Severfield Regulatory News (SFR)

25 Mar 2009 07:00



Preliminary Results

For Year Ended 31 December 2008

RECORD PERFORMANCE, STRONG BALANCE SHEET

AND STRATEGIC POSITIONING

Severfield-Rowen Plc, the market leading structural steel group, today announces its Preliminary Results for the year ended 31 December 2008, including further record levels of revenue and underlying profitability.

Financial Highlights

Revenue increased by £93.6m to £394.3m (2007: £300.7m)

Underlying operating margin at 14.0% (2007: 14.2%)

Underlying profit before tax margin at 13.3% (2007: 14.3%)

Underlying profit before tax increased to £52.5m (2007: £42.9m)

Profit after tax (reflecting non-underlying items) of £24.0m (2007: £26.4m)

Basic earnings per share of 27.06p (2007: 31.77p)

Final dividend of 10.00p per share giving total dividend of 20.00p (2007: 20.00p)

Year end net borrowings of £15.8m (2007: £48.1m)

Current order book value £311m 

*  Underlying is before the amortisation of acquired intangible assets of £9.15m (2007: £2.20m), movements in losses on derivative financial instruments of £0.74m (2007: £2.4m), the associated tax benefits from these items and the tax cost from the phasing out of Industrial Buildings Allowances of £6.3m in 2008.

  Tom Haughey, Chief Executive Officer, commented:

Severfield-Rowen has again produced record underlying results which confirm the Company's market leading position in the sector. Its continued focus on customer satisfaction and its cost base underpin market share and financial performance.

At £311m, our order book remains healthy and represents almost one year's turnover. The make-up of the order book has changed reflecting new business in many diverse UK sectors, including health, education and power.

Whilst some key traditional sectors in the UK have declined significantly in scale, the Company is confident that its strategy of increasing domestic market share and developing export sales, despite some pressures on margins, will position it well for the future. 

Joint Venture operations will be commissioned in India during 2010, providing an exciting platform for growth in the coming years.

The Company's balance sheet has strengthened further with net debt at the year end reducing significantly with further improvement expected in 2009.

Trading conditions in the UK will be difficult over the next two years, but the Company will continue to exploit its key commercial cost and operational benefits to develop its market leading position. We are, therefore, confident of further satisfactory results in 2009 and beyond.

The Company is pleased to recommend a final dividend of 10.00p per share thus maintaining the total dividend for 2008 at 20.00p (2007: 20.00p).

For further information, please contact:

Chairman's Statement

Overview

In my first period as Chairman, it is my pleasure to report on a year of record underlying financial performance and major strategic development for the Company.

In 2008, we have produced higher revenues and underlying profits, a robust balance sheet, good order recruitment and have created new opportunities outside of the UK, for both the short and long term.

Importantly, the Company has moved its focus sufficiently early into those sectors of the UK that have been expanding and has also targeted overseas markets, to counteract the anticipated fall in demand in some of the major, traditional UK segments.

The integration of Fisher Engineering, acquired in October 2007, has been very successful.  Despite the decline of the markets in Ireland, Fisher Engineering remains competitive and busy and it has made a significant contribution to the Company's overall results, including UK market share advantage development.

The Company is positioning itself to face the challenges of the short term and to take advantage of its strategically strengthened position when economic conditions improve.

Results

Underlying operating profit (before amortisation of acquired intangible assets of £9.2m and the losses on the movements in derivative financial instruments of £0.7m) increased by 29.1% to a record £55.1m (2007: £42.7m) on increased revenue of £394.3m (2007: £300.7m).

The underlying operating margin was 14.0% (2007: 14.2%) which in the economic downturn is very commendable.

Following finance costs of £2.6m underlying profit before tax was 22.2% higher at £52.5m (2007: £42.9m) producing an 18.1% increase in underlying basic earnings per share of 42.2p (2007: 35.7p).

Profit after tax was £24.0m (2007: £26.4m), with basic earnings per share of 27.1p (2007: 31.8p), both reflecting non-underlying items.

We ended the year with significantly reduced net borrowings of £15.8m (2007: £48.1m).

