Half-yearly management report
AEA - INTRODUCTION
AEA is one of the world’s leading energy and climate change consultancies. AEA’s core strength lies in its ability to advise governments and business on how best to reduce their consumption of energy and minimise emissions in the most cost effective manner. The acquisition of PPC during the summer of 2008 enabled AEA to access the US market and gave the Group a data systems capability. AEA can now offer its customers’ integrated strategy, implementation, evaluation and data collection solutions.
The Group employs over 900 people within the UK, Europe and US and continues to work on prestigious projects involving the UN, EU, the World Bank, US and UK Governments.
AEA'S VIEW OF THE MARKET
The need for governments to take action on global warming is now widely understood. The risk to the global economy, the global habitat and its consequences for the human population are so severe that even in a time of economic slowdown it remains a priority action for government and industry.
Science is driving the targets that governments are now setting by regulation. There are two horizons to be faced; the reduction in emissions necessary by 2020 and a further reduction in the level of emissions necessary by 2050 to keep the increase in global temperatures to 2oc. The 2oc target has been set because, whilst there will still be significant environmental and economic consequences resulting from this increase, it is a threshold which scientists believe will maintain the huge deposits of methane (one of the worst of the greenhouse gases) captured under the Siberian ice shield and thereby prevent runaway global warming.
To restrict a global temperature increase to just 2oc will require decisive inter-governmental action. The next forum for inter-governmental discussions is expected to be the UN Climate Change Conference in Copenhagen during 2009. At that meeting discussions will focus on what measure of responsibility the US and Europe should take for the current situation and therefore whether these economic zones should have higher target levels compared to those set for China, India and the rest of the world. US President-Elect Obama has already made a policy commitment for an 80% reduction of greenhouse gas emissions by 2050. No target is set for 2020. The EU has set targets for reductions in Co2 emissions of 20% by 2020 because it believes that clear and decisive action is required now if the 80% reduction target by 2050 is to be achieved. The UK and Scottish Governments have also committed to an 80% reduction.
AEA is at the very heart of helping governments translate these high level targets into actions, which need to be taken in the various sectors of the economy. As a principal advisor to the UK Government’s Climate Change Committee and the new Department of Energy and Climate Change (DECC), AEA has an in-depth understanding of how science is driving these targets going forward and what measures need to be taken to ensure that the UK meets its international obligations. The Group has been at the heart of considering what investment and encouragement is needed and how the return on that investment can be measured across the economy. Governments are going to base their decision making on data derived from the effectiveness of these measures against an economic backdrop where difficult choices need to be made.
The picture in the US is no different and the acquisition of PPC by AEA enables AEA to enter the US market at this critical time. As in the EU, government will, through the creation of regulation, initially create the market but in the medium term the real growth will be seen in the private sector.
All this new regulation will generate significant amounts of new data. Governments will require new systems to understand what data to collect, how to interpret it and how to modify policy and plans in the light of actual results. PPC is a leading supplier to the US Government in designing systems to collect and manage energy and climate change data. Its major customers include the US Department of Energy and the Environmental Protection Agency amongst others.
The combination of AEA's understanding of the complexity of government regulation, the measures necessary to achieve the 80% reduction in emissions and PPC's ability to design and build bespoke systems for government and the private sector places the Group in a strong strategic position.
At a time of economic slowdown businesses have to make hard choices regarding their investment strategies and as additional regulation comes into force in 2009 there will, initially, be an extra burden of reporting. AEA firmly believes that the need for businesses to reduce emissions will focus action on investing in energy and resource efficiency programmes as well as infrastructure. AEA is uniquely placed to advise businesses on where to focus this investment in order to maximise the return. Whilst there will be a need to invest in infrastructure, a greater priority will need to be given to minimising the consumption of resources and energy because it offers a more immediate payback.
STRATEGY
Against this background there are two key elements in AEA’s medium-term growth strategy:
- To take its know-how into the EU and US markets by providing policy support, technical services and behavioural change programmes, which will help governments meet their climate change targets.
