remain well advanced. This additional land will allow the business to expand its geographical footprint whilst providing it with the platform to expand quickly and add the necessary volume to support the expected future market growth.

In summary, JSSL’s strong order book, improving pipeline of potential orders and identified growth opportunities, leave the business well-positioned to take advantage of a very encouraging outlook for the Indian economy and a strong underlying demand for structural steel in construction.

ESG

Safety

The health, safety and wellbeing of our staff, subcontractors, suppliers, clients and the public remains the Group’s top priority. In 2023, following significant improvements in safety performance in previous years, whilst our accident frequency rate (‘AFR’) reduced to 0.14 from 0.16, we saw our injury frequency rate (‘IFR’) increase to 1.61 from 1.49. Although the overall IFR has increased, the result for 2023 reflects improved IFR performance in many areas of the business, including in our manufacturing operations and for our recently acquired infrastructure business (DAM Structures) which, disappointingly, has been offset by higher IFRs in some areas of our construction operations. Whilst our safety statistics continue to be industry-leading, we remain committed to continually improving and focusing on leading indicators in our pursuit of ‘no harm’. We have updated our behavioural safety programme, which is based on awareness, training, coaching and visible leadership, and have launched our Safer@Severfield initiative, which will further ingrain our culture of employee engagement, commitment and our life saving rules.

Sustainability

ESG remains at the forefront of our strategic decision making. As a result of decisions made in recent years, the Group remains in a prominent market position in the high-growth markets of the future and is well-positioned to assist in accelerating the journey to Net Zero in its core sectors. We align our ESG approach with the UN Sustainable Development Goals (‘SDGs’), through a variety of central and local initiatives.

In 2023, we maintained our carbon neutral accreditation from the Carbon Trust for scope 1, 2 and operational scope 3 emissions for our manufacturing, office and construction operations. As part of our sustainability strategy towards Net Zero, the Group monitors greenhouse gas (‘GHG’) emissions in line with the Streamlined Energy and Carbon reporting (‘SECR’). An interim target on this transition to Net Zero, is our commitment to reducing our scope 1 and 2 GHG emissions by 25 per cent by 2025 against a 2018 baseline, aligned with the Paris Agreement to limit global warming to below 1.5 degrees Celsius. By the end of the financial year, we had achieved this target ahead of schedule with the successful transition to sustainability initiatives, including the use of hydrogenated vegetable oil (‘HVO’) at our factory and construction sites and switching to renewable energy contracts (‘REGO’).

In 2024, we will be submitting near and long-term carbon emissions targets for approval by the Science-Based Target Initiative (‘SBTi’). These targets are aligned with the objectives of the Paris Agreement and a commitment to reach Net Zero emissions by 2050 across scope 1, 2 and 3. We will disclose progress against these targets on an annual basis through our annual report and our Carbon Disclosure Project (‘CDP’) reporting.

In 2023, for the third year running, the Group was included in the Financial Times (‘FT’) listing of Europe’s climate leaders which showcases corporate progress in fighting climate change. For 2023, this list includes the c.500 European companies that have achieved the greatest reduction in their GHG intensity. In the FT listing, for businesses with a rating from the CDP, only those with a score of at least ‘B-’ were considered. In 2023, we were awarded a ‘B’ rating in the CDP index and a supply chain score of ‘A-’ as well as maintaining our ‘very good’ BES 6001 responsible sourcing accreditation, highlighting our continued engagement with our supply chain to promote sustainability.

As a SteelZero signatory, we previously made the commitment to procure 100 per cent low carbon steel by 2050, demonstrating the importance of transitioning to low embodied carbon steel production in the construction sector. In 2023, we joined the SteelZero policy taskforce collaborating with the Climate Group and other members on the most effective approach to capturing and reporting data for the Steel Zero framework. In 2024, we plan to start disclosing our progress against low carbon steel procurement to the Climate Group.

Recognising the importance of social value, we have adopted the National TOMs – Themes, Outcomes and Measures – methodology framework to focus our future commitments on all areas of social value both internally and in partnership with our clients. This has included monitoring and measuring our social value contribution as a Group including areas such as apprentices, local spend and volunteering.

Social

The Group actively engages with its colleagues to hear their perspectives, including through our Group-wide ‘MyVoice’ forums, which provide valuable, ongoing insights and feedback for the board. In 2023, these forums, which form a significant part of our listening and engagement strategy, have facilitated improvements to health and wellbeing provisions, facilities and leadership communication.

2023 was a particularly challenging time with the cost-of-living crisis and the Group has provided support to its colleagues, including one-off cost-of-living payments and enhanced employee benefit packages. In addition, our annual pay awards have taken into account ongoing inflationary pressures, and we have implemented higher pay increases for our more junior and lower paid colleagues. All of our colleagues are paid at or above the real living wage.

During the year, the Group further bolstered its commitment to young people, recruiting a record number of UK apprentices, across a range of disciplines and becoming a gold member of ‘The 5% Club’, demonstrating our commitment to ‘earning and learning’. This will help improve the innovative thinking and fresh ideas required to sustain the industry and the Group into the future.

In 2023, the board also reviewed the performance and potential of an expanded population of colleagues from Executive Committee downwards enabling us to make better informed decisions on talent development and succession planning. This has facilitated the roll out of new development programmes, including through partnering with external bodies to deliver events such as a Team Leader Development Programme and Senior Leadership Development Centres.

Board changes

In October 2022, the Group announced the appointment of Mark Pegler as a non-executive director, to serve on the remuneration, nomination and audit committees. This appointment forms part of the board succession process and it is intended that Mark will become audit committee chairman following the retirement of Tony Osbaldiston in July 2023. Mark spent over a decade as Chief Financial Officer at Hill & Smith PLC, overseeing the significant international growth of the business, both organically and through acquisition. This knowledge will be highly beneficial to the Group as it continues to build on the considerable positive momentum within the business.

Summary and outlook

In 2023, the Group has delivered a strong financial performance whilst managing inflationary pressures well. We have significantly increased revenues and profits in the UK and India, our order books are substantial and of high quality, and our balance sheet and cash position remain healthy. The Group’s businesses are well-positioned in markets with excellent opportunities, underpinned by our new, simplified divisional structure and the acquisition of VSCH. All this provides us with an excellent platform to fulfil our strategic growth aspirations.

Whilst there are signs of inflation easing, we remain mindful of the macro-economic backdrop. However, given the Group’s performance to date and the strength of our order books, we are confident of delivering further progress and a result for 2024 which is in line with our expectations.

Alan Dunsmore

Chief Executive Officer

14 June 2023