NMCN.L Regulatory News (NMCN)

North Midland Construction PLC ("the Group")

AGM Statement

At the Annual General Meeting to be held today at noon, the Group's Chairman, Robert Moyle, will make a statement to shareholders, including the following on current trading:

"Last year's results, as a consequence of the further impact of the legacy contracts were extremely disappointing and, whilst the first quarter of this financial year has delivered a small loss of £125,000 on revenues which increased by 21.3% to £53.96 million, the underlying situation is far more encouraging. The loss predominantly emanates from closure costs on the withdrawal from two loss making geographical areas on the Carillion Telent framework contract for British Telecom.

The losses of the last two years have been largely attributable to the resolution and completion of legacy contracts secured at the height of the recession. The major contract still has a small presence on site and practical completion will be applied for in the near future. The remaining few contracts are in the final stages of contractual settlement and, it is disappointing to report, that two of those involve litigation.

The General Election has certainly cleared the uncertainty that was prevailing and the last week has seen an increase in tender opportunities. The general economic situation has progressively improved and the Board expects this year's revenues to exceed that of the previous year. The current Group order book for work to be executed this financial year is circa £167 million and this represents a significant proportion of the forecast for the year. Orders on the many frameworks currently being undertaken are only included when they are actually received, so the current shortfall is expected to be retrieved.

The Building division has been divorced from the old B&CE division and reinstated as a standalone division with a new management team. The first quarter (Q1) result is encouraging, delivering an operating profit of £11,000 on revenues which increased by 87.1% to £2.65 million. The current order book to be constructed this year is £12.4 million and includes a major office scheme at Grove Park in Leicester and student accommodation, also in Leicester. The latter scheme has a total value of £15 million, of which £7 million is expected to be built this financial year. Tender enquiries are good and the division is optimistic about receiving a further £2 million contract in the near future. A revised operational strategy concentrating on repeat business with blue chip clients within a fifty mile radius of Head Office has been developed and this is now delivering.

The Utilities division has experienced a very poor start to the year, delivering a Q1 loss of £588,000 on revenues which reduced by 2.8% to £4.91 million (2014 £5.05 million). The BDUK (Broadband UK) programme of broadband rollout for Carillion Telent has proved to be unprofitable due to the mix of work being undertaken varying entirely from the model tendered. The losses sustained in the Lincolnshire and Shropshire areas were unsustainable and the decision was taken to terminate the contract in these areas. This withdrawal was undertaken on 20th February 2015 and the severance costs have been included in the first quarter result. A thorough review of the contractual rates and terms of the CT contract in the remaining two areas of the East Midlands and Yorkshire, where the division continues to work is being discussed with the client over future viability.

The division has been successful in winning the Virgin Media framework contract for the North West and Yorkshire for the next three years with an optional extension of a further two years. This contract commenced on 1st April 2015 and has involved the TUPE transfer of over one hundred employees from Fujitsu, the incumbent contractor. The division has worked for Virgin Media for many years and is delighted to have received such a prestigious contract, which will underpin future revenue and growth. The division is also currently engaged on framework contracts for City Fibre, KCom, Centro and Electricity North West. These coupled with the new Virgin Media contract, along with the termination of the loss making CT contracts, leads to confidence that the division will return to profitability in the near future. The current secured workload for this year's completion is £32.3 million.

For the comparable period last year the Highways division returned a loss of £25,000 on a revenue of £3.08 million. It is very gratifying, therefore, to report a return to profitability on significantly increased revenue and a strong order book. Revenue increased to £9.44 million and operational profitability to £89,000 for the first quarter of the year. Secured orders for completion this year currently are £33.2 million. Consolidation of its position as a significant presence in the Midlands and the North has continued with the division being considered for contracts of a higher notational value and increased complexity. As an illustration, work is currently underway on a new road project in Blackburn valued at circa £6 million and a super cycleway between Leeds and Bradford at circa £10 million. Controlled expansion into the South West, on the back of the Bristol City framework is underway and the division currently enjoys preferred bidder status on two large highway schemes in the Bristol area. On the back of this burgeoning order book, a return to acceptable levels of profitability is forecast.