  Dividend

In November 2008, at the time of the Interim Management Statement, the Board stated its intent to follow a prudent and more sustainable dividend policy.

Consequently, we are pleased to recommend a final dividend of 10.00p per share, thus maintaining the total dividend payment for 2008 of 20.00p per share (2007: 20.00p).

The Board's policy remains to follow this prudent approach in the current year (2009) and continue to monitor the business environment going forward.

Board

At the end of May 2008, Peter Levine retired from his role as Chairman. The Board thanks him for many years of first class contribution to the Company and his role in its development.  I had the pleasure of becoming the new Chairman.

At the same time, John Featherstone retired from his position as Non-Executive Director, and the Board number was reduced to seven overall, including three Executive Directors.

Four executives from the Plc Board moved to join four other directors in the Executive Management Committee, which is now effectively focused on strategic and operational performance matters relating to the business.

The new configuration has operated extremely well and provides the Board with clear visibility and engagement in all relevant areas.

People

The Board has met at all our trading business locations across the Group within the past 12 months, engaging with local management and staff who have greatly impressed with their knowledge, attitude and experience. Their work rate and innovation remain key to the Company's success.

 Outlook

In January 2008, the Company was one of the first to observe and voice concern at the potential weakening of demand in the retail and commercial sectors in the UK. Since then, it has been following a path of commercial diversification which is proving to be a successful policy.

The Company is in robust financial condition and is well equipped for the future. We are confident that even against a poor macroeconomic outlook for the period, we will continue to produce a satisfactory performance in the coming 12 months and that the strong order book and balance sheet will support the Company's ambitions.

Toby Hayward

Chairman

  Chief Executive's Review

In 2008, Severfield-Rowen further consolidated its position as market leader in the steelwork fabrication industry, increasing domestic market share and successfully being awarded, and executing, many significant, high profile projects.

Business

The Company provides commercial value and high levels of satisfaction to its blue-chip customer base and their supply chains, which, together with cost base, service range, experience and people skills, enables it to continue to offer improved and competitive solutions to clients and their projects.

Our range of service has been successfully extended to more clients in all sectors, including power stations, waste to energy facilities, data centres, public buildings, education facilities, transport and infrastructure, many in areas where significant investment programmes remain.

The overall effect has led to the Company achieving an increase in domestic market share.

In 2008, the Company anticipated that it would need to export a proportion of its output, albeit at lower margins, for 2010. Consequently, we opened an office in Abu Dhabi to facilitate its sales intentions to the petrochemical markets in the Middle East, which will benefit from more favourable exchange rates and shipping costs.

Order Book

The order book, standing now at £311m remains strong representing almost 12 months activity and consists of business from all sectors of the UK market, including power stations, education, bridgework, stadiums, health and transport.

The Company has a pipeline of potential work in its domestic and overseas markets, which gives it cause for cautious optimism beyond the current order book, although we do expect to see continuing pressure on margins.

Costs

The Company has a highly competitive cost base and capability, which is being further enhanced through management initiatives, controlled spending and continuous review.

In the latter half of 2008, production and overhead cost reductions were made across the Group providing annual savings going forward of £3m.

 Severfield-Reeve Projects is a subsidiary company based in North Yorkshire engaged primarily in local, small scale Design and Build projects. The Company's average turnover in recent years has been £12m.  The decision was taken in 2008 to trim the operations of this Company reflecting the local decline in sales opportunity and forecast profitability. During 2009, evaluation of this business is likely to see further reductions in its scale. 

The operation in India will provide the Company with real and sustainable growth opportunities for the coming years.

UK Projects

Severfield-Rowen businesses in the UK have achieved further milestones of success with major projects undertaken or awarded in 2008, including:

It is a mark of respect to the people and capability of all the businesses that these projects have been won and are being executed efficiently in line with clients' expectations.

 Business Investment

Several investments were made in 2008, adding to the significant investments made in all locations in recent years.

At Severfield-Reeve Structures in Dalton, new, high speed processing equipment was installed in two lines and logistical traffic and storage improvements were made.

A new business division was created at Atlas Ward in Sherburn, to produce structural steel staircases and light steel, which was supported by new investment. The projected annual turnover is now £4m, which previously would have been subcontracted to companies outside of the Group.

