Jarvis warns profit margins set to tumble - both this year and next

Jarvis has agreed a “revised cost structure” with Network Rail to deliver a lower volume of work. Jarvis has warned that its profit margins will fall and this year’s results will be “slightly below management expectations”.

More tellingly, it adds that the next financial year’s figures will be “significantly below expectations”

The deal had to be struck as a result of a statement on 22 January by Network Rail announcing its intention to “significantly reduce from current levels” its IMT track renewals volumes and expenditure.

The planned cut-backs will come into force on 1 April 2009 and stay in place until 31 March 2010.

Jarvis issued a trading update this morning on the Stock Exchange spelling out the knock-on effect which is: “As a result of this agreement, the company will reduce its operating costs to reflect these lower levels of activity.

“It is expected that the associated restructuring will, overall, result in a neutral cash flow position to the company.

“The company is still in the process of reviewing the financial impact of the projected lower volumes, however it is anticipated that operating margins in 2009/10 will be adversely impacted.”

Rail

A strong third quarter in rail enhancement works. Following the completion of the Rugby remodelling project in December, volumes have fallen.

The electrical projects team continues to experience strong demand.

The London North East (LNE) Integrated Management Team (IMT) track renewals contract has performed well throughout the year and has achieved the key performance indicators set by Network Rail.
 

Plant

The On Track Machines (OTM) and Small Plant businesses mirrored the strong performance in Rail in the third quarter.

As a result of Network Rail's decision to reduce its track renewals volumes in 2009/10, the company has cancelled its plans to order new vehicles for its transport division in the final quarter of this financial year.
 
The knock-on consequences of reduced track renewals volumes in 2009/10 on demand for OTM are not yet clear.

However, it is likely that they will result in significantly lower utilisation levels. Network Rail has initiated a bid process for a one year OTM contract to reflect the lower volumes, and the company is in the early stages of responding to that process.

Facilities Management

Jarvis Accommodation Services has continued to see an improvement in its performance. Margins on several contracts have improved.

The directors say the outlook is worse then previously anticipated.

“In the third quarter of the current financial year, the company performed in line with management expectations,” they report.

“In the final quarter, rail project volumes are declining significantly, as expected, and performance will be affected by unrecovered costs as a result of a shortfall in replacement contracts in the early part of the next financial year.

“As a consequence of this, operating results for the full year are now expected to be slightly below previous management expectations. 

“Operating results in the 2009/10 financial year are now expected to be significantly below previous management expectations.”