Severfield Regulatory News (SFR)

15 June 2022

Results for the year ended 26 March 2022

Record order book, good earnings visibility through 2023, inflationary pressures being well managed

Severfield plc, the market leading structural steel group, announces its results for the year ended 26 March 2022.

Headlines

§  Revenue up 11% to £403.6m (2021: £363.3m)

§  Underlying1 profit before tax up 11% to £27.1m (2021: £24.3m), demonstrates resilience of the Group in challenging market conditions

§  Underlying1 basic earnings per share up 12% at 7.2p (2021: 6.4p)

§  Total dividend increased by 7% to 3.1p per share (2021: 2.9p per share), includes proposed final dividend of 1.9p per share (2021: 1.8p per share)

§  Year-end net debt (on a pre-IFRS-16 basis2) of £18.4m (2021: net funds of £4.4m), reflects higher steel purchases to meet production needs in 2023 and the impact of steel price rises

§  Record UK and Europe order book of £486m at 1 June 2022 (1 November 2021: £393m), includes new industrial and distribution, film studio, commercial office and bridge orders and the new stadium for Everton F.C.

§  Share of profit from Indian joint venture ('JSSL') of £0.8m (2021: loss of £0.7m), reflecting revenue growth and margin improvement following the disruptive impact of COVID-19 in 2021

§  India order book of £158m at 1 June 2022 (1 November 2021: £140m), reflects strong underlying demand for structural steel in India

§  Successful completion of new £50m revolving credit facility maturing in December 2026

§  New simplified divisional structure implemented for UK and Europe operations from 1 April 2022 - creating three new divisions aligned with our chosen market sectors

ESG

§  Certified by the Carbon Trust as carbon neutral, CDP 'A-' rating for leadership on climate change

§  Top UK construction business in the 2022 Financial Times listing of Europe's climate leaders

§  Net zero carbon target established for 2040

Outlook

§  UK and Europe - tendering and pipeline activity remains encouraging - including opportunities in the industrial and distribution (battery plants and distribution centres), transport infrastructure, nuclear, data centre and commercial office sectors

§  India - strong and growing underlying demand for structural steel - JSSL is very well-positioned to take advantage of an improving economy

§  Record order book provides good earnings visibility through 2023 and beyond

§  Inflationary and supply chain pressures remain a challenge but continue to be well managed

§  Expectations for 2023 are unchanged despite the challenging macro-economic backdrop

Alan Dunsmore, Chief Executive Officer commented:

'We are delighted to be reporting a resilient and strong performance despite the ongoing market challenges. The Group's growth strategy is delivering a record order book with a broad diversity of sectors, geographies and clients, providing us with good earnings visibility through 2023 and beyond. Although inflation and supply chain pressures remain, we are managing these well and the earnings visibility gives us confidence in maintaining our positive performance expectations for 2023.'

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Notes to financials:

1 stated before non-underlying items of £6.1m (2021: £3.2m) including the amortisation of acquired intangible assets of £5.2m (2021: £2.8m) and net acquisition-related expenses of £0.7m (2020: £0.4m). Non-underlying items have been separately identified as a result of their magnitude, incidence or unpredictable nature. Their separate identification results in a calculation of an underlying profit measure in the same way as it is presented and reviewed by management (see note 3 to the financial statements).

2 the Group excludes IFRS 16 lease liabilities from its measure of net funds / debt as they are excluded from the definition of net debt as set out in the Group's borrowing facilities (see note 9 to the financial statements).

3 except as otherwise stated '2021' and '2022' refer to the 52-week periods ended 27 March 2021 and 26 March 2022 and '2023' refers to the 52-week period ending 25 March 2023. The Group's accounts are made up to an appropriate weekend date around 31 March each year.

A reconciliation of the Group's underlying results to its statutory results is provided in the Alternative Performance Measures ('APMs') section (see note 11 to the financial statements).

Notes to editors:

Severfield is the UK's market leader in the design, fabrication and construction of structural steel, with a total capacity of c.165,000 tonnes of steel per annum. The Group has six sites, c.1,500 employees and expertise in large, complex projects across a broad range of sectors. The Group also has an established presence in the expanding Indian market through its joint venture partnership with JSW Steel (India's largest steel producer).

OPERATING REVIEW

Group overview

The Group has had another successful year in 2022, delivering profit growth both in the UK and India against a backdrop of some challenging market conditions, and securing a significant value of new work, which is reflected in our order books of £486m in the UK and Europe and £158m in India. Together, these provide us with good visibility of earnings and leave us well-positioned with a strong future workload for the 2023 financial year and beyond.

Despite inflationary and supply chain pressures which have been a feature of most of the year, with an already challenging trading environment now being exacerbated by the Russian invasion of Ukraine, the 2022 results demonstrate the resilience of the Group and serve to highlight its many strengths. These include the additional resilience provided by our market sector, geographical and client diversity, the talent and commitment of our workforce, our supply chain management expertise, and our strong financial position.

In 2022, we have increased our revenue by 11 per cent to £403.6m (2021: £363.3m) and our underlying1 profit before tax by 11 per cent to £27.1m (2021: £24.3m), following the operational disruption experienced in 2021 from the COVID-19 pandemic. The increase in profit also reflects our ability to offset inflationary cost increases through a combination of operating efficiencies, higher selling prices and contractual protection as steel remains largely a pass-through cost for the Group.

We have maintained a good financial position throughout the year, enabling us to continue to grow the dividend and support ongoing investment in the business. Year-end net debt (on a pre-IFRS 16 basis2) was £18.4m (2021: net funds of £4.4m), which includes the outstanding term loans for acquisitions of £14.9m (2021: £20.8m). The increase in borrowings mainly reflects a normalisation of working capital, the impact of steel and other input price rises, together with higher steel purchases to meet production requirements when executing our record order book in 2023.

The Indian joint venture ('JSSL') has performed profitably in 2022, following a difficult start to the year when output was disrupted by the second wave of COVID-19. JSSL continues its recovery towards pre-pandemic levels of output in 2023 and the company's strong order book, together with an improving pipeline of potential orders, reflects a continuing strong underlying demand for structural steel in India. All this leaves the business very well-positioned to take advantage of an improving economy.

