A seventh successive year of substantial growth in earnings per share and dividend is an outstanding achievement, especially in the current economic climate, which has made market conditions very challenging.

Our ability to perform strongly in current market conditions reflects the benefits of implementing a consistent and successful strategy for sustainable profitable growth, supported by a commitment to behaving in accordance with our core values and applying rigorous risk management policies and processes.

Our strategy

• Growing support services and Public Private Partnership (PPP) projects
• Developing and marketing integrated solutions tailored to the needs of customers, including project finance, design and construction, maintenance and lifetime asset management
• Maintaining a strong and selective construction capability focused on higher added-value contracts for long-term customers, especially the delivery of PPP projects and integrated solutions for support services customers.

The effects of our strategy
The success of our strategy is clearly evident in our track record, having

• transformed Carillion from being primarily a UK construction company into a leading UK support services business
• delivered seven successive years of significant earnings and dividend growth, with underlying earnings per share and our dividend increasing over the last five years at compound annual growth rates of 15 per cent and 14 per cent, respectively
• consistently achieved or exceeded our financial and strategic objectives
• created a resilient business mix with strong market positions, both in the UK and internationally.

The transformation of Carillion’s business away from a heavy dependence on UK construction into one of the UK’s leading support services companies, with a large portfolio of PPP projects and a strong and selective construction capability, has given us the resilience to perform strongly in 2009 and the platform to make further progress in 2010.

A resilient business mix
In 2009, 66 per cent of underlying operating profit came from long-term contracts for support services and PPP projects, which are more resilient in cyclical downturns. The remaining 34 per cent of underlying operating profit came from construction services, where earnings have also become more resilient, due to contract selectivity and geographical diversification, which have greatly reduced our dependence on the UK and increased the contributions from our international businesses, notably in the Middle East. In 2009, Middle East construction services accounted for 21 per cent of underlying operating profit, with construction services (excluding the Middle East) accounting for 13 per cent.

Strong market positions
In transforming our business mix, we have also developed strong positions in new market sectors, while selectively capitalising on our existing strengths.

In support services, through organic growth and acquisitions, notably Mowlem and Alfred McAlpine, we have built a UK business that has the skills and resources to provide customers with nationwide services to manage, maintain and operate property and infrastructure. Our ability to combine our skills and resources and use leading-edge technology to deliver fully integrated services for large, complex property estates and infrastructure networks, is one of our key strengths. For example, we provide facilities management and other support services for hundreds of thousands of buildings, including an estate of around 43,000 houses for military personnel in the UK and some 7,000 properties for BT. We also provide management and maintenance services for over 17,000 kilometres of roads in the UK and Canada and for extensive sections of the UK’s rail and public utilities networks.

We have been a leader in Public Private Partnership (PPP) projects since the inception of the UK’s Private Finance Initiative in the early 1990s. Since then, we have won over 50 PPP contracts in the UK and Canada, for hospitals, schools, prisons, military accommodation, roads and railways. We also led the way in developing the secondary market for PPP equity and to date we have sold 28 equity investments, generating proceeds of some £279.9 million and a pre-tax profit of £105.6 million.

In the Middle East, where we have had Joint Venture construction businesses for nearly 40 years, we have built an outstanding reputation for quality and reliability through delivering many of the region’s most prestigious projects, including Dubai Festival City, the Grand Mosque in Oman and more recently the Yas Hotel, which forms the centrepiece of Abu Dhabi’s new Formula 1 Grand Prix circuit.

In construction services (excluding the Middle East) our experience spans almost two centuries, as Carillion brings together the heritage of Tarmac, Mowlem and Alfred McAlpine. Our highly selective approach has focused our construction skills on fewer higher value-added projects for long-term customers, particularly PPP projects for which our ability to provide fully integrated solutions helps to differentiate us from our competitors. For example, our portfolio includes the UK Government Communications Headquarters in Cheltenham, 20 major hospitals and other healthcare facilities, over 140 new schools, several prisons and numerous motorway, trunk road and rail projects.

Our values
	Openness		Professional delivery
	Collaboration		Sustainable profitable growth
	Mutual dependency		Innovation

Applying our core values to everything we do is creating a culture focused on understanding the needs of customers and using the Group’s wide range of skills and resources to create high-quality, value-for-money solutions to meet those needs.

