RHL.L Regulatory News (RHL)

Redhall Group plc

("Redhall" or the "Group")

Preliminary Results

Redhall Group plc (AIM: RHL), the high integrity Manufacturing and Specialist Services group, announces its preliminary results for the year ended 30 September 2016.

Highlights

• Significant order book and profit growth achieved in latest stage of transformation to high integrity Manufacturing and Specialist Services group 

• Manufacturing order book growth of 109% to £23m (2015: £11m)

• Adjusted operating profit of £0.9m (2015: loss of £0.7m), slightly ahead of market expectations 

• Revenue on continuing operations of £43.8m (2015: 44.7m) 

• Adjusted operating profit before exceptional and central costs of £3.3m significantly increased (2015: £1.2m)

• Group loss after exceptional items and losses of discontinued businesses of £1.7m (2015: loss of £12.2m) 

• Group order book of £29m (2015: £21m) benefiting from major contract awards in defence, nuclear decommissioning and infrastructure sectors 

• Investment of £0.8m made in FY16 in manufacturing capability and new product development. A further £0.4m approved since year end 

• Hinkley Point C Nuclear new build project providing major tender opportunities

Martyn Everett, Chairman of Redhall, commented: 

"I am pleased to report that Redhall has more than doubled its manufacturing order book to £23 million and has achieved an adjusted operating profit of £0.9 million in FY16. We are on track to create a high integrity Manufacturing business engaged in the defence, nuclear decommissioning, infrastructure and nuclear new build sectors and will focus this year on delivering further improvements in profitability and operational performance and building a robust platform for a sustainable period of growth"

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CHAIRMAN'S STATEMENT

Redhall achieved two important goals during the year in its transformation to a high integrity Manufacturing and Specialist Services group. Firstly the manufacturing order book has grown substantially and is now £23 million of the total group order book of £29 million (2015: £11 million and £21 million respectively). Secondly, the Group made an adjusted operating profit of £0.9 million before interest, tax, amortisation, exceptional items and IFRS2 charges (2015: loss of £0.7 million).

The Board's confidence in the Group's strategy to focus on high integrity Manufacturing opportunities has been endorsed by the award of a number of major contracts in the defence, nuclear decommissioning and infrastructure sectors and the announcement in September that the UK Government has approved the investment in the nuclear new build project at Hinkley Point C. This is expected to be the first of a number of similar major projects.

The Group made a substantial investment in capital and development projects during the year. The total level of capital expenditure was £0.8 million. We have new machining equipment at Jordan Manufacturing, which has already improved our efficiency and performance on a number of substantial projects, and we have invested in a new test facility and product development at Booth Industries ("Booths"). Product development has become key for our customers who need an increasingly high level of security, fire, acoustic and insulation properties in our products to respond to ever more stringent regulation and security requirements. Since the year end, we have approved a further £0.4 million investment at Booths for laser cutting equipment to improve efficiency and quality and to reduce manufacturing costs. This new equipment will be in operation in our second quarter.

Trading results

Revenue in the year to 30 September 2016 from continuing operations was £43.8 million (2015: £44.7 million). Adjusted operating profit before exceptional items was £0.9 million (2015: loss of £0.7 million). Adjusted fully diluted earnings per share for the continuing business amounted to nil pence per share (2015: loss of 3.34p).

This result reflects a strong performance from our Specialist Services businesses which have provided a bridge in profitability whilst we have invested in the growth of our Manufacturing businesses during the year.

Exceptional items

This year, the level of operating exceptional items has significantly reduced, reflecting the end of the sustained restructuring implemented in previous years. The Group has reduced its cost base by initiatives including relocating its head office, reducing the cost of central services, and relocating smaller operations to more appropriate facilities. The total operating exceptional items for the continuing business associated with this amounted to £0.4 million.

For the discontinued businesses the Group has incurred costs in exiting from contracts and agreeing final accounts. This process has been more protracted than originally anticipated and negotiations are ongoing on a small number of accounts. The total amount of these exceptional costs incurred in the discontinued businesses amounted to £1.0 million (2015: £8.1 million).

Financial position

In December 2015 the Group agreed new three-year bank facilities with HSBC Bank plc and funds managed by Henderson. These facilities amounted to £11.2 million at the year end, of which £8.2 million was drawn.

Net assets at 30 September 2016 amounted to £15.5 million (2015: £18.6 million). The reduction includes an increase in the pension deficit to £3.8 million (2015: 2.0 million). The deficit increased significantly following the UK's decision on the European membership referendum in June, as a result of a material reduction in gilt yields.

Dividend

The Board does not recommend a dividend (2015: nil).