Strategy

The Group's strategy is driven by its core strengths of engineering and construction. This well-established strategy is unchanged, focused on growth, both organic and through selective acquisitions, operational improvements and building further value in JSSL.

In recent years, the evolution of this strategy has been particularly evident in our significant market sector, geographical and client diversification, which has enabled us to successfully navigate periods of market softness in certain of our main sectors in the UK, notably commercial offices. This has resulted in a more balanced business (the Group now serves ten market sectors) and a resilience which has seen us successfully negotiate the headwinds of Brexit, the COVID-19 pandemic and the inflationary pressures in the current year. The successful implementation of our strategy has also facilitated revenue growth and reinforced the Group's strong balance sheet and ability to generate cash which have allowed us to continue to invest in our operations and in acquisitions such as Harry Peers and DAM Structures. As a result, our capabilities are aligned with many market sectors with strong growth potential. The Group is well positioned to meet the demand for ongoing investment in the UK's infrastructure, while our diverse construction activities remain focused on key areas such as industrial and distribution, data centres, stadia and leisure, nuclear and commercial offices.

In India, we remain positive about the long-term trajectory of the market and of the value creation potential of JSSL. This is especially considering the structural changes in the economy over recent years, the government's ongoing focus on simplifying regulations and the 'ease of doing business', and the significant expansion of the business already evidenced to date which has resulted in a business capable of producing over 100,000 tonnes of steelwork from one site in Bellary.

In response to the strong long-term growth projections for India, and in tandem with our joint venture partner, we are in the process of selecting a plot of land to facilitate expansion of the business in the future. We expect that this land purchase will be completed in the 2023 financial year. This will allow the business to expand its geographical footprint whilst providing it with the platform to build quickly and incrementally add the necessary volume to support the expected future market growth.

New divisional structure

The Group has grown significantly over recent years, both organically and through acquisition. In response to this, since the size and shape of the Group has changed and evolved significantly over the last five years, we have created a simpler divisional structure for our UK and Europe operations. This has resulted in three new market-focused divisions (see below) in a structure designed to align our existing businesses more closely with the ten market sectors that we serve and our growing customer base. Further information on how this new structure will be presented will be provided at a Capital Markets Day ('CMD') later in the calendar year (a separate RNS notice will be issued for the CMD in due course). There are no non-underlying costs associated with this re-organisation which has been implemented for operational purposes.

The market dynamics of our three new divisions are different, in terms of the solutions that customers seek, project characteristics, the competitive landscape and their economic cycles. This in turn offers very different opportunities for the Group in terms of the growth rates and margin opportunities available to us. By creating a Group structure with three divisions focused on our chosen markets, we will not only optimise the operations of each division to the market dynamics they face but provide us with a better platform to fulfil our strategic growth aspirations, both organically and by acquisition.

This new structure will also allow us to adopt a more holistic approach to manufacturing across the Group, under the leadership of our Group Manufacturing Director, as we continue to invest in and optimise our factories, particularly at our main production centres in Dalton, Lostock and Enniskillen.

With effect from 1 April 2022, the current structure of six mainly location-based business units was streamlined into three market-focused divisions as follows:

The Commercial and Industrial division will bring together the Group's strong capabilities which serve the following market sectors - industrial and distribution, commercial offices, stadia and leisure, data centres, retail and health and education.

The Nuclear and Infrastructure division will encompass the Group's market-leading positions in the nuclear, power and energy, transport (road and rail) and process industries sectors.

The Products and Processing division will include the growing modular product ranges of Severfield (Products & Processing) based in Sherburn and of Construction Metal Forming ('CMF'), our cold rolled steel joint venture business based in Wales. We continue to be the only hot rolled steel fabricator in the UK to have a cold rolled manufacturing capability.

UK and Europe review

Revenue was up 11 per cent over the prior year mainly reflecting an increase in steel prices and the full year revenue effect of DAM Structures which was acquired in February 2021. During the year, we continued to work on several large distribution facilities in the UK, our first HS2 bridge package, Water Orton Viaducts in the Midlands, and a large industrial facility in the Republic of Ireland, which is now substantially complete. Other significant revenue contributing projects include the Google Headquarters at King's Cross, the Co-op Live Arena in Manchester and Sky Studios in Elstree, together with a number of mid-sized office developments, both in London and the UK regions (including Argyle Street in Glasgow, and 30 Grosvenor Square and 30 South Colonnade, both in London).

The underlying1 operating margin (before JVs and associates) was 6.7 per cent (2021: 7.0 per cent), resulting in an underlying1 operating profit (before JVs and associates) of £26.9m (2021: £25.5m). This represents profit growth of six per cent against a comparator which included a one-off profit of £1.5m on a bespoke paint package on the large industrial project in the Republic of Ireland (if this one-off profit is disregarded, the Group's results show profit growth of over 12 per cent).

Whilst underlying operating profits have increased year-on-year, the slight reduction in the margin percentage mainly reflects the dilutive impact of steel prices which have recently more than doubled and are largely passed on to the client at zero margin. This has resulted in an increase in revenue of c.£20m in 2022 but no associated increase in the Group's absolute profitability. This dilutive effect on margins would reverse if steel costs reduced to pre-pandemic levels in the future.

Across the Group, inflationary pressures and supply issues for both us and our clients have presented challenges in 2022, with an already difficult trading environment now being exacerbated by the war in Ukraine. We have experienced some increases in lead times and supply restrictions, upward pressures on costs due to tighter labour markets and significant price increases for certain products and services. This has included steel products, reflecting the volatility in iron ore prices, increased energy costs and, latterly, some supply restrictions as a number of steel products previously originated in Russia and Ukraine. Whilst not immune to these pressures, we have not experienced any significant disruptions to operations and the impact has generally been managed through contractual protection, operating efficiencies, higher selling prices and by forward purchasing as appropriate, leveraging the Group's scale and supply chain and sub-contract management strengths. For steel supply, we benefit from relationships with several partners in the UK and continental Europe, reducing the risk of interruptions to the Group's steel supply.

Inflationary pressures remain present and are expected to continue into 2023, however we expect to be able to minimise the impact of these through the focused sourcing of materials through the supply chain and ongoing operational efficiencies.