Investments at Watson Steel Structures, Bolton and Fisher Engineering near Enniskillen, were made to improve site accommodation, storage, handling and logistics.

Safety, Health and Environment

The Executive Committee take a leading role in the development and implementation of the Company's progress in the areas of Safety, Health and Environment.

In recent years, the Company has taken major steps to further improve its performance in key areas;

A full time dedicated Group Director and a dedicated organisation of 13 members to focus on improvement.

The creation and distribution of a corporate policy for Sustainability, Community Involvement, Equal Opportunities, Ethical Trading, Supply Chain and formal accreditation standards.

The award to all operational companies within the Group of the Steel Construction Sustainability Charter.

The development and deployment of innovative accident prevention systems for materials handling and operator access during steel erection.

OHSAS 18001: 2007 (Health & Safety).

BSEN ISO 14001: 2004 (Environmental).

An improvement in Accident Frequency Ratio over 12 months from 1.32 in 2007 to 1.06 in 2008.

Further improvements objectives have been set for 2009.

 Risk Management

Management regularly identify, and have independently verified, potential risks to the business operations of the Company.

The risks range from general economic influences, through changes in regulatory standards to operational failures and cost changes. These risks are reviewed and responses updated on a regular basis.

Summary

The economic downturn has hit several of our major UK consumer sectors hard, which subsequently impacts upon the UK structural steelwork industry at large. Our businesses have remained strong by capitalising on our inherent strengths and advantages and by moving early to secure strong positions across a range of UK sectors and targeting selected export markets.

Each of the businesses has contributed excellent performances in achieving the record underlying financial results and has established outstanding order books in the midst of recession.

The Company has invested very successfully in recent years to expand the business and improve its relative competitiveness on a global basis. The Company's finances are healthy, with strong cash being generated in 2008,  and minimal debt forecast by the end of 2009. 

Whilst the economic recession will influence the business, the Company is confident that it will sustain a comparatively strong performance in the year and that its strategy for the longer term is robust.

Tom Haughey

Chief Executive Officer  Financial Review

I am delighted to announce that, despite the difficult economic trading conditions, the Group has had another record year with underlying profit before tax (before amortisation of acquired intangible assets of £9.15m and movements in losses on derivative financial instruments of £0.74m) of £52.48m. Importantly we also have a good order book of £311m. 

Revenue of £394.33m and underlying profit before tax of £52.48m have increased 31.15% and 22.19% respectively over the figures achieved in 2007.

Basic earnings per share, based on the underlying profit after tax, increased by 18.07% to 42.20p. The Board will be recommending a final dividend of 10.00p per share resulting in a total dividend for the year remaining at the 2007 level of 20.0p per share.

Profit after tax (after underlying items detailed below) of £23.98m (2007: £26.43m) has been transferred to reserves.

We ended the year with net borrowings of £15.76m, a significant improvement on the net borrowings at the end of 2007 of £48.06m.

Revenue

Group revenue increased by 31.15% to a record level of £394.33m, assisted by a full year's results from the Fisher Engineering subsidiary, acquired in October 2007. 

Operating Profit

The Group's underlying operating profit increased by 29.10% to £55.11m. We are particularly pleased that even in the current economic climate underlying operating margins, expressed as a percentage of revenue, were at an encouraging level of 13.98% compared to 14.20% achieved in 2007.

These figures continue to incorporate the Group's two associated companies, Kennedy Watts Partnership Limited and Fabsec Limited, of which the Group owns 25.1% and 25.0% respectively. The Group's operating profit for the year includes its share of these two companies' results which amounted to a net profit of £128,000 (2007: £58,000). Kennedy Watts is a company involved in CAD/CAM steelwork design which the Group uses as an external drawing office.

Fabsec Ltd is a company involved in the development of the bespoke fire engineered beam made out of plate. It holds the master intellectual property rights, carrying out marketing and promotion. Fabsec Ltd is not directly involved with the Group's operational plate and intumescent paint lines at Dalton which produce the Fabsec and fire engineered beams under licence from Fabsec Ltd.