People

Our people have worked extremely hard to deliver the requirements of the second stage of our strategic plan. We are very grateful for their commitment which has achieved an operating profit for the continuing businesses and a much improved level of future orders.

Prospects

The turnaround of Redhall through the creation of a high integrity Manufacturing business focussed on the defence, nuclear decommissioning, infrastructure and nuclear new build sectors remains on track.

We are currently engaged in a number of very significant tenders which if successful will provide Redhall with a strong and sustainable long term order book. These tenders include major door and fabrication packages for the nuclear new build project at Hinkley Point C. They also include initial inquiries for further nuclear new build projects of which there are currently plans for a further five developments.

Our specialist fabrication manufacturing facility at Jordan Manufacturing has also seen substantial order growth in the year and is a leading fabricator for contractors in the nuclear decommissioning market. There is also a material increase in the level of tenders in this sector and, whilst this requires substantial investment in bidding resources, we are confident that these will sustain an increase in turnover in the coming years.

Our successful delivery on recent defence and rail infrastructure projects has also driven the increase we have seen in the order book and we will continue to work on these projects during the next 18 months, whilst looking to secure further similar projects.

We remain cautious about the recovery of the oil and gas sectors but once there is an improvement we are well placed to benefit from opportunities that might arise.

Our Specialist Services segment, which has served the group well for the last two years, will reduce in our 2017 financial year following BAE's decision not to renew our contract to provide blast and spray and insulation services to the Astute submarine programme. However, our telecommunications and food process businesses, Redhall Networks and Redhall Jex, are expected to continue to perform well in the new financial year.

We will focus this year on delivering further improvements in profitability and operational performance and building a robust platform for a sustainable period of growth.

Martyn EverettChairman7 December 2016

STRATEGIC REPORT

Overview

Our strategic focus in the 2016 financial year has been on investment, improvement and growth in our high integrity Manufacturing based business, concentrating on the key markets of defence, decommissioning, nuclear new build and major infrastructure. We have made significant strides forward and I am pleased that the Group has reported an adjusted operating profit slightly ahead of market expectations and has delivered an order book which is greatly improved in both value and quality. The overall order book now stands at £29 million (2015: £21 million) of which £23 million (2015: £11 million) is high integrity manufacturing. This has created a solid platform for our future performance.

These improvements were enabled by our fund raising at the end of the previous financial year, which provided investment in our asset base, our bidding and pre-contract capability and research and development and gave our customers increased confidence in Redhall.

We are now moving into a period of growth for our manufacturing businesses and we are confident that we can deliver a strong performance in FY17 based on our clients' current delivery requirements.

This confidence is based on the improving order book and on the growing pipeline of opportunities we are experiencing in many of our core markets. These opportunities include: increased manufacturing spend in decommissioning at Sellafield, the commencement of the Successor boat programme and associated defence spending, the growing requirement for high integrity doors to combat the security threat to key infrastructure and the ongoing spend in large rail infrastructure for Crossrail, Crossrail 2 and HS2. These markets will be a source of work for many years. When coupled with the considerable opportunity presented by nuclear new build, most imminently Hinkley Point C, we believe that our strategy of focusing on high integrity manufactured products in these markets will produce long term benefits for all our stakeholders.

Our Specialist Services segment performed particularly well in the year. All businesses in the segment delivered strong operating profits and generated cash which helped facilitate our improvement plan.

The Group made an adjusted operating profit on continuing operations of £0.9 million on revenue of £43.8 million. Before deducting group and central services costs the adjusted profit amounted to £3.3 million. The result is slightly ahead of market expectations and represents a significant step forward. It is of note that the result in this financial year was despite the significant downturn in the oil and gas sector which has historically driven a large proportion of the Group's manufacturing turnover and profit.

Health and Safety

The health and safety of our employees and those who may be affected by our business remains our highest priority. All of our six subsidiaries have accredited management systems to control health and safety risks to OHSAS 18001 and environmental management systems certified to BS EN ISO 14001.

During the year, many of our subsidiaries once again applied for health and safety awards from The Royal Society for the Prevention of Accidents (RoSPA), which recognises high or very high levels of performance. All of our businesses that applied obtained a minimum of the Gold Award.

Manufacturing

Our Manufacturing segment made an adjusted profit of £0.9 million during the year on turnover of £17.2 million (2015: £0.3 million and £18.5 million respectively). We have worked extremely hard with our customers to develop high class products and solutions, particularly for the defence, nuclear decommissioning and infrastructure sectors. This has required substantial investment of £0.8 million in capital equipment, test facilities and product development. The requirements of our markets are changing and our customers are asking us to provide ever more sophisticated products with security, fire, blast, pressure and acoustic properties.

