Foundations of Successkpmg.co.uk/email/03Mar13/280837/Foundations_of_Success_acc-v2.pdfWelcome Richard Richard Threlfall Threlfall UK Head Infrastructure, Building & Construction +44

FoundatiF d tions of Success

27 February 2013

Welcome

Richard ThrelfallRichard Threlfall UK Head Infrastructure, Building & Construction

+44 (0)113 231 3437 [email protected]

mailto:[email protected]

Margins

© 2013 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.

2

Insolvencies

Impact of Insolvencies over the current recessionary period Time

House House building building

Insolvencieswith high Property development

levels of debtFacilities management

Insolvencies with high levels of fixed

Contractors with fixed costs Contractors with fixed costs Steelwork/modular

costs/own labour Sub-contractors with own labour (M&E)

Main contractors

Run on Northern Rock

Connaught and Rok Kinetics Robinson Steel/Barratt

Steel/Pocklington Steel Doyle, Kirby and

Gayford, MJN Coulston, Rotary, Airedale

250250 224 224 217 219

200

150 153 161 149

190 186 173 177 142

177 143

177 163 155 143 147 127

Num

ber

99 96 94 100

5050

0 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2007 2008 2009 2010 2011 2012

Receiverships Administrations CVAs

Source: Insolvency Service.


3

30%

) (%

nge

hac ua

ln

nnA

20%

10%

0%

(10)%

(20)% (20)%

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

(30)% 19

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

10

GDP Construction (excl. Public) Construction (incl. Public)

UK GDP and Construction Output 1970 – 2010

SourceSource:: KPMG analysis KPMG analysis


4

% Quarterly growth

8 0% 8.0%

ConsensusGDP

fforecast

6.0%

4.0%4.0%

2.0%

-

Highest 2.0%

Median 1.1%

(2.0%) Lowest 0.3%

(4.0%)

(6.0%)

(8.0%) Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3Q3

2007 2008 2009 2010 2011 2012 2013

Construction output growth UK GDP growth

S ONS HM T

UK GDP and Construction Output 2007 – 2012

ONS, HM Treasury.Source:


5

Foundations of Success

Cost

Cash Growth

6© 2013 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.

7© 2013 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.

Event overview

Cost

Cash Growth

1The power of technology to transform cities Pedro Miranda

2The Debt MarketsClive Gibbard

3Cost Transformation Jeremy Kay

4PricingRobert Browne

5ThThe HHousebbuildiilding OOutltlookk Dane Houlahan

Interactive Infrastructure


8

Interactive Infrastructure


9

The Debt Markets

Clive GibbardClive Gibbard Partner, Debt Advisory

+44 (0)20 7311 1671 clive gibbard@kpmg co [email protected]


Debt Markets Current market conditions

W. European loan volumes and number of deals

500 400 NNum

ber of transaactions

Vol

ume

(US

$bn) 400

300

200

100

300

200

100

0 01Q07 1Q08 1Q09 1Q10 1Q11 1Q12

Investment grade Investment grade LeveragedLeveraged Number of transactions Number of transactions Source: LPC

W. European investment grade bond issuance

250 180 160

Pro

ceeed

s (U

S$b

n) 200 140

Num

bber o

f dea

ls

120150 100

80100 6060 4050 20

0 0 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12

Investment grade Investment grade Number of deals Number of deals Source: Thomson Bonds

W. European loan average margins

500

a

1Q07 1Q08 1Q09 1Q10 1Q11 1Q12

400

Mar

gin

(bps

)

300

200

100

0

LeveragedLeveraged Investment Grade Investment Grade Source: LPC

Historic 10-year GBP Credit Spreads

500

200

300

400

0

100

Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13

BBB A

Spr

ead

(bps

)

BBB A Source: DataStream


11

Debt Funding Challenges and Opportunities


12

■ Macro Activity and Outlook ■ Regulatory Pressure on

Financial Institutions ■ Sector Reliance on the Bank

Market ■ Limited number and appetite of

lenders ■ Positive Working C apital ■

unwinding

■ Government action ti■ Resolution of Lender Legacy

Positions ■ Development of Alternative

Funding Markets ■ Financial Markets Stabilising?