Finance Costs

Net finance costs for the Group amounted to £2,628,000 (2007: income £266,000). The change to a net payable position reflects the borrowings that were taken out to fund the acquisition of Fisher Engineering during 2007.

Profit Before Tax

The table below provides a summary of the profit before tax:

The underlying profit before tax has increased to £52.48m, an increase of 22.19% over the previous year. Margins, at this level, expressed as a percentage of revenue, fell slightly to 13.31% (2007: 14.29%), principally reflecting finance costs described above.

Non-Underlying Items

Non-underlying items are included within the "Other Items" column of the Consolidated Income Statement and have reduced profit before tax by £9.89m (2007: £4.59m). These relate to:

Movements in losses on derivative financial instruments - £0.74m (2007: £2.39m). The Group, particularly through Fisher Engineering, contracts in to the Euro zone (principally Eire) and fixes the contract profit by locking in the exchange rate at the time of accepting this work. Each year due to the weakening of Sterling against the Euro between the date when the forward exchange contracts were put in place during the year and the year end a fair value creditor has been accrued in the Balance Sheet on these contracts. The loss in 2008 reflects the increase in the creditor held to £3.59m (2007: £2.85m) in the Balance Sheet.

Taxation

The underlying tax charge of £15.09m represents an effective tax rate of 28.74% compared with 30.76% in the previous year. The rate is slightly higher than the prevailing rate due to the adjustments made in respect of disallowable expenditure incurred during the year.The total tax charge for the year was £18.62m, representing an effective tax rate of 43.7% (2007: 31.1%). This increased rate reflects changes to the Industrial Buildings Allowance regime which were enacted in 2008.  These resulted in the deferred tax liability held in the Consolidated Balance Sheet increasing by £6.3m in the year with a corresponding taxation charge to the Consolidated Income Statement.

Accordingly a charge of £6.3m has been included in the "Other Items" column of the Consolidated Income Statement as it reflects a one-off significant change in the tax legislation impacting the Group. This is offset against the tax credit due in respect of the tax on the non-underlying items.

Earnings per Share

Underlying basic earnings per share was at a record level of 42.20p, an increase of 18.07% over the previous year. This calculation is based on the underlying profit after tax of £37.39m and 88,607,876 shares, being the weighted average number of shares in issue during the year.

Basic earnings per share, based on profit after tax after non-recurring items is 27.06p (2007: 31.77p).

Underlying diluted earnings per share is 42.15p (2007: 35.70p). This calculation is based on the underlying profit after tax of £37.39m and 88,718,080 shares, being the weighted average number of shares in issue, allowing for contingent shares under a share based payments scheme.

Diluted earnings per share, based on profit after tax after non-recurring items is 27.02p (2007: 31.73p).

Dividend

The Board will be recommending a final dividend of 10.00p per share (2007: 13.25p) at the Company's Annual General Meeting on 3 June 2009, bringing the total dividend for the year to 20.00p per share. This total dividend is the same as the total dividend per share paid to shareholders for 2007 and is in line with the statement made in the Interim Management Statement of 17 November 2008.

The final dividend will be paid on 15 June 2009 to shareholders on the register on 15 May 2009. The ex-dividend date will be 13 May 2009.

  Balance Sheet

The Group's Balance Sheet continues to strengthen with shareholders' funds increasing by £2.93m to £119.76m. This equates to a total equity value per share at 31 December 2008 of 135.2p, compared with131.8p at the end of 2007.

Goodwill on the Balance Sheet is valued at £54.71m (2007: £54.71m) and is made up as follows:

Acquisition of Action Merchants Limited (Fisher Engineering) in 2007 - £47.98m. The goodwill is subject to an annual impairment review under IFRS 3. Given the excellent performance of Fisher Engineering since acquisition, and our expectations, no impairment existed at 31 December 2008 or 2007.

Acquisition of the Atlas Ward Group of Companies in 2005 - £6.6m. The goodwill is subject to an annual impairment review under IFRS 3. Given the excellent performance of Atlas Ward since acquisition, and our expectations, no impairment existed at 31 December 2008 or 2007.