Smarter, Safer, more Sustainable

The Group's operational improvement programme has engendered a self-help culture within the organisation. This programme has served us well in maintaining efficient operations during the pandemic and in helping us to offset many of the supply chain and cost pressures currently being experienced by the Group.

During the year, we have continued our drive to reduce costs and increase and upgrade our fabrication capacity and efficiency. This includes the continued roll out of our new coatings management system at Dalton covering the reduction of paint waste and improvements to the specification, management and application of factory paint systems, together with 'right first time' initiatives to improve overall quality including the targeted reduction of factory and site NCRs (rework items) and drawing office errors. Having rolled out a new Group-wide production management system (StruMIS) in 2019, we are currently in the process of further streamlining production flows and improving real-time factory information at our main centre in Dalton. This includes the use of mobile devices to capture information at the point of use and to provide live information to both operatives and management. This will help drive quality, reduce bottlenecks, and improve the reliability and speed of our operations. As part of our ongoing capital investment programme, we have also continued to expand and automate our fabrication capability at Dalton to improve the throughput and efficiency of these operations.

The Group also continues to make good progress on its digital journey. This is focused on driving operational excellence through process standardisation and data alignment supported by the implementation of new systems. This includes our innovative approach to drawing and design, where we continue to make good progress with the automation of repetitive tasks, and the optimisation of engineering software under the leadership of our Group Engineering Director.

Order book, pipeline and market conditions

The future success of the Group is determined, amongst other things, by the quality of the secured workload and our discipline to maintain contract selectivity irrespective of economic conditions. The UK and Europe order book at 1 June includes a significant amount of new work which we have secured over the past twelve months and now stands at a record level of £486m (1 November 2021: £393m), of which £397m is planned for delivery over the next 12 months. This leaves the Group very well-positioned with a strong future workload for the 2023 financial year and beyond. The growth in the order book has been driven by several significant project awards. These include the new stadium for Everton F.C., a film studio, two large commercial office developments in London, and various large and several smaller industrial and distribution facilities in the UK, reflecting a sector which continues to remain buoyant. We have also secured several new HS2 bridge packages and other bridge awards reflecting investment in infrastructure by Highways England and Network Rail. The order book remains well-balanced, showcasing the benefits of our strategic diversification over recent years, and contains a healthy mix of projects across the Group's key market sectors.

In terms of geographical spread of the order book of £486m, 96 per cent represents projects in the UK, with the remaining 4 per cent representing projects for delivery in Europe and the Republic of Ireland (1 November 2021: 95 per cent in the UK, 5 per cent in Europe and the Republic of Ireland). The more UK-centric nature of the current order book is driven by a lower proportion of work in the Republic of Ireland, as several projects, including the large industrial facility, draw to completion. This, together with fewer ongoing projects in continental Europe, reflects a pipeline which was adversely impacted by COVID-19 twelve months ago, but which has since recovered strongly over recent months. Furthermore, whilst the order book is currently at record levels, only 16 per cent of this represents commercial offices in London, compared a peak of c.60 per cent around five years ago. This highlights the success of our strategic diversification.

We remain encouraged by the current level of tendering and pipeline activity across the Group, both in the UK and in continental Europe, in which we retain a good market position and which remains an important part of our strategic growth plans. We are well-positioned to take advantage of some significant opportunities in the industrial and distribution (battery plants and distribution centres), transport infrastructure, nuclear and data centre sectors, and, despite predictions of the demise of the office following the pandemic, in the commercial office market, including in London. Although we remain mindful of the ongoing effects of Russia's invasion of Ukraine, with the most significant effects of COVID-19 now behind us, we remain well-placed to win work across a wide client base and in a diverse range of market sectors and geographies. This provides us with greater resilience and the ability to drive future profitable growth.

'A golden age of infrastructure'

As a key component of economic growth, the construction industry will be central to a sustainable economic recovery. New, low carbon infrastructure (including HS2, wind power, new nuclear, rail electrification, energy efficient buildings) will play a leading role in stimulating sustainable growth. In November 2020, the UK Government released details of its five-year plan, the National Infrastructure Strategy ('NIS') to invest in digital, transport and energy to drive economic recovery, levelling up and meeting the UK's net zero emissions target by 2050. This plan announced funding of £650 billion, an increase of around £100 billion from the previous plan, for developments in roads, railways, power networks and other UK infrastructure projects. At Network Rail, in addition to HS2, the CP6 (control period) budget of around £53 billion (2019-2024), which includes a significant amount of rail electrification work, is substantially higher than the previous CP5 budget of £38 billion (2014-2019). At Highways England, the second Road Investment Strategy ('RIS2') budget of £24 billion (2020-2025) is a significant increase over the expenditure of £15 billion during 'RIS1' (2015-2020). We have already secured some significant road bridge awards and orders for HS2 from a variety of consortia, together with some ancillary steelwork packages at Hinkley Point, and we continue to make good progress with several other similar opportunities, including rail electrification work. We remain well-positioned to win work in the transport sector given the Group's historical track record and our in-house bridge capability, together with the in-depth expertise of DAM Structures.

Looking further ahead, in April 2022, prompted by Russia's invasion of Ukraine, the UK government published its Energy Security Strategy, pledging a new generation of nuclear power (under the banner of 'Great British Nuclear') as well as offshore wind generation, together with several other new energy supply initiatives, to reduce reliance on foreign energy supply. The combination of the in-house nuclear expertise acquired with Harry Peers, together the Group's unmatched scale and capability to deliver major infrastructure projects, leaves us well positioned to win work from such projects, many of which are likely to have a significant steelwork content.

Clients - increasingly broad spread and diverse

Our proven ability to work collaboratively and innovatively with clients is fundamental to our success and is critical to securing new work. Our preferred and predominant two-stage and negotiated procurement routes help significantly by allowing early collaboration with the client and supply chain and providing increased price and programme certainty.

Our unique capability to deliver complex design solutions, our capacity and speed of fabrication, the expert capabilities of the Group and its colleagues and our management and integration of the construction process is important to our clients and a key differentiator for the Group. During the year, when certain construction programmes were delayed and disrupted due to supply chain challenges or when inflationary pressures stretched existing budgets, our operational delivery capabilities allowed us to help clients deliver changes to these programmes quickly and efficiently, to provide clients with problem-solving solutions and to ensure that programme milestones were achieved.