NMC Nomenca continues primarily to be engaged on frameworks for Severn Trent and Anglian Water. First quarter revenues increased by 4.6% to £22.0 million (2014 £21.02 million), but profitability declined by 49.8% to £229,000 (2014 £456,000). The 2014 figures included an exceptional profit from the E5 consortium, therefore the comparative decline excluding this is 7.7%. The current level of orders secured on the frameworks for completion this financial year stands at £53.6 million, which represents 69.6% of the budgeted revenue. This year has seen the completion of the AMP5 programme and the commencement of the AMP6 programme on April 1st for the next five years. Although the peaks and troughs of the early AMP changeovers have now largely been smoothed out, the AMP transition inevitably involves a slow-down in activity, but overall the level of planned future expenditure is very encouraging. The E5 consortium has nearly completed its programme of works successfully and the final commercial negotiations will be completed during this financial year. The division is a joint venture partner with Laing O'Rourke Imtech engaged on the construction of a £37.5 million concrete storage reservoir at Ambergate in Derbyshire. The project has started well and will assist in replacing the contribution from the E5 consortium this year. The division continues to deliver enhanced operational performance and innovation for its clients and the requirements to remain a major player in the AMP7 programme in five years time are already being considered and implemented.

The Civil Engineering division is now a single entity, operating under the senior management of NMC Nomenca. The division is primarily engaged in the power and industrial sectors, servicing major blue chip companies such as WPD and Northern Power Grid. For the period, the operating loss reduced by 25.6% to £22,000 on a revenue reduced by 50.6% to £1.55 million. The current order level for completion this year is £6.1 million. First quarter revenues were depressed and this has resulted in insufficient overhead recovery. However, the level of tender enquiries is good and the recent award by Siemens of a £3.7 million sub-station contract at Dudgeon will assist short-term revenue and operational profitability.

The Nomenca subsidiary has delivered an encouraging set of first quarter results with operating profitability increasing by 5.4% to £156,000 (2014 £148,000) on revenues increased by 43.2% to £13.42 million (2014 £9.37 million). The current level of secured orders for completion this financial year is £28.6 million. Nomenca has become a major force in the mechanical and electrical sector of the water industry and is well positioned to benefit from the new AMP7 programme. However, currently the AMP transition looks to be leading to a drop-off in revenue in the third quarter of this year. This may very well change as further clarity of expenditure levels is forthcoming. The subsidiary is well represented across the country with all the major water companies and has recently been successful in securing the AMP7 framework for South East Water in a joint venture with BAM Nuttall, which will increase their presence in an important strategic area. A fledgling combined civil / mechanical and electrical operation, akin to NMC Nomenca has successfully been developed in the South West. The St Austell office, whilst maintaining its existing business with Imerys has expanded its design and project management capability, assisting in the construction of the Hemerdon Tungsten mine, near Plymouth. There are good prospects to expand both of these capabilities along with the manufacture of chemical dosing and Ultra Violet rigs going forward. The proportion of mechanical and electrical expenditure is predicted to increase in the AMP7 programme throughout the country. Nomenca's increasing market share and presence, coupled with this proposed increased level of expenditure, puts it in a prime position to significantly grow the business.

It is encouraging that the general economic recovery is also contributing to increased construction activity. However, the downside is that the under investment in recruitment and skills training during the recession is now leading to major capacity issues, particularly in the supply chain. Fortunately, the Group has maintained close ties with selected universities and colleges of further education, along with both its apprenticeship and graduate training schemes.

The maintenance of cash flow is of paramount importance and a perpetual on-going issue. Rigorous cash collection procedures are in place and the cash position is closely monitored. The Group continues to operate within its facilities.

Legacy contracts and their resolution have had a significant impact on the Group's trading over the last two years, even though the underlying trend of the rest of the Group's activities has been a return to profitability. The particular problems on one major contract and its continued programme and cost overruns are well documented and were addressed at previous meetings. The project is technically extremely challenging. However, as stated previously, there is now only a small team on site completing snagging works and practical completion should be applied for in the near future. Contractually the situation is extremely complex, but production of the final account is well underway. Once practical completion has been achieved, the final account will then be submitted and resolution will then be pursued.

As a result of the problems experienced on these legacy contracts, the whole issue of governance and approach to risk have been re-evaluated and a far more risk-averse approach to potential projects has been adopted.

The Board is acutely aware that the financial performance of the last two years has had a significant effect on shareholder return and value, with the decision not to pay a dividend being particularly unpalatable. However, it was decided that cash should be retained within the business and that a prudent approach should be adopted. The current economic climate is more benign and the Group's prospects for growth are very encouraging on the back of the already secured future workload. The resolution of the few remaining legacy contracts still remains outstanding, but the Board remains cautiously optimistic for the year. The restoration of the dividend, as soon as possible, remains the prime objective.

To finish, may I take this opportunity to thank all the shareholders for their continued support during these difficult times and all the employees for their continued loyalty and dedication.

Contacts:-

North Midland Construction PLC 01623 515 008

Robert Moyle, Chairman

Dan Taylor, Finance Director