Other intangible assets on the Balance Sheet are valued at £30.13m (2007: £39.04m) and are made up as follows:

a) Intangible Assets Acquired in Acquisition £27.65m (2007: £36.80m) Following the acquisition of the Action Merchants Limited Group (Fisher Engineering) in 2007 a valuation of the Group's identifiable intangible assets was carried out to identify and estimate the fair value and estimated useful lives of these intangible assets as required under IFRS3. These assets were valued at £39m. These assets will be amortised on a straight-line basis over a varying period of time for each class of asset. The amortisation charged in the year was £9.15m (2007: £2.2m), giving a total amortised at the year end of £11.35m (2007: £2.2m).

b) Development Costs £2.48m (2007: £2.24m) This represents capitalisation of the Group's costs in the development of a pedestal mounted powered work platform for use on sites in the erection of steel. These costs will be amortised on a straight line basis over 10 years. Amortisation to 31 December 2008 amounted to £275,000 (2007: £Nil).

  The Group now has property, plant and equipment totalling £92.91m. Depreciation charged in the year amounted to £5.10m. During 2008 we continued to invest in our business to improve efficiencies further with capital expenditure being £12.1m principally made up as follows:

This expenditure is higher than initially planned for the year because of the land purchases and the logistical storage and site traffic safety at Dalton, all of which further consolidate the Company's relative efficiency advantages.

Expenditure in 2009 is expected to be approximately £4m, with a further £4m planned to be invested into the Indian JV.

Unlike the rest of the Group, Atlas Ward has a defined benefit pension scheme which, although closed to new members, had an IAS 19 deficit of £6.75m as at 31 December 2007. At 31 December 2008, the deficit decreased slightly to £6.65m and is shown as a liability in the Group Balance Sheet. The regular triennial actuarial review of the scheme is currently being carried out.

The provision held in the accounts of £2.6m in respect of an alleged leak to a roof of a contract carried out by Atlas Ward Structures Limited has been under regular review by the Directors. Although the case has been to adjudication no real progress was made and there was no further indication of the likely outcome. Consequently, it was decided that the provision should remain in place.

Cash Flow

Management of the Group's cash has always been of prime importance to the Board and this remains the case with cash being tightly controlled. During 2007 a significant amount of borrowings were taken out to fund two acquisitions. Consequently the Group ended 2007 with net borrowings of £48.06m. During 2008 careful cash management resulted in net borrowings to be reduced significantly to £15.76m at 31 December 2008. This figure was somewhat better than anticipated due to approximately £10m, which was originally expected to be receivable in January 2009, being received early prior to the year end. The Group has a revolving credit facility of £70m with RBS and National Australia Bank as joint lenders until August 2010. The level of borrowings at 31 December 2008 leaves the Group very comfortably within the limits of its facility.

During the year £84.50m was generated from operations.

Outflows of cash during the year included dividends of £20.60m, corporation tax paid of £18.86m and the purchase of property, plant and equipment, net of sale proceeds, of £9.36m.

The Group ended the year with gearing significantly reduced to 13.16% (2007: 41.14%).

Treasury

Group treasury activities are managed and controlled centrally. Risks to assets and potential liabilities to customers, employees and the public continue to be insured. The Group maintains its low risk financial management policy by insuring all significant trade debtors.

The treasury function seeks to reduce the Group's exposure to any interest rate, foreign exchange and other financial risks, to ensure that adequate, secure and cost effective funding arrangements are maintained to finance current and planned future activities and to invest cash assets safely and profitably.

The Group now has more exposure to exchange rate fluctuations, currently between Sterling and the Euro. In order to maintain the projected level of profit budgeted on contracts foreign exchange contracts are taken out to convert into Sterling at the expected date of receipt.

The Group, in view of the current climate, is further strengthening its financial controls, cash management and appropriate accounting and treasury policies.