We have again achieved national recognition though several awards including at the 2021 Structural Steel Design Awards (for 60 London Wall), the Royal Society for the Prevention of Accidents ('RoSPA') (Harry Peers won the President's award) and at the 2021 Morgan Sindall Supply Chain Awards. We have also been shortlisted for training excellence at the Construction News Specialists Awards.

The Group worked on over 100 projects with our clients during the year including:

Modular construction

Our modular (off-site) construction offering continues to include the growing product ranges of Severfield (Products & Processing) ('SPP') based in Sherburn and of CMF, our cold rolled steel joint venture business based in Wales. These businesses will make up the Group's new Products and Processing division.

SPP

SPP was originally established to allow us to address smaller scale projects and provide a one-stop shop for smaller fabricators to source high-quality processed steel and ancillary products, at lower margins. We have continued to grow and invest in the business, including strengthening the factory management, engineering and commercial functions, to maintain our focus on growing our 'Severstor' modular product range and 'Rotoflo' products, both of which attract higher margins. For Severstor, we are already making significant progress in growing our client base and have secured repeat orders from several blue-chip clients as well as continuing to develop our pipeline of opportunities. During the year, to help develop the overseas footprint of the business, the Rotoflo team appointed a new sales manager in India where we see some potentially interesting opportunities, particularly for the paint industry. SPP has already been awarded 'Fit for Nuclear' and certain Network Rail accreditations which, together with an expanding client base and our previous record in modular construction, we believe will help us to achieve our future growth aspirations for the business.

As well as servicing its growing external client base, SPP has also continued to provide high-quality sub-contract fabrication packages for other Group companies to assist in the delivery of our record UK and Europe order book, thus ensuring a greater proportion of project work remains in-house and subject to Severfield quality standards.

CMF

CMF has continued to develop its product range which now includes load bearing frame and deck profiles, purlins and side rail systems to service a cold formed steel market which has grown significantly in recent years through the increased use of steel in off-site and modular construction. In response to these market developments, the business is currently being expanded through the development of a new, separate manufacturing facility in South Wales. This new facility is required as the existing CMF facility in Pontypool is operating at close to full capacity and cannot be developed any further due to space constraints. The expanded capacity will allow CMF to serve an external client base and ensure that its market share is maintained and increased in line with market growth.

The expansion project commenced earlier in 2022 and the facility is expected to be operational in the next six months. The overall cost of construction for CMF is c.£10m, including land of £3m, which is being financed by a combination of equity of c.£5m, provided in equal amounts by the joint venture partners in 2021, and bank debt of c.£5m.

India review

JSSL returned to profitability in 2022 despite a difficult start to the year when output was disrupted by the second wave of COVID-19. This follows the loss recorded in the previous year which was severely impacted by COVID-19. This recovery is evident in the Group's after-tax share of profit of £0.8m (2021: share of loss of £0.7m). The improved performance reflects a doubling of revenue to £100.3m, compared with £48.0m in the previous year, and an increase in the operating margin to 5.2 per cent, compared with 3.3 per cent in the previous year. Financing expenses of £3.3m (2021: £3.4m) are broadly unchanged from the previous year and turn JSSL's operating profit of £5.2m (2021: £1.6m) into a profit before tax of £1.9m (2021: loss before tax of £1.8m).

Notwithstanding some current inflationary pressures, JSSL has continued to win new work, resulting in a strong order book of £158m at 1 June 2022 (1 November 2021: £140m). In terms of mix, 37 per cent of the order book represents higher margin commercial work, with the remaining 63 per cent representing industrial projects (1 November 2021: commercial work of 62 per cent, industrial work of 38 per cent). The current higher level of industrial work is consistent with the ongoing fluctuations in the timing and mix of industrial and commercial work in a growing order book.

JSSL's pipeline of potential orders continues to include several commercial projects for key developers and clients with whom it has established strong relationships, including in the commercial office, data centre and healthcare sectors. This, together with JSSL's healthy order book, reflects a strong and growing underlying demand for structural steel in India, leaving the business very well-positioned to take advantage of an improving economy. Accordingly, we expect the business to recover to pre-pandemic levels of output in 2023.

In response to this demand, which is supported by strong long-term growth projections for India and the continued conversion of the market from concrete to steel, and in tandem with our joint venture partner, we are in the process of selecting a plot of land to facilitate expansion of the business in the future. We expect that this land purchase will be completed in the 2023 financial year. Whilst Bellary continues to ramp up towards its maximum capacity of c,100,000 tonnes in 2023, this land purchase will allow the business to expand its geographical footprint in India whilst providing it with the platform to build quickly and incrementally add the necessary volume to support the expected future market growth.

ESG

Health and safety

Our updated SHE strategy is based around three key areas: people, communication and engagement, and systems and processes. The strategy will serve to further enhance and progress our SHE culture and values as we strive to be industry-leading in our approach. The Group's safety focus remains on its six Life Saving Rules namely, Fundamentals (do not carry out a task unless you are trained to do it), Working at Height, Control of Lifting Operations, Machine Safety, Vehicle Movement and Material Stability.

In the previous year, we rolled out a new platform for reporting SHE incidents and completing inspections to identify trends and root causes in safety performance to enable targeted improvements. Following the improvements in safety performance in 2021, we have made further improvements in 2022, and maintained our primary focus on the Group's injury frequency rate ('IFR') and high potential near misses ('HiPos'). Despite wider industry trends moving in the opposite direction as working practices return to normal post-pandemic, we have seen a further reduction in injury rates, resulting in an IFR (including JSSL) of 1.32, compared to 1.48 in 2021. The 2022 result excludes DAM Structures, which will be included in the reported IFR statistics in 2023 now that we have established a baseline performance in the year following its acquisition. Furthermore, the Group's accident frequency rate ('AFR') (including JSSL) for the year, which is based solely on the level of RIDDORS (reportable accidents), of 0.16 (2021: 0.18) continues to outperform the industry average.

Sustainability

The Board gives full and close consideration to environmental, social and governance ('ESG') factors when assessing the impact of the decisions it makes and supports. As a result of strategic decisions made in recent years, the Group now has a prominent market position in the high-growth markets of the future and is well-positioned to help accelerate the journey to net zero in its core sectors.