Optimising lender perceptions


13

Banks’ credit issues:

■ Activity and Pipeline ■ Profitability and Cashflow ■ Control and contingency ■ Transparency and disclosure ■ Security

Borrower opportunities:

■ Promote strong relationships ■ Demonstrate stability ■ Develop funding options ■ Demonstrate ‘self-help’ ■ Articulate credit story

Key Funding Strategy considerations


14

Strongcapitalisation capitalisation

expected to be a positive

differentiator

can miti tDebt structuring

itigate credit pressures

Funding diversityFunding

has value

Evaluation of JV Evaluation of JV vehicles should

include all funding impacts

pl i fPreparation and

lanning of funding provides flexibility flexibility

Cost optimisation

Jeremy Jeremy KayKay Partner, The Strategy Group

+44 (0)20 7694 4540 [email protected]


Cost optimisation

1 It’s time to act

2 Finding it

3 3 Delivering Delivering it it


16

It’s time to act 1

2012 Business Leaders survey

Changing business operation s to realise co st efficiencies


17

43%

Improving cash and working capital management 32%

Exploiting growth opportuniti es through successful transactions 30%

Preparing your organisation f or major busines s mode changes 25%

Managing and retaining the rig ht peop le within the organisation 24%

Addressing risk throughout t he organisation 21%

Average operating margin


18

2 Finding it – journey’s end?

PortfoP tf lilio – didispose//acquiire

Structural/Operating model Structural/Operating model

Effectiveness – less for less

Efficiency – same for less

Volume related

Discretionary

2 Finding it – do you know ...


19

11 How many layers between the

iGroup CEO

i ti ? and ‘man on tools’

in your organisation?

Good is 6 - 8 max 6 8 max

Opportunity to: ■ simplify

organisation ■ widen spans of

control ■ speed decision

making



20

22 What is the average revenue per

Opp erations Director ? Good is £50m £50m +

Opportunity to: ■ standardise

regional modelsregional models ■ improving spans

of control ■ re tf h lfocus the role

on value adding activity



21

33 What is your cost to value

ratio in pp rocurement? Good is 1:13 1:13

Opportunity to: ■ execute real

category management

■ enforce compliancecompliance

■ leverage Group scale



22

44 What proportion of your transactional

h d iactivity is done

toutside

?of a

shared service centre ?

Good is <15% 15%

Opportunity to: ■ consolidate and

rationalise activity ■ move to lower

cost locations ■ creatte

standardisation of process



23

55 What is your average IT spp end pp er user?

Good is £1.8k £1.8k

Opportunity to: ■ outsource ■ rationalise

applications and licences

■ reduce service levels

3 Delivering it – ‘eye of an investor’

Transparency

Fi i l Financial, organisation and operational

Hardeconomics

raT d ff b fit iT de off benefits, riskkand implementation

complexity

Speed Treat like a Treat like a

deal – weeks not months

Sustainability


24

Execution and making

it stick Engagement

Ownership, governance and communication

Comparators Internal sectorInternal, sectorand out of sector


25

Cost optimisation – in conclusion

1 Act now – don’t just catch up

2 Find it – raise the ambition

3 Deliver it – not business as usual 3 Deliver it not business as usual

Introduction to Strategic Pricing

Robert Robert BrowneBrowne

Partner, The Strategy Group

+44(0)20 44(0)20 73173111 89628962

[email protected]


Summary of KPMG pricing research

“Paying the Price for Recession”

Pricing trends during the recession and implications for

future strategy

■ In response to currentt economiic condiditions:ti

– 54% of companies ‘reduced prices across the board’,, and

– 63% implemented discounting policies without understanding the impact on demand

■ 70% of senior managers believe their organisations do not have a clear pricing strategy

■ 50% of senior managers believe they are in a price war


27

Why is pricing difficult? Buying capabilities are significantly more developed

Sellers / BD Vs. Buyers


28

Pricing is primarily a tactical lever to win work and

achieve sales objectives £ Purchasing is a capability strategic capability to cut costs and drive profitability

Strategy Conflict between market share (use capacity) and profitability

Reduce costs from supply base over time

Process Many pricing decisions are ad hoc and reactive

T ender processes used consistently

People People No pricing roles Sales and BD people have little

pricing and negotiation training

Purchasing department Proven techniques and training

for price-based negotiation

Data Don’t know competitors’ pricing

strategg ies Systems collect market pricing

and price history

Measures Focus on revenue not profitability % price or cost reduction

KPMG’s strategic pricing framework

Key questions

Strategy

Value creation creation

Price and offer structure

■ How do you create value for customers compared to competitors? • What are your sources of advantage?

■ How does the value you create differ by type of work and by customer type? ■ How are prices (and offers) set?

PolicyPolicy

Price and discount policy

Process and governance

■ What is the price and discount policy? ■ How are pricing decisions managed including

during the contract term? • Are you negotiating based on value?

Implementation


29

V l i ti d lli Value communication and selling

Pricing organisation and capability

■ Are you communicating and selling based value, not price?

on

■ What data, tools and skills are used in pricing decisions?

Pricing in the Construction sector Two rules…easy to understand, challenging to implement (1 of 2)

RULE NUMBER 1 RULE NUMBER 1

DO NOT CUT PRICES TO DO NOT CUT PRICES TO ACHIEVE REVENUE GOALS

■ Cuttingg pprices to achieve revenue ggoals is unlikelyy to drive enough extra business to break even on profitability (unless the market is growing quickly)

■ Offering “ad hoc” discounts or price cuts simply encouragges customers to seek them out

■ Empowering sales or bidding teams with additional “pricing flexibility” will accelerate price declines

■ Know your walk-away price / margin and stick to it – locking in low margin work will damage long-term profitability, particularly when the market improves


30

Pricing in the Construction sector Two rules…easy to understand, challenging to implement (2 of 2)


31

RULE NUMBER 2 RULE NUMBER 2

DEVELODEVELO P P TTARGETED ARGETED PRICING AND SALES

STRATEGIES

■ Design specific pricing actions to defend customers and / or types of work where you have an advantage

■ D evel op di scount policies with ri gidl y d efi ned parameters that empower the sales and BD team to sell incremental work

■ Monitor competitors’ pricing and respond strategically (e.g( g ., defend business we don’t want to lose)) ratherthan tactically to try to win every sale

■ Get alignment with sales and BD team…the best laid plans will have no effect if you cannot them on board

The Housebuilding Outlook

Dane Dane HoulahanHoulahan Corporate Finance

+44 (0)20 7311 8708 [email protected]


DRAFT

Housing market overview

■ The housing market continues to out perform relative to many other sectors and broader B&C sector

■ However this is not necessarily across the board….

1. Housing continues to outperform apartments

22. Cl d i N th / S th di idClear an i d increasing Nor th / Sou th divide

3. London market remains strong fuelled by overseas investors – is it a bubble?

■ ■ Mortgage availability is the key constraint in the first and second time buyer market

■ Financing for the sector is also an issue

■■ initiatives are needed Government committed to increase housing supply making some impact but more is


33

DRAFT

Consensus house price forecasts

Historic and forecast UK house prices

25.0

20.0

15.0

10.0

5.0

0.0

-5.0

-10.0

-15.0

11.5% forecast UK house price growth to 2017

1995 1996 1997 1998 1999 1998 2000 2001 2002 2003 2004 2003 2005 2006 2007 2008 2009 2010 2011 2012 2011 2013 2014 2015 2016 2017

0.5% 1.5% 2.0% 3.5% 3.5% 1995 1996 1997 1999 2000 2001 2002 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2016 2017

Halifax Savills Jones Lang LaSalle Midpoint

% c

hang

e

Moderate short term growth with improving outlook over the medium term

Source: Halifax, Savills, Jones Lang LaSalle

© 2013 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity. Source: Savills 34

Majority of growth driven by London and the South East

Forecast UK house prices by region

Region 2013 2014 2015 2016 5yrs to end 2017 5yrs to end 2017

UK 0.5% London 1 5% London 1.5% South East 1.5% South West 1.0% East 1 0% East 1.0% East Midlands 0.5% West Midlands 0.0% North East -0.5% North East 0.5% North West 0.0% Yorkshire & Humber 0.0% Wales 0.5% Scotland 0.0%