Going Concern

In determining whether the Group's annual consolidated financial statements can be prepared on a going concern basis, the directors considered all factors likely to affect its future development, performance and its financial position, including cash flows, liquidity position and borrowing facilities and the risks and uncertainties relating to its business activities. The key factors considered by the Directors were as follows:

The order book, which currently stands at £311m;

The implications of the challenging economic environment on the Group's revenues and profits. The Group undertakes forecasts and projections of trading and cash flows on a regular basis. Whilst this is essential for targeting performance and identifying areas of focus for management to improve performance and mitigate the possible adverse impact of a deteriorating economic outlook, they also provide projections of working capital requirements;

The impact of the increasingly competitive environment within which the Group operates, including pressures on margins and counterparty risks;

The impact on our business of key suppliers being unable to meet their obligations to the Group;

The potential mitigating actions that could be taken in the event that revenues are worse than expected, to ensure that operating profit and cash flows are protected; and

The committed finance facilities to the Group. The Group has access to a £70m revolving credit facility to meet day to day working capital requirements. The Group at 31 December 2008 had significant headroom both on this facility and on the bank financial covenants in place and this position is forecast to continue for the foreseeable future. The bank facility is available to August 2010, with a reasonable expectation that sufficient facilities will be made available on renegotiation.

Having considered all the factors impacting the Group's business, including downside sensitivities, the Directors are satisfied that the Group will be able to operate within the terms and conditions of the Group financing facilities for the foreseeable future. In addition, the Group does not expect to have to refinance or renegotiate its facilities during the next 12 months.

The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the 2008 Annual Report.

 Summary

Despite the prevailing market conditions, the Group has had a very successful year with revenue, underlying profit before tax and earnings per share once again reaching record levels.

It is particularly pleasing that the Group's net debt has reduced significantly leaving it with a substantial headroom on its borrowing facilities. The debt position is expected to reduce further during 2009.

The Group has continued to improve its already healthy financial position which, together with its good order book of £311m, means it is well placed to trade satisfactorily despite the current recession.

Peter Davison

Finance Director

  Consolidated Income Statement

For the year ended 31 December 2008

Other items relate to the amortisation of acquired intangibles, movements in gains/(losses) on derivative financial instruments, the associated tax impact of these items and the tax cost from the phasing out of Industrial Buildings Allowances.

They have been disclosed separately in order to give an indication of the underlying earnings of the Group.

  Consolidated Statement of Recognised Income and Expense

For the year ended 31 December 2008

  Consolidated Balance Sheet

31 December 2008

Consolidated Cash Flow

For the year ended 31 December 2008

1) Basis of preparationThe Group's financial statements have been prepared in accordance with the prior year accounting policies and IFRSs. The financial statements have also been prepared in accordance with IFRSs adopted by the European Union and therefore the consolidated financial statements comply with Article 4 of the EU IAS Regulations. The financial statements have been prepared under the historical cost basis, except for the revaluation of financial assets and liabilities under IAS 39 "Financial instruments: recognition and measurement". This preliminary announcement does not constitute the full financial statements prepared in accordance with International Financial Reporting Standards ("IFRSs") or within the meaning of section 240 of the Companies Act 1985. Full accounts for the year ended 31 December 2008 have not yet been audited or delivered to the Registrar of Companies. The Annual Report is due to be posted to shareholders on or around 28 April 2009. A copy of the statutory accounts for the year ended 31 December 2007 has been delivered to the Registrar of Companies. The Auditor's Report on those accounts was not qualified and did not contain a statement under section 237 (2) or (3) of the Companies Act 1985.

2) Revenue and segmental analysisRevenue in both years originated from the United Kingdom. Revenue, profit before tax and net assets, in both years, related to the design, fabrication and erection of structural steelwork and related activities.

3) Taxation

The taxation charge comprises:

During 2007 proposed amendments to the Industrial Buildings Allowance regime were announced. 

These amendments have been enacted during the year, resulting in the deferred tax liability held in the Consolidated Balance Sheet increasing by £6.3m with a corresponding taxation charge to the Consolidated  Income Statement.

4) Dividends

The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The proposed dividend will be paid on 15 June 2009 to shareholders on the register on 15 May 2009. The ex-dividend date is 13 May 2009.

5) Earnings per share

There are no discontinued operations in either the current or prior year.

6) Reconciliation of Group operating profit to cash generated from operations

7) Statement of changes in equity

8) Analysis of net borrowings