Booth Industries has won and delivered a substantial amount of defence and infrastructure related work in the year both in the UK and France. We are currently manufacturing and delivering doors to the majority of the new stations and the tunnels on the Crossrail project. Booths has also developed a number of market leading high integrity door and blast products during the year which keep us at the forefront of the manufacture of products that are relied upon for the UK's day to day security across a number of sectors.

Jordan Manufacturing grew significantly during the year. It is being repositioned particularly in the nuclear decommissioning, nuclear new build and high integrity fabrication markets. It is also looking to diversify into other areas where there is good demand for Jordan's skills. It has delivered a number of key and diverse projects during the year including further glovebox manufacture for Dounreay Site Restoration Limited (DSRL) and over packs and floor plates for use at Sellafield. Other fabrications have been supplied for submarines, 3D printers and offshore skids. It is pleasing to note that the relationship enjoyed with DSRL will continue. Jordan Manufacturing was awarded the minor works framework for DSRL in November, which lasts for a period of up to 4 years and has prequalified for the major works framework tender due to be submitted in the first quarter of 2017.

Our investment in key people has been significant as we build our manufacturing sales and tendering teams, our engineering and design capability and our commercial support. We are also developing a comprehensive learning and development programme. Our teams are now working extremely hard to meet and exceed the exacting standards required by our clients. The high levels of tenders we are currently experiencing are anticipated to continue for some considerable time and our focus is on identifying the opportunities to which our capabilities are best matched.

Specialist Services

Specialist Services consisted of our activities in installation and maintenance of the telecommunications network infrastructure, design, manufacture and installation of process lines in food and pharmaceutical markets and specialist surface finishings to Astute class submarines. We were informed in October 2016 that our contract for surface finishings to Astute class submarines would not be renewed. The Group was unable to submit a compliant tender as it considered that the new terms represented a material increase in the level of risk. The interim contract that Redhall Marine has been working under since December 2015 is due to end in January 2017. 

Turnover in the year was £26.6 million and the segment profit was £2.4 million (2015: £26.2 million and £0.9 million respectively). All of the businesses performed ahead of the previous year and expectations.

Redhall Networks benefited from continuing high levels of infrastructure work and our number of delivery teams was increased to take advantage of the level of work available. Mobile communications is an ever increasing part of our national infrastructure and the maintenance, upgrading and consolidation of the network by the operators provides us with confidence that the volumes experienced in Redhall Networks will continue.

In the food and pharmaceutical sectors demand was maintained for the services provided by Redhall Jex in the first half. We benefited from good volumes on capital project work for major customers such as Kellogg's, Mondelez and Nestle. The second half performance was not as strong as the first half due to the completion of a number of these capital projects. We are, however, seeing an increase in opportunities as new projects are commencing and management has established new customer relationships to supplement existing ones.

Redhall Marine also performed well during the period. Our focus is now moving to the successful demobilisation and agreement of final accounts with BAE for work on boats 2 to 7.

Discontinued operations

Site Services consisted of our businesses held for strategic divestment and closure. At the year end we had completed all but one of the projects that were on site in Redhall Nuclear when we announced the closure of our site based nuclear business.

Exceptional items

During the year we incurred £0.4 million of exceptional operating costs in our continuing businesses relating to relocation and redundancy costs as we completed the strategic restructuring. We also incurred £1.0 million of exceptional costs relating to discontinued operations due to the costs of exiting contracts and agreeing final accounts.

Outlook

We are pleased that in the 2016 financial year the Group achieved another important phase of the strategic plan by delivering an adjusted operating profit and a substantially improved order book. We have now created momentum for our manufacturing businesses to deliver substantial growth. In addition, we anticipate that both our Redhall Networks and Redhall Jex businesses will continue to make a substantial contribution in the next financial year.

Further growth in our high integrity manufacturing order book is a key focus for the Group as we continue to deliver our strategic plan. We have successfully secured a number of important orders in the defence sector both in the UK and abroad and we continue to bid for sizable contracts for delivery in 2017 and 2018. We now have considerable knowledge in this sector and firmly see it as one of our core markets.

We are experiencing an increase in opportunities in the decommissioning market particularly from Sellafield Ltd and DSRL but also from Magnox. This has already resulted in an order intake of £8.8m in the year with further work packages being released for tender.

Both Booth Industries and Jordan Manufacturing have submitted important bids for Hinkley Point C the most significant of which was the recent bid for security doors which was led by Booth Industries in consortium with Baumert from France. Whilst contract awards for Hinkley Point C are not expected to commence until the middle of 2017, success in tenders for this major project will be of a long term nature and would contribute to significant increases in the order book. The nuclear new build sector could be very important for the Group if, as predicted, up to five further facilities are constructed over the next two decades.