Operational risk management

The application of rigorous risk management policies and processes also plays an essential role in our success. These policies and processes are firmly embedded in our culture and designed to identify, mitigate and manage strategic risks and those specific to individual business and contracts, including economic, social, environmental and ethical risks. These processes are described in more detail in the Corporate Governance report.

The Group Head of Risk is responsible for advising on strategic risk issues across the Group and for oversight of risk training. The Group Head of Risk is also responsible for carrying out independent appraisals of all projects before these are submitted to the Major Projects Committee, which is a committee of the Board that sanctions all major commitments and transactions, including capital expenditure, major contracts and business acquisitions and disposals. The Committee has delegated authority up to specified levels of risk, beyond which Board approval is required.

We apply our risk management processes to every aspect of our operations, from choosing our market sectors and the contracts for which we bid, to the selection of our customers, partners and suppliers. We also apply them to every stage of a contract, from its inception to completion, in order to deliver high-quality services for our customers and the cash-backed profit we expect.

The principal risks facing the Group are summarised in the table below, together with the measures we have in place to mitigate and manage these risks.

Business disposals

In 2009, we disposed of two non-core businesses, Carillion IT Services and Enviros, an environmental consultancy business, generating total gross proceeds of £62.4 million. In line with our policy of selling equity investments in Public Private Partnership projects once they have moved successfully into the operational phase and reinvesting the proceeds in new projects, we sold investments in a further four mature projects during 2009, generating total proceeds of £100.7 million.

Operational risk management

	Risk			Mitigation
	Managing our pension schemes to ensure that scheme liabilities are within a range appropriate to our capital base			The Group’s main defined benefit schemes have been closed to future accruals and been replaced with defined contribution schemes. Investment policies are reviewed regularly to ensure that employee and company contributions, together with scheme benefits, remain appropriate
	Continuing to win orders in markets that are more competitive			We maintain a firm focus on cost reduction and efficiency to remain competitive. We are committed to ‘living’ our values in everything we do to ensure we listen to, and understand the needs of, our customers and offer solutions tailored to meet their needs
	The impact of the current global economic downturn on the financial stability of our customers, partners and suppliers			We apply rigorous selectivity criteria to the choice of customers, projects, partners and suppliers, in relation to their financial stability, the security of project funding and contractual terms and conditions
	Managing major contracts to ensure they are delivered on time, to budget and to the required standards			We apply rigorous selectivity criteria to ensure that we take on contracts only where we understand the risks involved and can manage them. We apply equally rigorous policies and processes to monitor and manage contract performance
	Maintaining financial discipline			We apply strong cash management policies and processes to deliver cash-backed profit

Group key performance indicators in 2009

The Board set six Group key performance indicators for 2009, in respect of which the Group has performed strongly, as discussed below.

1. To continue to attract, develop and retain excellent people by being an employer of choice.
Delivering the high-quality services that our customers expect and upon which the reputation of Carillion and that of its customers depend, requires excellent people at all levels throughout the Group. The services we provide are often critical to the success of the public and private sector organisations for which we work and for whom Carillion employees are frequently the ‘public face’. Consequently, our ability to attract, develop and retain excellent people by being an employer of choice remains our top priority.

In 2009, we continued to develop and implement our bespoke leadership, personal development and employee engagement programmes, which are designed to help all our people achieve their full potential.

We strongly believe in the power of engaging with, and empowering, our employees to play a full role in improving service delivery and the overall development of our business, through creating a culture of trust and open communication. Our managers and supervisors seek to engage with all our people through regular one-to-one meetings, individual performance and development reviews and monthly team talks, supported by newsletters and our national award winning company newspaper, ‘Spectrum’. Successful employee engagement depends on listening to what our people tell us and acting upon it. Therefore, in addition to one-to-one meetings and team talks, we also conduct regular employee surveys to help us monitor and measure our progress. For example, every year we conduct ‘The Great Debate’, a major interactive survey in which our people, selected randomly from across the Group, share their views on a wide range of issues that are important to their personal development and satisfaction and to the success of Carillion. In 2009, 3,867 people took part in The Great Debate, the results of which showed that we made very good progress across the Group, with improved responses in 21 out of 23 areas tested and significant improvements in key areas relating to the satisfaction of our people, such as the extent to which they feel valued at work and feel proud to work for Carillion.