- To leverage its knowledge of government targets and trends in regulation and enable the private sector to reduce carbon emissions and develop business strategies for climate change at minimum cost.
The first part of this strategy was underpinned by the acquisition of the US-based environmental and information management consultancy, PPC, in August 2008.
ACQUISITION
The acquisition of PPC on 22 August 2008 has enabled AEA to enter the US market and transfer its strong technical knowledge from the UK into the US. The acquisition also gave AEA the capability of providing a data systems offering to its existing UK and European customer base. This will be necessary to collect the significant volumes of new information that will be generated by the new regulations as they are progressively implemented from 2010 onwards. Governments will continue to look for evidence-based regulation, whilst the private sector will be looking for ways to select appropriate areas for investment and to maximise the return on that investment. Both of those requirements will need to be underpinned by a data driven decision-making process. The combination of AEA’s ability to understand what needs to be measured and to be able to evaluate that data and PPC’s ability to organise systems to collect that information and deliver it to the various end-users gives AEA a very powerful offering in this market. The integration of that capability is progressing well and a number of projects in the US, UK and Europe have been identified as strong potential opportunities.
PPC, based in Washington, has an excellent track record and a number of key relationships in various departments of the US Government. While this clearly offers AEA a defined route to expansion in the US, just as importantly PPC enhances AEA’s expertise in water and environmental information systems as well as strong systems integration capability.
BUSINESS PERFORMANCE
AEA has made good progress in the first half of the year. There has been a strong performance in orders growth, which is up by 48% over the period to £34.3 million (2007: £23.1 million). Importantly, and in line with AEA’s strategy, growth in private sector orders rose by 139% as demand for the Group’s consulting abilities grew, particularly with the launch of Ecopath and Fuelpath, two products which enable private sector businesses to reduce their energy costs and Co2 emissions. In the US, post acquisition, PPC won an important five-year framework contract with the US Government for approximately $60 million despite strong competition from many of the major US multinational corporations. By contrast the UK Government sector continued to be slow and, as anticipated, a number of AEA’s major programmes, including Envirowise and Sustainable Production and Materials, were reduced by in excess of 50%, which impacted Group revenue.
Revenue in the first six months increased by 1% to £35.6 million (2007: £35.3 million) with strong growth in energy and climate change projects, air and water quality activities and the Group’s innovation and knowledge transfer practice area. The reduction in the scope of major government programmes resulted in a significant reduction in subcontractor through costs, which has impacted revenue but has had no impact on the Group’s profit. Excluding the subcontractor through costs on those contracts, revenue was up 12% to £31.8 million (2007: £28.3 million). UK Government now represents only 70% of revenue compared to 78% at September 2007.
AEA has now completed its major investment in strengthening its marketing & sales, commercial, resourcing and recruitment capabilities, which added an additional £1.1 million to the cost base in the first half. That is the main reason why adjusted operating profit only rose by 5% to £3.9 million (2007: £3.7 million). This investment has enabled AEA to transfer its knowledge of energy and climate change regulation and advice from government into the private sector, in advance of the growing pressures on business to reduce Co2 emissions through a reduction of energy and consumption of resources as a result of the Climate Change Bill. Operating profit increased by 14% to £4.2 million (2007: £3.7 million), after £0.1 million (2007: nil) of amortisation of acquired intangibles and a one-off exchange gain of £0.4 million (2007: nil) arising on deposits of US Dollars purchased to effect the acquisition of PPC.
Net interest payable has been impacted by an increase in the net pension charge of £0.7 million to £0.8 million (2007: £0.1 million). Net bank interest payable has reduced from £0.8 million to £0.6 million due to reductions in average net borrowings over the period. Overall total interest including the pension interest has increased by £0.4 million, which resulted in the growth in profit before tax being 4% (2008: £2.9 million; 2007: £2.8 million). Excluding net pension finance costs, a £0.1 million amortisation charge on intangibles and a one-off exchange gain of £0.4 million arising on the acquisition of PPC leads to an adjusted profit before tax of £3.4 million (2007: £2.9 million), which is 17% growth.
The acquisition of PPC has resulted in a £2.4 million increase in the Group’s deferred tax asset and the creation of a £2.0 million deferred tax liability. However, there is no tax charge in the US as taxable income is offset by available tax losses. Overall the Group has no tax charge for the six months (2007: nil).
The adjusted earnings per share remains at 2.0 pence (2007 restated: 2.0 pence) as a result of an increase in the weighted average number of shares due to the Rights Issue (see note 11). Basic earnings per share reduced to 1.7 pence (2007 restated: 1.9 pence) per share.
FINANCIAL POSITION
Net assets
Following the acquisition of PPC in August 2008 (
note 6) the balance sheet of the acquired subsidiary has been consolidated within the Group balance sheet. The fair value of PPC’s assets and liabilities consolidated as at 30 September 2008 (2007: nil) are detailed in
note 6 to this Half-Year Report.
Net debt and cash flow
Net debt increased from £19.4 million at 31 March 2008 to £25.6 million. The net movement of £6.2 million reflects net proceeds of £36.2 million from the Rights Issue, offset by cash outflows in respect of the PPC acquisition of £35.8 million, a cash outflow from operations of £4.7 million (2007: £4.4 million), exchange movements on foreign currency borrowings of £1.1 million (2007: nil), net interest/tax outflows of £0.6 million (2007: £0.8 million) and capital expenditure of £0.2 million (2007: £0.2 million). Conversion of profit into cash continued at a good level but cash outflow from operations was impacted by the seasonal nature of the business and the change in the profile of the Envirowise through-costs as noted above. Included in the cash outflow of £4.7 million from operations (2007: £4.4 million) are payments to settle legacy issues of £2.8 million (2007: £5.1 million) and payments to reduce the pension deficit of £2.8 million (2007: £0.6 million).
Rights Issue
On 5 August 2008 the Company issued 99,302,000 shares at a price of 40 pence per share. This Rights Issue raised £36.2 million after expenses. Of the funds raised, £35.8 million was used to partially fund the acquisition of PPC and the balance is to provide additional working capital to the enlarged Group. Further details can be found in
note 8.
Pensions
The net balance sheet liability for retirement benefits has decreased to £56.0 million (31 March 2008: £60.0 million, 30 September 2007 £57.2 million). This decrease has occurred as a result of changes to the financial assumptions used in calculating the present value of funded obligations. In particular, the discount rate increased to 7.0% (31 March 2008: 6.6%, 30 September 2007: 5.8%). An actuarial review of the pension deficit is underway and the outcome of that process is not expected until later this financial year.
PRINCIPAL RISKS
The mitigation of risk is a key part of the management of AEA and the Group has a developed process to identify, manage and limit its exposure to areas that may have a negative impact on its business. The principal risks and uncertainties faced by the Group have not changed significantly since the publication of the 2008 Annual Report and these are described on pages 16 and 17 of that document. The acquisition of PPC has not significantly changed the risk profile of the Group and PPC face similar risks to those identified in 2008. The risks identified at March 2008 were achieving organic growth, changes in the competitive environment resulting from government policy, recruitment and retention of sufficient high calibre people, retirement benefits and legacy issues. The Board keeps under review the potential effect of economic circumstances and the changing profile of the principal risks and ensures appropriate management of risk.
RELATED PARTY TRANSACTIONS
There have been no related party transactions that have a material effect on the financial position or performance of the Group in the first six months of the financial year.
OUTLOOK
AEA believes the market for energy and climate change consultancy will remain solid, despite the prospect of a deep global recession. Whilst there is the possibility of some delay, particularly in the US as the new President takes up office, this tougher economic climate will drive government and business to be more focused on costs and efficiency when mitigating the impacts of climate change.
AEA’s offerings are focused on helping government and business meet their climate change objectives, at the lowest economic cost. As government continues to drive the market the Group remains cautiously optimistic in the medium term.
By order of the Board
| Bernard Bulkin |
Andrew McCree |
Alice Cummings |
| Chairman |
CEO |
CFO |
| 26 November 2008 |
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