As part of our ambitious sustainability strategy, the Group has committed to reduce our scope 1 and 2 greenhouse gas ('GHG') emissions by 25 per cent by 2025 against a 2018 baseline, aligned with the Paris Agreement to limit global warming to below 1.5 degrees Celsius. We remain well on course to achieve this target through the successful implementation of sustainability initiatives including the switch to 'green' electricity at all our production facilities (which is now largely complete), through mandating hydrogenated vegetable oil ('HVO') fuels and the transition to electric and hydrogen construction plant where possible. Progress of all targets is measured and monitored and reported monthly through ESG dashboards.

In 2022, for the second year running, the Group was included in the Financial Times ('FT') listing of Europe's climate leaders which showcases corporate progress in fighting climate change. For 2022, this list includes the c.400 European companies that have achieved the greatest reduction in their GHG intensity between 2015 and 2020, over which the Group's emissions fell by 34 per cent. In the FT listing, for businesses with a rating from the Carbon Disclosure Project ('CDP'), only those with a score of at least 'B-' were considered. In 2022, we were awarded an 'A-' rating in the CDP index, improving on our 'B' rating from the previous year.

Our sustainability strategy also outlines our commitment to reach net zero for our scope 1 and 2 carbon emissions by 2040. Ahead of COP26 in 2021, the Group signed up to the United Nations 'Race to Zero' campaign, which requires the establishment of a net zero target in line with a 1.5-degree world, to hold off some of the worst climate impacts. We are on schedule to submit this target for validation by the Science-Based Target Initiative ('SBTI') by the end of the 2022 financial year. During the year, we achieved our target to be accredited as carbon neutral for our manufacturing and construction operations by the Carbon Trust, in accordance with PAS 2060, the only recognised international standard for carbon neutrality. This is an important milestone in our journey towards net zero. Carbon neutral in this context means that we use carbon offsetting to eliminate our combined scope 1, scope 2 and operational scope 3 greenhouse gas emissions.

During the year we continued to collaborate with several clients, attending workshops in areas such as sustainable procurement, low embodied carbon steel, and material passporting. Early engagement with clients remains vital in reducing the embodied carbon in the structures we build, in tandem with our existing SteelZero commitments which demonstrate how important the transition to low embodied carbon steel production is to the construction sector.

Social

We recognise the importance of input from our people in helping us deliver on our strategic ambitions and, in 2022, we launched our Group-wide 'MyVoice' forums. These provide a formal, structured way for colleagues and management to connect, gain feedback and exchange information and views on any business-related topic. Louise Hardy, our designated non-executive director responsible for workforce engagement, Alan Dunsmore, our CEO and Samantha Brook, our Group HR Director, regularly meet with forum representatives. These meetings have provided valuable, ongoing insights and feedback for the board during a challenging year for everyone, and we look forward to continuing this work with our colleagues in the year ahead.

Summary and outlook

The Group has had a successful year in the face of some challenging market conditions, highlighting the benefit of the strategic and operational progress made over recent years. We have increased revenues and profits, including a return to profitability for JSSL, we have continued to drive efficiencies through our operational improvement programme, and our balance sheet remains healthy, allowing us to make the right long-term decisions for the business. Our new, simplified divisional structure in the UK and Europe will optimise the operations of each division to the market dynamics they face and provide us with a better platform to fulfil our strategic growth aspirations.

We continue to make strong positive progress in our key market sectors, with the size and quality of our secured workload increasing during the year. This success is reflected in our order books of £486m in the UK and Europe and £158m in India. Our capabilities are aligned with many market sectors with strong growth potential, and we have an encouraging pipeline of significant, profitable opportunities in the UK, Europe and India, leaving us well positioned to increase our market share and to drive future profitable growth. Whilst we remain mindful of the macro-economic backdrop, particularly regarding inflationary pressures which are expected to continue in 2023, we continue to expect to deliver further progress and our expectations for the year ahead remain unchanged.

Alan Dunsmore

Chief Executive Officer

15 June 2022

FINANCIAL REVIEW

* The basis for stating results on an underlying basis is set out on page 2. A reconciliation of the Group's underlying results to its statutory results is provided in the Alternative Performance Measures ('APMs') section (see note 11 to the financial statements).

Trading performance

Revenue for the year of £403.6m represents an increase of £40.3m (11 per cent) compared with the previous year, reflecting an increase in steel prices (£19.2m) and the full year revenue effect of DAM Structures which was acquired in February 2021 (c.£20m).

Underlying operating profit (before JVs and associates) of £26.9m (2021: £25.5m), was £1.4m higher than in the previous year which included a one-off profit of £1.5m on a bespoke paint package on the large industrial facility in the Republic of Ireland. This represents year-on-year profit growth of 6 per cent but if the one-off prior year profit is disregarded, the results show profit growth of 12 per cent. Whilst underlying operating profits have increased, the slight reduction in the margin to 6.7 per cent (2021: 7.0 per cent) reflects the dilutive impact of steel price increases which are largely a pass through to the client at zero margin. This has resulted in an increase in revenue of c.£20m in 2022 but no associated increase in the Group's absolute profitability. The statutory operating profit, which includes the results of JVs and associates and the Group's non-underlying items, was £22.8m (2021: £22.3m).

Underlying profit before tax, which is management's primary measure of Group profitability, was £27.1m (2021: £24.3m). The statutory profit before tax, which includes the Group's non-underlying items, was £21.0m (2021: £21.1m).

Share of results of JVs and associates

The share of results from JSSL was a profit of £0.8m (2021: loss of £0.7m), reflecting revenue growth and margin improvement following the disruptive impact of COVID-19 on JSSL's prior year trading and profitability. Our specialist cold rolled steel business, CMF, contributed a share of profit of £0.5m (2021: £0.4m), the prior year for CMF also having been impacted by COVID-19. The CMF business is currently in the process of expanding its production operations in Wales and has continued to develop its product range, including modular steel products, to drive organic revenue growth.

Non-underlying items

Non-underlying items have been separately identified as a result of their magnitude, incidence or unpredictable nature. Their separate identification results in a calculation of an underlying profit measure in the same way as it is presented and reviewed by management. Non-underlying items for the year of £6.1m (2021: £3.2m) includes the amortisation of acquired intangible assets of £5.2m (2021: £2.8m) and other acquisition-related expenses of £0.7m (2021: £0.4m).