2. Be a recognised leader in the delivery of safety and sustainability in the sectors in which we operate.
The health and safety of our people and everyone who works with us or is affected by our operations is paramount. Our corporate objective, known as ‘Target Zero’, is to eliminate all reportable accidents. This demanding objective requires the constant vigilance and the commitment of everyone in Carillion in order to ensure that everyone consistently adopts safe working practices.

We support the achievement of Target Zero with a wide range of tools including training, audits, our hazard reporting programme ‘Don’t Walk By’, Safety Action Groups, strong visible leadership, such as regular Directors’ Safety Tours and employee engagement activities. Carillion’s behaviour standard, ‘Behaving Safely’, which was launched in 2008, was widely embedded across our businesses during 2009 and we have started to measure progress using workforce feedback.

In 2009, the Group’s Accident Frequency Rate (AFR) was 0.13 reportable accidents per 100,000 man hours worked (2008 AFR: 0.14), with four out of five operational sites, worldwide, achieving Target Zero. The improvement we achieved in 2009, on an already relatively low accident rate in 2008, reflected our continuing and rigorous focus on reducing reportable accidents to zero. It is particularly pleasing to note that in 2009 the accident rates in our construction businesses in the UK and the Middle East reduced by around 40 per cent.

In 2009, we continued to submit information on the Health and Safety performances of all our business units to the Corporate Health and Safety Performance Index, which is sponsored by the Health and Safety Executive and covers all aspects of Health and Safety management and performance. A wide range of industries participates in the Index and this enables us to benchmark our performance beyond our own industry sector. In 2009, our Index score of 8.3 (2008: 8.0) continued to show year-on-year improvement. This score compares very favourably with the average Index score of 6.7 and places Carillion in equal 16th place out of the 127 organisations that chose to take part in the 2009 Index.

We deeply regret that in 2009 there was one fatal accident in which Kenneth Campbell, a Carillion employee at a quarry in Scotland, was fatally injured when the vehicle he was driving overturned on the quarry haul road. No other vehicle was involved. Every accident is a personal tragedy and our thoughts are very much with the family and friends of Mr Campbell. Two prosecutions of Carillion companies by the Health and Safety Executive were completed in 2009. One of these related to an accident that occurred in the former Alfred McAlpine business, before it was acquired by Carillion.

Being a leader in delivering sustainable solutions for our customers continues to help differentiate Carillion from its peers. In 2009, Carillion was included in the Top 20 UK companies in the Sunday Times Best Green Companies. We also continued to improve our ranking in Business in the Community’s (BITC) Corporate Responsibility Index, moving from a ‘Gold’ to a ‘Platinum’ ranking, with a score of 96.5 per cent, which topped the support services sector. The Corporate Responsibility Index involves a detailed, independent third-party assessment of company strategy, management processes and performance. The average score of participating companies was 87.5 per cent, which demonstrates that Carillion not only continues to be a leader in the support services sector, but that our performance ranks favourably with that of all participating companies. Carillion also continues to be a member of the FTSE4Good Index.

3. Deliver integration and re-organisation cost savings arising from the acquisition of Alfred McAlpine of £35 million in 2009 and achieve a run rate of £50 million per annum by the end of 2009.
Absolute integration and re-organisation cost savings were £35 million in 2009 and by the year end we had achieved a run rate of £50 million a year, fully meeting this key performance indicator.

4. Deliver materially enhanced earnings.
Underlying earnings per share⁽¹⁾ increased by 14 per cent to 39.0 pence per share (2008: 34.3 pence per share). Achieving this key performance indicator, despite challenging market conditions, reflected the resilience of the Group’s business mix, including strong international businesses, and the benefits of the Alfred McAlpine integration and re-organisation cost savings.

5. Generate cash-backed profit.
Delivering cash-backed profit from operations continues to be an absolute priority for all Carillion’s business units. A rigorous focus on cash management has once again resulted in strong underlying cash flow from operations of £268.2 million (2008: £198.3 million), which represented 136 per cent of underlying profit from operations of £196.8 million (2008: £165.2 million).