We have established close relationships with the Centre for Protection of National Infrastructure and a number of our products have been developed to comply with their requirements in a market where security is an increasingly important element for manufactured products for the nation's infrastructure.

Booths has been active in the year in the delivery of special doors and hatches to Crossrail stations and tunnels. We have focussed heavily on product development for this type of infrastructure which led us to build the largest door test facility in Europe. We expect that the investment we have made in these products will provide further opportunities on projects such as Crossrail, HS2 and Crossrail 2 as well as with London Underground. We have also recently signed agreements to work on a major tunnel project in Israel.

Although work winning remains a clear focus for the Group, we are acutely aware of the importance of efficiently delivering the increase in production resulting from the growth in our order book. We have and will continue to invest in product development and capital equipment to keep the group at the forefront of its chosen markets. We will also invest in the quality of our people and extend the access our people have to learning and development opportunities to create the highest calibre teams.

Our 2017 financial year is another important phase in the delivery of the Group's strategic plans and for Redhall as a high integrity manufacturing led business. We expect the Group to deliver a strong performance, further building shareholder value.

Phil BrierleyChief Executive7 December 2016

CONSOLIDATED INCOME STATEMENT

* Adjusted operating profit/(loss) is profit/(loss) before financial expenses, IFRS 2 charge, tax and amortisation of intangible assets acquired with business combinations.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

The accompanying notes form part of these financial statements

CONSOLIDATED BALANCE SHEET

CONSOLIDATED STATEMENT OF

CHANGES IN EQUITY

Other reserves comprise share based compensation £462,000 (2015: £250,000), equity reserve relating to the grant of options on conversion of debt £925,000 (2015: £925,000) and other reserves of £2,000 (2015: £2,000).

CONSOLIDATED CASH FLOW STATEMENT

See note 3 for cash flows relating to discontinued activities

 *IFRS 2 amount charged to reserves net of employer's national insurance

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. SEGMENT ANALYSIS

IFRS8 "Operating Segments" requires an entity to report on those operating segments that engage in business activities from which it may earn revenues and incur expenses; whose operating results are regularly reviewed by the chief operating decision maker ("CODM"); and for which discrete financial information is available. The CODM has been identified ultimately as the Board of Directors.

The Board assess the performance of the operating segments based on a measure of operating profit or loss which excludes the effects of exceptional items. Central costs and unallocated items represent head office functions and items such as amortisation of acquired intangible assets arising on the acquisition of businesses. Central costs for the period from 1 October 2015 include the costs of the Group's centralised Finance, IT and HR functions. These activities were previously incurred in the individual segments.

The activities of each business segment are as follows:

Manufacturing

Manufacturing encompasses the design, manufacture and installation of bespoke specialist plant and equipment typically in the nuclear defence, nuclear decommissioning, oil and gas, petrochemical, chemical, pharmaceutical and food sectors. The division has particular expertise in the design and manufacture of high integrity fire and blast resistant doors, window and wall systems.

Specialist Services

Specialist Services comprises our activities in installation and maintenance of the telecommunications network infrastructure, design, manufacture and installation of process lines in food and pharmaceutical markets and specialist surface finishings to Astute class submarines.

Site Services

During the previous period the activities of the Site Services segment were discontinued following the Group's decision to sell its Engineering business and to close its site-based Nuclear contracting businesses. The results of these businesses are disclosed in Note 3.

OPERATING SEGMENTS

*Adjusted operating profit is stated before exceptional items, IFRS 2 charge and amortisation of intangible assets acquired with business combinations.

* Adjusted operating profit is stated before exceptional items, IFRS 2 charge and amortisation of intangible assets acquired with business combinations.

Continuing operations

Practically all of the Group's revenue is considered to be contract revenue as defined by IAS11.

Customers accounting for more than 10% of revenue

One customer accounted for more than 10% of revenue in the year, which is a customer of the Specialist Services segment and accounted for revenue of £10.2 million (2015: one customer accounting for £9.6 million of revenue in the Specialist Services segment).

2. EXCEPTIONAL ITEMS

The Board has separately identified, by virtue of their size or incidence, certain credits and charges to the consolidated income statement that should be separately disclosed to enable users of the financial statements to better understand the underlying performance of the Group:

Continuing operations

Redundancy and restructuring costs reflect the costs of resizing the businesses. These are split between cost of sales and administrative expenses on the basis of the function of the business to which they relate.