1.5% 4 0% 4.0% 3.5% 2.5% 3 0% 3.0% 2.0% 0.5%

-0.5% 0.5% 0.0%

-0.5% 1.5% 0.0%

2.0% 4 5% 4.5% 4.0% 3.0% 3 5% 3.5% 2.5% 1.0% 0.0% 0.0% 0.5% 0.5% 2.0% 0.5%

3.5% 5 0% 5.0% 4.5% 4.0% 4 5% 4.5% 4.0% 3.0% 2.5%2.5% 2.5% 2.5% 3.5% 2.5%

3.5% 11.5% 4 5% 21 0% 4.5% 21.0% 4.5% 19.5% 4.0% 15.5% 4 0% 17 0% 4.0% 17.0% 3.5% 13.0% 3.0% 7.5% 3.0% 4.5% 3.0% 4.5% 3.0% 6.0% 3.0% 5.5% 3.5% 11.5% 3.0% 6.0%

© 2013 KPMG LLP, a UK limited liabili ty partnership, i s a subsidiar y of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. This document is confidentia l and its circulation and use are restricted. KPMG and the KPMG log o are registered trademarks of KPMG International Cooperative, a Swiss entity.

35

Regional market outlook is driving strategies Regional for many of the nationals market outlook is driving strategies for many of the nationals

DRAFT

Performance of the listed house builders

60.00%

80.00%

100.00%

0.00%

20.00%

40.00%

‐40.00%

‐20.00%

Listed housebuilder index FTSE 100 FTSE All Share Index

June 2011 EV:Gross Asset Multiple: 1.0x Average EBIT margin: 8.9%

EV:P/E Multiple: 26.1x

January 202EV:Gross Asset Multiple: 1.0x Average EBIT margin: 11.8%

EV:P/E Multiple: 24.5x

100.00%

120.00% January 2013EV:Gross Asset Multiple: 1.35x Average EBIT margin: 12.1%

EVEV :P/E P/E MM ultilti pll e: 15.815 8 x

Note: The listed housebuilder i ndex is comprised of Barratt, Bellway, Berkeley, Bovis, Persimmon, Redrow and Taylor Wi mpey Source: Captial IQ

■ Strong relative performance to the market

■ Improving margins and KPIs – benefits of land write-down's flowing through

■ A number now focusing on thei r mei dium an d longer term landbanb k s


36

DRAFT

Increased corporate activity

The various market drivers have led to an increased level of corporate activity over the past 12 months

Persimmon’s acquisition of

Hillreed in October 2012

Rumours and subsequent attempted

take private around Redrow in 2011/2

GSO’s £160m equity investment in

Miller Miller in in March March 2012 2012

Crest Nicholson’s flotation in February

20132013

Oaktree’s acquisition of CountrysideProperties in

February 2013

And we expect to see further mid-market deals over the next 18 months… 1. Pent up deals 2. Banks looking to sell “inherited” assets

3. Nationals looking to grow land banks 4. PE interest in the sector


37

DRAFT

Finance constrained environment

Finance remains a key constraint particularly for SMEs…

■ Many of the larger players have been able to refinance

■ But many SMEs are capital constrained through:

– Reserves being eroded through the down-turn

– Lower LTV lending ratios from banks and/or a lack of appetite to lend

■ '2 speed' market developing between the 'haves and have nots'

Accentuating issues around how the sector can increase volumes in the short to medium term


38

DRAFT

Conclusions


39

Underlying demand / supply imbalance will supply imbalance will

remain

■ Will continue to vary by product and geography ■ North/South divide likely to continue to grow ■ Positive but cautious given linkage to the broader economy

Government policy willGovernment policy will remain important

■ 'Getting Britain Building' remains high on Government’ s agenda ■ New build seen as a key driver for recovery in construction and

the wider economy

Mortgage availability ■ Mortgages are the key constraining factor on the demand side ■ FirstBuy and NewBuy has made other some difference but needs

to be maintained

Finance availability for the sector

■ Financing for SMEs will continue to constrain new build volumes ■ Potential opportunities for new capital providers and market

entrants ■ Likely continued corporate activity

The housebuildingg sector can helpp lead the construction industryy back to continued ggrowth

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the ffutture. No one should act on such information without appropriiatte professional advice after a thorough examination of the particular situation.

© 2013 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).

Documents

Foundations of Successkpmg.co.uk/email/03Mar13/280837/Foundations_of_Success_acc-v2.pdfWelcome Richard Richard Threlfall Threlfall UK Head Infrastructure, Building & Construction +44