The amortisation of acquired intangible assets represents the amortisation of customer relationships, order books and brand name, which were identified on the acquisitions of Harry Peers and DAM Structures. These assets are being amortised over a period of 12 months to five years. Acquisition-related expenses include movements in the valuation of the contingent consideration for the DAM Structure acquisition which is payable over a five-year period.

Taxation

The Group's underlying taxable profits of £25.8m (2021: £24.7m) resulted in an underlying tax charge of £4.8m (2021: £4.6m), which represents an effective tax rate of 18.6 per cent (2021: 18.5 per cent). The total tax charge of £5.4m (2021: £3.8m) also includes adjustments relating to prior years and the deferred tax impact of the future increase in UK corporation tax from 19 per cent to 25 per cent which, in line with the Group's policy, are categorised as non-underlying and included in non-underlying items.

Earnings per share

Underlying basic earnings per share increased by 12 per cent to 7.2p (2021: 6.4p) based on the underlying profit after tax of £22.3m (2021: £19.8m) and the weighted average number of shares in issue of 308.8m (2021: 307.3m). Basic earnings per share, which is based on the statutory profit after tax, was 5.1p (2021: 5.6p), reflecting the increased underlying profit after tax offset by an increase in non-underlying costs. Diluted earnings per share, which includes the effect of the Group's performance share plan, was 5.1p (2021: 5.6p).

Dividend and capital structure

The Group has a progressive dividend policy. Funding flexibility is maintained to ensure there are sufficient cash resources to fund the Group's requirements. In this context, the board has established the following clear priorities for the use of cash:

§  To support the Group's ongoing operational requirements, and to fund profitable organic growth opportunities where these meet the Group's investment criteria,

§  To support steady growth in the core dividend as the Group's profits increase,

§  To finance strategic opportunities that meet the Group's investment criteria, and

§  To return excess cash to shareholders in the most appropriate way, whilst maintaining a good underlying cash position.

The board considers the dividend to be a very important component of shareholder returns. Accordingly, based on the outlook for the year ahead and our strong financial position, and despite the current uncertain macro-economic backdrop, the board is recommending a final dividend of 1.9p per share (2021: 1.8p), payable on 14 October to shareholders on the register at the close of business on 9 September. This together with the interim dividend of 1.2p per share (2021: 1.1p), will result in a total dividend of 3.1p per share (2021: 2.9p).

Goodwill and intangible assets

Goodwill was £82.2m at 26 March 2022 (2021: £85.8m), the movement reflecting the finalisation of goodwill and intangible assets arising on the DAM Structures acquisition. In accordance with IFRS, an annual impairment review has been performed. No impairment was required either during the year ended 26 March 2022 or the year ended 27 March 2021. Other intangible assets were £10.3m (2021: £9.6m). This largely represents the net book value of the intangible assets (customer relationships, order books and brand name) identified on the acquisitions of Harry Peers and DAM Structures.

Property, plant and equipment

The Group has property, plant and equipment of £91.4m (2021: £91.7m). Capital expenditure of £7.4m (2021: £6.6m) represents the continuation of the Group's capital investment programme. This predominantly consisted of site improvements at Ballinamallard, the purchase of additional land at Dalton to future-proof the site, new and upgraded equipment for our fabrication lines and the acquisition of cranes to support our site operations. Depreciation in the year was £6.9m (2021: £6.0m), of which £1.7m (2021: £1.6m) relates to right-of-use assets under IFRS 16.

Joint ventures

The carrying value of our investment in joint ventures and associates was £30.1m (2021: £28.8m), which consists of investments in India of £18.4m (2021: £17.6m) and in CMF of £11.7m (2021: £11.2m).

Pensions

The Group's defined benefit pension liability at 26 March 2022 was £14.4m, a decrease of £8.0m from the 2021 position of £22.4m. The deficit has reduced due to a higher discount rate, reflecting the significant increase in bond yields, and employer deficit contributions over the year. This has been offset to a lesser extent by higher expectations of long-term future inflation. All other pension arrangements in the Group are of a defined contribution nature.

Return on capital employed

The Group adopts ROCE as a KPI to help ensure that its strategy and associated investment decisions recognise the underlying cost of capital of the business. The Group's ROCE is defined in the APMs section (see note 11 to the financial statements). For 2022, ROCE was 13.5 per cent (2021: 13.6 per cent), which exceeds the Group's minimum threshold of 10 per cent through the economic cycle.

Cash flow

** The Group excludes IFRS 16 lease liabilities from its measure of net funds / debt as they are excluded from the definition of net debt as set out in the Group's borrowing facilities. A reconciliation of the Group's underlying results to its statutory results is provided in the Alternative Performance Measures ('APMs') section (see note 11 to the financial statements).

The Group's business model has been established to generate surplus cash flows and we have always placed a high priority on cash generation and the active management of working capital. The Group ended the year with net debt (on a pre-IFRS 16 basis) of £18.4m (2021: net funds £4.4m). Net debt at 26 March 2022 included an overdraft of £4.0m (2021: cash of £25.0m) and the outstanding term loans of £14.9m for acquisitions (2021: £20.7m).

Operating cash flow for the year before working capital movements was £32.6m (2021: £30.2m). Net working capital has increased by £34.5m during the year mainly reflecting the expected unwinding of the unusually low working capital position (two per cent of revenue) at the start of the year, together with the impact of steel and other input price rises, and higher steel purchases to meet production requirements in early 2023 when executing our record order book. Furthermore, on 1 March 2021, the UK's new VAT Domestic Reverse Charge regulations for construction services came into force, further increasing existing cash flow pressures on many businesses in our sector, and this was also a contributary factor in the Group's higher working capital position at the year-end.

Year-end working capital represented approximately ten per cent of revenue (2021: two per cent). Although this is higher than our well-established target range of four to six per cent, we expect an improvement in working capital in 2023, as some of the 2022 working capital pressures abate. Similarly, although we have missed our operating cash conversion (defined in the APMs section - note 11 to the financial statements) target of 85 per cent in 2022, we expect to exceed this target once again in 2023.

