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‘Steady improvement’, story so far for RPS in 2018

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Now almost a year into the job, RPS chief executive John Douglas reviews the 2018 performance to date and strategic priorities, as the London-listed consultancy posts first half results which show further improvement spearheaded by the international energy business, whilst results elsewhere were mixed.

In the first six months of the year RPS has seen an acceleration in net fee income to £289m, with 6% growth over H1 2017 (in constant currency). Organic growth in fees is expected to come in at 5% for the full financial year, compared to 1.3% in 2017. Operating profit was up 2% to £29.4m, enabling a stable operating margin of just over 10%. Net debt was reduced to £90.5m.

Douglas commented: "The performance in the first half of the year has been steady overall, benefiting from a strong improvement in Energy. We have made good progress in respect of our strategic priorities including the re-organisation of the business that will provide a solid platform for growth." The new structure is said to be "flatter, more responsive...and with strong functional support".

'Underutilised capacity'

There was a 10% revenue increase and 50% rise in profit before tax to £4.7m for the energy operations - which houses 400 staff of the group's 5,600 total, as well as 350 associates. The full year PBTA for RPS Energy is expected at £8.9m in 2018, but this is still well below its peak contribution of c£36m in 2013. Douglas told EA: "Six months ago we were talking about an underutilised capacity in the energy business. We’ve now pulled out all the regional businesses [with direct exposure to the oil & gas sector] to run globally, reflecting the fact that the division’s employees and associates are geographically footloose.

"Energy clients are spending more but the bigger long-term projects are not really coming off yet; we are very much focused on the exploration and development side and we have strong ocean and coastal capabilities."

Aside from reinstating the full global energy business, other changes to the new six-division group structure include the creation of a Consulting UK & Ireland business and a Services UK & Netherlands business, a more granular approach than RPS’s previous integrated Built & Natural Environment Europe line. It has also defined the six sectors it is focused on (property, energy, transport, water, defence and security, and resources), as well as a dozen "service clusters" - of which one of these is environment, alongside others such as design and development, planning and approvals, training and water services.

Douglas provides the context for the reorganisation, stating: "Eighteen months ago when I came to RPS there were some 250 individual service offerings so it was no mean feat to redefine our business in this way…."

"The Consulting and Services divisions reflect our two biggest businesses [contributing c25% and 21% of the FY17 profit total]. Most of our environmental consultancy sits inside the Consulting segment - it's probably the number-one service cluster in the UK and Ireland - although not exclusively so. Services are more blue collar in focus, encompassing laboratory, leakage detection and other water services, as well as health, safety and risk, but there is also come consulting."

Brexit not too much of a concern

The 1,650-strong Consulting UK&I business saw a 1% dip in net fee income in H1 2018 compared to H1 2017 and a 12% drop in segmental profit with the margin reported at 13.3%. The RPS interim statement said: "Our design and development businesses in Ireland and Northern Ireland performed steadily, benefiting from strong public infrastructure spending. In Great Britain market conditions in our planning and approvals, environment and project and programme management businesses were generally good although the business has been held back by recruitment challenges, especially in London.

"We anticipate similar market conditions in H2 although any Brexit impact will be felt more keenly by this segment."

When asked if he considers Brexit a limiting factor for a British-based international firm working across the borders in Europe, Douglas responded: "The new segmentation of the business has allowed us to describe the impact which isn’t to the global operations. Instead it would be confined to mainly the UK and Ireland and to a lesser extent the UK and Netherlands businesses, and the rest will be largely unaffected.

"The two main potential issues for us would be the impact of an economic slowdown and any restriction on the free movement of professionals between UK and Ireland where we do share some lab and management expertise."

Strategic direction

The interim report underlines the company’s progress against the strategic priorities revealed earlier this year under the new boss (EA 06-Mar-18). They include "growing our businesses organically and through selective acquisition" - with the US identified as a target market for expansion. RPS confirmed it has explored a number of potential acquisitions here, but not yet pursued any.

On this, Douglas noted: "We have a history of acquisitive growth but this is now focused on adding density to our existing services, not diversifying. The US is attractive owing to its relative size and buoyant demand, but vendor M&A valuations here are making it challenging right now and we have not ruled out making well-fitting acquisitions elsewhere." Presently the North America Region accounts for just over 10% of group fee income.

However, it is not very likely that RPS will be participating in any transformational-sized deals any time soon following on from the spate of mega-mergers in the wider professional and consulting services sector in 2017. "We [the largely renewed management and board of directors] are absolutely committed to a thoughtful cohesive strategy for RPS, something that works for clients, staff and investors alike," says Douglas.

"There is value in a positioning offering specialist expertise which is our differentiator. But we do have a track record acting as an industry consolidator - aiding the private to public transitions of upcoming firms - and it is my expectation that we’ll continue to do that but there is a committed intent to remain independent."

However, he did concede that if there was a "compelling opportunity" for clients, shareholders and employees - as there was when Douglas was in the top job at Coffey International a couple of years ago when it was approached for takeover by Tetra Tech (EA 19-Oct-15) - then "never say never".

RPS’s other strategic priorities include investing in and engaging with its people to help bring down staff turnover, which is acknowledged to be above industry norms, as well as improving brand identity and "telling our story better".

It is perhaps surprising - given the recent attention devoted by others in the peer group - that digitalisation doesn’t get a single mention in the strategic reboot outlined. But Douglas reassures: "Digital is an absolute given especially where we say in the strategy that we want to ‘exploit revenue synergies where they exist – but not where they don’t’. And it is fundamentally changing our marketing, recruitment, data management and so on."

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