6. Continue to reduce year-end net borrowing.
At 31 December, the Group had net cash of £24.9 million, compared with net borrowing at 31 December 2008 of £226.7 million. This reflected the Group’s strong cash flow from operations, together with total gross cash proceeds of £163.1 million from the sale of investments in Public Private Partnership projects, in line with the Group’s policy of recycling these investments, and from the disposal of non-core businesses.

2010 KPIs

The Board has set the following key performance indicators for 2010
	To attract, develop and retain excellent people
	Be a recognised leader in Health & Safety and Sustainability in the sectors in which we operate
	Continuously improve customer satisfaction and brand reputation
	Continue to reduce costs and improve efficiency to support earnings growth
	Generate cash-backed profit.

Outlook and prospects

In view of the wider economic environment, we expect market conditions to remain challenging in 2010. However, we have a substantial high-quality order book and a good pipeline of contract opportunities in each of our business segments. Consequently, the Group continues to be well positioned with a resilient business mix and we believe we will make further progress in 2010.

The Group’s order book was worth approximately £17.7 billion at the year end (2008: £20.4 billion), with the reduction since December 2008 due to the sale of equity in Public Private Partnership projects and the disposal of non-core businesses. In addition, we had a pipeline of probable new orders worth some £2.0 billion at the year end (2008: £3.1 billion).

In support services, the outlook is positive. We have our largest ever pipeline of contract renewal and new contract opportunities, and currently only some 15 per cent of expected revenue in 2010 is not already covered by our order book and probable orders. The level of new contract opportunities reflects the pressure on both public and private sector organisations to reduce costs and increase efficiency through outsourcing non-core services. We expect this trend to continue and in the public sector to accelerate, following the UK General Election in 2010, as both central and local government are expected to step up their efforts to reduce the costs of delivering better public services. As market conditions are expected to remain competitive, we will maintain our financial discipline and continue to apply strict contract selectivity criteria in order to underpin our margins. Having increased our operating margin in this segment to 4.9 per cent in 2009 (2008: 4.6 per cent), we are targeting a margin of around five per cent in 2010.

In Public Private Partnership (PPP) projects, we have a good pipeline of concession contracts for which we are either the preferred bidder or shortlisted. This reflects the strong positions we have in our target market sectors in the UK and in Canada, where we expect continuing opportunities for new projects, notably in the education sector in the UK and in the health sector in Canada. Consequently, we expect to continue adding new PPP projects to our portfolio. We also expect to continue to explore opportunities for selling equity investments in mature projects, namely once construction of the asset has been completed and the project has moved successfully into the operational phase with the support services contract fully established. Therefore, we expect to continue generating significant value for the Group through our PPP equity investments.

In Middle East construction services, currently some 85 per cent of expected revenue in 2010 is already covered by our order book and probable orders. In addition, we have a strong pipeline of contract opportunities that is currently worth over £4 billion, the largest elements of which are in Abu Dhabi and Oman. Given our reputation for delivering projects to the highest standards of quality and reliability, we expect to continue benefiting from the region’s major investment programmes, notably in Abu Dhabi and Oman, and also in Qatar where we have recently established a new business. Following the global economic downturn, rather than negotiating contracts we are now tendering competitively for contracts in this region. As a result, we expect our operating margin to reduce from the very high level we achieved in 2009 of 8.5 per cent (2008: 7.4 per cent). However, we are still targeting a healthy margin of over six per cent in 2010. Furthermore, given the scale of opportunities we have in the region, we believe that the medium to long-term outlook also continues to be positive, with margins expected to stabilise in the medium term at between five and six per cent.

In construction services (excluding the Middle East), we expect the contribution to revenue from the UK to continue to decline in 2010, in line with our expectations, by applying strict contract selectivity criteria. In Canada, we expect further growth in 2010 partially to offset the reduction in UK revenue. Through contract selectivity we will continue to ensure that the size of our construction business is appropriate to support the delivery of PPP projects, the needs of our support services business and our expectations for reduced demand in our other UK construction markets. We have already made significant progress in this regard and 100 per cent of expected revenue for the year in this segment is already covered by the order book and probable orders. Maintaining financial discipline and contract selectivity will also support our objective of moving the combined operating margin for all our construction activities, including the Middle East, towards three per cent in 2010.

John McDonough
Group Chief Executive
3 March 2010