Prompt Payment Code

We believe in treating our suppliers and subcontractors fairly and with respect. Our three main businesses are all signatories of the Prompt Payment Code ('PPC'). Our relationships with our supply chain partners are of strategic importance and key to the Group's success, and payment practices remained a major area of focus throughout the year. However, the business operates in a sector where supply chains and contractual terms are complex, and prompt payment is often materially impacted by resolution of disputes and alignment to agreed contractual terms. For the PPC reporting period of 1 October 2021 to 26 March 2022, all the Group's businesses that are signatories of the PPC, reported that between 90 and 95 per cent of invoices were paid within 60 days.

From 1 July 2021 the PPC introduced the requirement to pay 95 per cent of invoices to businesses with fewer than 50 employees within 30 days instead of 60 days. In the second half of 2022, the Group paid over 80 per cent of its suppliers identified with fewer than 50 employees within the 30-day timeframe. Whilst we acknowledge that not all businesses with fewer than 50 employees have the latest systems to ensure prompt payment, the Group continues to take the appropriate action to further streamline its systems and processes, and work with them, to try to meet the timeframe set out by the Code.

Bank facilities committed until 2026

In December 2021, the Group completed a refinancing of its revolving credit facility ('RCF'). The new £50m RCF provides additional liquidity above the £25m RCF which it replaced and extends the term of the facility which now matures in December 2026. The new facility provides the Group with enhanced liquidity and long-term financing to help support its growth strategy. The RCF remains subject to three financial covenants, namely interest cover, net debt to EBITDA and debt service (cash flow) cover. The Group operated well within these covenant limits throughout the year ended 26 March 2022.

Going concern

In determining whether the Group's annual consolidated financial statements can be prepared on the 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 following factors were considered as relevant:

§  The current market conditions and the impact of these (including the potential future impact of the current inflationary market conditions and similar other significant downside risks linked to our principal risks) on the Group's profits and cash flows,

§  The UK and Europe order book and the pipeline of potential future orders,

§  The Group's operational improvement programme, which has delivered tangible benefits in 2022 and is expected to continue doing so in 2023 and for the period under forecast, and

§  The Group's cash position and its bank finance facilities, which are committed until December 2026, including both the level of those facilities and the three financial covenants (see above) attached to them.

In the previous year, the Group continued to trade safely and profitably with positive operating cash flows whilst operating under various COVID-19 restrictions. The directors expect the Group to remain similarly resilient over the forecast period. The directors have reviewed the Group's forecasts and projections for 2023 and for at least 12 months from the date of approval of the financial statements, including sensitivity analysis to assess the Group's resilience to potential adverse outcomes including a highly pessimistic 'severe but plausible' scenario. This 'severe but plausible' scenario is based on the combined impact of securing no further orders and further significant inflationary pressures for the entirety of the going concern period. Given the strong previous performance of the Group, this scenario is only being modelled to stress test our strong financial position and demonstrates the existence of considerable headroom in the Group's covenants and borrowing facilities in this 'severe but plausible' scenario.

Having also made appropriate enquiries, the directors consider it reasonable to assume that the Group has adequate resources to be able to operate within the terms and conditions of its financing facilities for at least 12 months from the approval of the financial statements. For this reason, the directors continue to adopt the going concern basis in preparing the financial statements.

Adam Semple

Group Finance Director

15 June 2022

Consolidated income statement

For the year ended 26 March 2022

All the above activities relate to continuing operations.

Further details of 2022 non-underlying items are disclosed in note 3. A reconciliation of the Group's underlying results to its statutory results is disclosed in note 11.

Consolidated statement of comprehensive income

For the year ended 26 March 2022

* These items will not be subsequently reclassified to the consolidated income statement.

Consolidated balance sheet

As at 26 March 2022

Consolidated statement of changes in equity

For the year ended 26 March 2022

* The issue of shares represents shares allotted to satisfy the 2018 and 2020 Sharesave scheme.

** The issue of shares represents shares allotted to satisfy the 2017 performance share plan award which vested in June 2020 and the 2017 Sharesave schemes.

Consolidated cash flow statement

For the year ended 26 March 2022

1) Basis of preparation

The preliminary announcement has been prepared in accordance with the Listing Rules of the FCA and is based on the 2022 financial statements which have been prepared in accordance with UK-adopted International Financial Reporting Standards ('IFRS'), with IFRS as issued by the International Accounting Standards Board ('IASB') and with the requirements of the Companies Act 2006. 

The accounting policies applied in preparing the preliminary announcement are consistent with those used in preparing the statutory financial statements for the year ended 27 March 2021.

The preliminary announcement is made up to an appropriate week end date around 31 March each year. For 2022, trading is shown for the 52-week period ended on 26 March 2022 (2021: 52-week period ended on 27 March 2021).

The financial statements of the Group's joint venture, JSSL, are made up to the year ended 31 March 2022 (2021: year ended 31 March 2021).

The preliminary announcement does not constitute the statutory financial statements of the Group within the meaning of Section 434 of the Companies Act 2006. The statutory financial statements for the year ended 27 March 2021 have been filed with the Registrar of Companies. The auditor has reported on those financial statements and on the statutory financial statements for the year ended 26 March 2022, which will be filed with the Registrar of Companies following the annual general meeting. Both the audit reports were unqualified, did not draw attention to any emphasis of matter, without qualifying their report, and did not contain any statements under Section 498(2) or (3) of the Companies Act 2006.

The preliminary announcement has been agreed with the Company's auditor for release.

2) Segment reporting

Following the adoption of IFRS 8, 'Operating Segments' the Group has identified its operating segments with reference to the information regularly reviewed by the executive committee ((the chief operating decision maker) ('CODM')) to assess performance and allocate resources. On this basis, the CODM has identified one operating segment (construction contracts) which in turn is the only reportable segment of the Group. The constituent operating businesses have been aggregated as they have similar products and services, production processes, types of customers, methods of distribution, regulatory environments and economic characteristics. All revenue is derived from construction contracts and related assets. Group revenue includes revenue of £57,619,000 (2021: £108,871,000), spread over several contracts, relating to one major customer, who individually contributed more than 10 per cent of Group revenue in the year ended 27 March 2022.

3) Non-underlying items

Non-underlying items include the amortisation of acquired intangible assets of £5,191,000 (2021: £2,842,000) and acquisition-related expenses of £674,000 (2021: £382,000).

Amortisation of acquired intangible assets represents the amortisation of customer relationships, order books and brand name, which were identified on the acquisition of Harry Peers and DAM Structures in 2020 and 2021 respectively. In the current year, acquisition-related expenses consist of the unwinding of the discount on the DAM Structures contingent consideration of £674,000. The prior year acquisition-related expenses include non-recurring legal and consultancy costs associated with these acquisitions of £689,000 and unwinding of the discount on the Harry Peers contingent consideration of £429,000 offset by movements of £736,000 in the valuation of the Harry Peers contingent consideration, which was paid in December 2020.

Tax on non-underlying items includes the impact of an increase in future corporation tax rates from 19 per cent to 25 per cent, that have been substantially enacted, on the Group's deferred tax liability. In the year, a charge of £604,000 has been recognised, comprising a tax credit on non-underlying items of £1,030,000 offset by a charge of £1,457,000 relating to the increase in future corporation tax rates and a charge of £177,000 relating to prior year adjustments.

Non-underlying items have been separately identified to provide a better indication of the Group's underlying business performance. They are not considered to be 'business as usual' items and have a varying impact on different businesses and reporting years. They have been separately identified as a result of their magnitude, incidence or unpredictable nature. These items are presented as a separate column within their consolidated income statement category. Their separate identification results in a calculation of an underlying profit measure in the same way as it is presented and reviewed by management. A reconciliation of the Group's underlying results to its statutory results is disclosed in note 11.

4) Taxation

The taxation charge comprises:

5) Dividends

The directors are recommending a final dividend of 1.9p per share (2021: 1.8p), payable on 14 October to shareholders on the register at the close of business on 9 September. This together with the interim dividend of 1.2p per share (2021: 1.1p), will result in a total dividend of 3.1p per share (2021: 2.9p).

6) Earnings per share Earnings per share is calculated as follows:

7) Business combinations

Summary of prior year acquisition

On 26 February 2021, the Company acquired 100 per cent of the share capital of DAM Structures Limited ('DAM Structures'), an innovative steel fabrication company. The board believe that the acquisition will give the Group immediate access to attractive, complimentary market sectors with strong growth potential including the propping, railway and steel piling market sectors.

The final net consideration of £22.9m comprised:

7) Business combinations (continued)

DAM Structures was acquired for an initial gross consideration of £16,994,000, including cash and cash equivalents of £5,521,000, which was funded by a combination of Group cash reserves and a new term loan.

In addition, a maximum deferred consideration of £7,000,000 is payable in cash in H1 of FY23. An additional performance-based contingent consideration is also in place which could further increase the purchase price by up to £8,000,000, if certain work-winning targets in the railway and steel piling sectors are achieved over a five-year period, ending in April 2026.

Following the finalisation of the acquisition accounting for DAM Structures in 2022, the provisional completion payment was agreed at £526,000, which has been paid in cash during the year, and the fair value of the contingent consideration has increased from the provisional stage to £3,977,000. This represents management's current assessment of the amount likely to be paid of £6,565,000 (out of the maximum £8,000,000), discounted at DAM Structures's cost of capital of 18.5 per cent.

The fair value of the assets and liabilities recognised as a result of the acquisition are as follows:

The finalisation of the acquisition accounting for DAM Structures resulted in an amount of £3,594,000 being reclassified from goodwill to intangible assets during the year. This reflects additional identified intangible assets on acquisition of £5,958,000, offset by fair value adjustments of £1,514,000 and related deferred tax liabilities of £850,000. The fair value adjustments relate to adjustments to contract balances, updated using the best estimates available, which are based on conditions existing at the date of acquisition. Due to the proximity of the acquisition to the previous year-end date, the valuation of these assets was not finalised until the year ended 26 March 2022.

7) Business combinations (continued)

Goodwill of £11,474,000 represents both existing and new end user customers (including core fabrication and rail), which were not recognised separately in accordance with IFRS 3 (Revised) 'Business combinations', the ability and skill of DAM's employees and management, know-how, and the quality of the services provided (none of which qualify for recognition as a separate intangible asset under IFRS 3). The goodwill arising from the acquisition is not expected to be deductible for income tax purposes.

Analysis of amounts disclosed in the cash flow statement in connection with the acquisition:

Acquisition-related costs of £689,000 were fully expensed in the period to 27 March 2021 as non-underlying operating costs (see note 3).

8) Net cash flow from operating activities

9) Net (debt) / funds

The Group's net (debt) / funds are as follows:

The Group excludes IFRS 16 lease liabilities from its measure of net funds / debt as they are excluded from the definition of net debt as set out in the Group's borrowing facilities. A reconciliation of the Group's underlying results to its statutory results is disclosed in note 11.

10) Contingent liabilities

Liabilities have been recorded for the directors' best estimate of uncertain contract positions, known legal claims, investigations and legal actions in progress. The Group takes legal advice as to the likelihood of the success of claims and actions and no liability is recorded where the directors consider, based on that advice, that the action is unlikely to succeed, or that the Group cannot make a sufficiently reliable estimate of the potential obligation. The Group also has contingent liabilities in respect of other issues that may have occurred, but where no legal or contractual claim has been made and it is not possible to reliably estimate the potential obligation.

11) Alternative Performance Measures

Our Alternative Performance Measures ('APMs') present useful information which supplements the preliminary announcement. These measures are not defined under IFRS and may not be directly comparable with APMs for other companies. The APMs represent important measures for how management monitors the Group and its underlying business performance. In addition, APMs enhance the comparability of information between reporting periods by adjusting for non-underlying items. The APMs are not intended to be a substitute for, or superior to, any IFRS measures of performance.

In order to facilitate understanding of the APMs used by the Group, and their relationship to reported IFRS measures, definitions and numerical reconciliations are set out below.

Principal risks and uncertainties

The board has carried out a robust assessment of the principal risks and uncertainties which have the potential to impact the Group's profitability and ability to achieve its strategic objectives. This list is not intended to be exhaustive. Additional risks and uncertainties not presently known to management or deemed to be less significant at the date of this report may also have the potential to have an adverse effect on the Group. Risk management processes are put in place to assess, manage and control these on an ongoing basis. Our principal risks are set out below: