CEO's Review (2009 Preliminary Results)

Tom Haughey
Chief Executive Officer

Overview

Business

Many prime projects were started or successfully completed in the last 12 months, including several related to the London 2012 Olympics; the 46 storey Heron Tower; The Shard of Glass, London Bridge; PFI hospitals; Westfield Stratford, Europe’s largest retail development; and new gas power stations in Nottinghamshire.
The Company has performed admirably on all of its projects.

The Company’s strong focus on client satisfaction, value and programme adherence continues to generate repeat business and high market share. As we entered 2010, the Company secured a target petrochemical project in the Middle East.
Regrettably since then the market has weakened, particularly in price terms, to the extent that we will be very selective when tendering for new business through the remainder of this year.
Our Joint Venture in India is a very important driver for future growth and production is scheduled to commence this summer.

UK Market

In 2010, the consensus view is that the overall construction market for steel will be approximately 50% down from its peak in 2007, but that it will stabilise and recover gently from 2011.

The key sectors going forward include transport, power (including waste), health and education, together with fewer but important individual UK projects in the traditional commercial, retail, industrial and warehousing sectors.

The Company will continue to monitor the UK’s demand/supply balances and price levels to determine its optimum business configuration.

Order Book

The Company’s order book remains relatively strong at £219 million and for the last six months has reflected the change in the market, consisting of a higher proportion of smaller scale, lower margin projects.
The Company has a good workload base for 2010 and beyond.

Costs and Capacities

In January 2010, significant salary and pay reductions were introduced across the business to lower costs. These, together with other measures, will generate savings of over £10 million in the current year.

The employees of the business have recognised these difficult measures as necessary to maintain the competitiveness of the Company against the background of intense market pressures.

Around 20% of our fabrication capacity has been removed through streamlining and reduced working hours, resulting in improved optimisation against demand across the Group.

Notwithstanding our recent successes, conditions in 2010 remain poor in the general UK market and opportunities in the Middle Eastern markets are tight.
The Company will continue to monitor developments and evidence of recovery.

Prices and Margins

As expected, the last quarter of 2009 saw UK market prices fall to lower levels, which will have a subsequent impact on margins.
The Company’s view is that current prices have reached the bottom of their trough, albeit that they are likely to recover slowly and generally in line with prevailing material cost increases.
The Company, through its joint venture Steel UK, remains one of Europe’s largest buyers of structural steel.

In international markets our exchange rate benefits and relatively low shipping costs are being offset by competitive pricing pressures.

India

The opportunities in India continue to manifest positively.
JSW Severfield Structures Ltd will commission its plant in the summer, with the overall project remaining on time and within budget.
The 35,000 tonnes per annum output plant will be fully commissioned by the end of this year and will employ 270 people.
The second joint venture with Structural Metal Decking will also become operational in the summer.

The total Indian construction expenditure in 2010 is estimated at £100 billion and predicted growth for the sector is 8-9% per annum.
The comparative UK expenditure in 2009 was approximately £33 billion.
First contract awards are being targeted during May 2010.

Projects

• 2012 Olympic Stadium
• Riverside Museum, Glasgow
• ExCeL Exhibition Centre Extension, London
• The Rock Shopping Centre, Bury
• 2012 Olympic Media Centre
• Dublin Airport Extension
• York University
• West Cheshire College, Ellesmere Port
• St Botolphs House Commercial Office, London
• Ropemaker Place Commercial Office, London
• St Botolphs Commercial Office, London
• Cannon Place Commercial Office, London
• London Borough of Newham Schools
• The Shard of Glass, London Bridge
• The Angel Building Commercial Office, London
• Heron Tower Commercial Office, London
• Westfield Stratford City Shopping Centre, London
• Staythorpe Power Station, Newark
• West Burton Power Station, Nottinghamshire
• Victoria Hospital, Kirkcaldy
• Heathrow Terminal 5C
• Bombardier, Belfast
• Montevetro Commercial Office, Dublin
• Riverbank House Commercial Office, London
• Stratford City Link Bridge, London
• One New Change, London
• New Court Commercial Office, London
• Data Centres in Yorkshire and Hertfordshire

Health, Safety and Sustainability

Further ambitious objectives have been set for 2010, particularly in relation to Sustainability.

Risk Management

The Company has had a proactive and formal approach to risk management.
It is nearing the completion of another major review being conducted in conjunction with Willis.
The emphasis of this review has been changed to reflect issues arising from more challenging operating conditions for the whole supply chain and the Company’s growing international presence.

Summary

The Company has enjoyed several very successful years and is in a strong position in terms of its balance sheet, cost base and core market advantages to compete in the current market.
In the UK, recovery is likely to be slow beyond 2010, with the Company’s focus on growth coming from overseas business, primarily from its joint venture in India.

Tom Haughey
Chief Executive Officer