Discontinued operations

Redundancy and restructuring costs of £983,000 (2015: £8,105,000) relate to the winding down and ultimate closure of those businesses which are discontinued.

3. DISCONTINUED OPERATIONS

Income and expenditure incurred on discontinued operations during the period comprised the Site Services business. RESL was sold on 13 May 2015 and on 14 May 2015 the Group announced the closure of its site based nuclear contracting businesses.

Site Services comprised certain engineering and nuclear related activities. These included engineering activities in industrial processes including oil and gas, petrochemical and chemical, and included design, project management and execution of on-site works through qualified and experienced engineers and trades personnel. Activities included mechanical design and construction, storage tank services, plant modifications and upgrades, repair and maintenance, shutdown services and offsite services.

The segment also included activities in both the civil and defence nuclear sectors and included design, project management and execution of on-site works through qualified and experienced engineers and trades personnel. Activities in the civil sector included decommissioning and waste management, support to operating nuclear power stations, and nuclear new build. Activities in the defence sector encompassed activities on behalf of the Ministry of Defence and included the design and manufacture of specialist equipment and mechanical and electrical engineering activities for the AWE establishment at Aldermaston.

The result for the current financial year related to the completion of a small number of contracts at customer sites.

During the period, discontinued operations contributed a net inflow of £0.11m 2015: £4.37m outflow) to the Group's operating cash flows and a net

inflow of £nil (2015: £5.09m inflow) to investing activities. There were no cash flows from financing activities.

The adjusted operating loss before exceptionals is stated after amortisation of acquired intangible assets of £nil (2015: £120,000).

Practically all of the Group's revenue is considered to be contract revenue as defined by IAS11.

4. FINANCIAL INCOME AND EXPENSES

* Includes £85,000 of pension administration expenses paid for by the Company (2015: £89,000).

5. TAX EXPENSE

6. DEFERRED TAX ASSETS AND LIABILITIES

Recognised deferred tax assets and liabilities

The net deferred tax liability at the year-end and movement during the year is analysed as follows:

Unrecognised deferred tax assets

Deferred tax assets have not been recognised on tax losses of £16,200,000 (2015: £16,300,000) as their recovery is insufficiently certain in the longer term. £14,100,000 are related to the discontinued site services segment.

Effect of reduction in the main rate of Corporation tax

The reduction in the main rate of corporation tax from 20% to 19% effective from 1 April 2015 was substantively enacted on 26 October 2015. It was further announced that the rate will be reduced to 17% effective from 6 September 2016. Accordingly, deferred tax balances have been recognised at the reduced rate of 17% in theses financial statements.

7. LOSS PER SHARE

Basic and diluted loss per share

The calculation of the basic loss per share of 0.83p (30 September 2015: loss per share 24.57p) is based on 200,050,084 shares (30 September

2015: 49,491,094:) being the weighted average number of shares in issue throughout the period and on a loss of £1,670,000 (30 September 2015: loss of £12,161,000).

The loss attributable to ordinary shareholders and weighted average number of ordinary shares for the purpose of calculating the diluted loss per share for both the year ended 30 September 2016 and 30 September 2015 are identical to those used for the basic loss per share. This is because the exercise of share options would have the effect of reducing the loss per share and is, therefore, not a dilution under the terms of IAS33. The dilutive potential ordinary shares are therefore not included in the table below. At 30 September 2016 there were 27,640,436 outstanding options under relevant schemes and 18.5 million shares under option to funds managed by Henderson. These may impact dilutive earnings per share in future.

Adjusted earnings per share

The Directors believe that helpful additional earnings per share calculations are earnings per share on adjusted bases (i.e. based on profit before exceptional items, IFRS 2 charge and amortisation of acquired intangible assets and on a fully taxed basis). The basic and adjusted weighted average numbers of shares and the adjusted earnings have been calculated as follows:

8. RETIREMENT BENEFIT OBLIGATION

The Group sponsors a defined benefit pension scheme in the United Kingdom, the Booth Industries Group PLC Staff Pension and Life Assurance Scheme ("the Booth Scheme") and operates a small number of defined contribution pension schemes and makes contributions to personal pension plans.

a) Defined benefit scheme

Pension benefits are linked to the members' final pensionable salaries and service at their retirement date (or date of leaving if earlier). The scheme is closed to new entrants. The scheme is governed by a Board of Trustees who meet on a quarterly basis. The Group has opted to recognise all actuarial gains and losses immediately through the Consolidated Statement of Comprehensive Income.

The most recent formal actuarial valuation was carried out as at 6 April 2015. The results of this valuation have been updated to 30 September 2016 by an independent qualified actuary. The assumptions used were as follows: