Severfield Regulatory News (SFR)

20 June 2018

Results for the year ended 31 March 2018 

Another year of improved performance with a 19% increase in underlying profit before tax, a 13% increase in core dividend and a special dividend of 1.7p per share

Severfield plc, the market leading structural steel group, announces its results for the 12 month period ended 31 March 2018.

Highlights

* Underlying results are stated before non-underlying items of £1.3m (2017: £1.8m):

- Amortisation of acquired intangible assets - £1.3m (2017: £2.6m)

- Movement in fair value of derivative financial instruments - £nil (2017: gain of £0.8m)

- The associated tax impact of the above, together with the impact of a reduction in future corporation tax rates on deferred tax liabilities - £0.4m (2017: £0.6m)

Alan Dunsmore, chief executive officer commented:

'The strong performance that we are reporting today pays tribute to the hard work of all our staff and continues to reflect our well-established market-leading position and our focus on operational performance and efficiencies.

With a high quality and stable UK order book of £237m and a strong pipeline of opportunities which provides us with good visibility of earnings, together with an encouragingly improving outlook for our Indian joint venture, we remain confident that 2019 will be another year of progress for the Group.'

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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.150,000 tonnes of steel per annum, which represents c.17 per cent of UK structural steel production.

The Group has four sites, c.1,300 employees and expertise in large, complex projects across a broad range of sectors. The Group also has an established presence in the developing Indian market through its joint venture partnership with JSW Steel (India's largest steel producer).

OPERATING REVIEW

Group overview

The Group has delivered another year of strong profit growth in 2018, driven by a combination of revenue growth and continued improvements in UK operational performance, together with another profitable year from our Indian joint venture.

In 2018, we have continued to grow our revenue which has increased by 5 per cent to £274.2m (2017: £262.2m) and are very pleased with our profit performance with underlying profit before tax up 19 per cent to £23.5m (2017: £19.8m). Year-end net funds were £33.0m (2017: £32.6m) and another year of positive cash generation has further strengthened our balance sheet whilst providing us with the flexibility to invest in our UK businesses and in India, where the term debt was repaid in June 2017.

The market position for our Indian joint venture, JSSL, has improved significantly over recent months and this is reflected in its record order book of £106m and a growing pipeline of commercial opportunities, all of which will benefit the business in 2019 and beyond. In 2018, JSSL continued to perform profitably. Good operational performance and lower financing costs, following the repayment of the term debt, have resulted in the Group's share of profit after tax of £0.5m (2017: £0.2m).

We continue to exceed our ROCE target of 10 per cent and have achieved an improved return of 16.5 per cent in the year (2017: 14.6 per cent), maintaining the Group's alignment with its construction and engineering clients and peers.

We have continued to make good progress during the year towards our strategic targets, including the doubling of 2016 underlying profit before tax to £26m by 2020. Based on this progress, I am delighted that the board is recommending an increase in the final dividend to 1.7p per share, making a total for the year of 2.6p per share (2017: 2.3p per share), a 13 per cent increase on the prior year. Furthermore, the board is also recommending a special dividend of 1.7p per share, which reflects our current balance sheet strength and confidence in the future prospects of the business and delivers a total cash return for shareholders of 4.3p per share.

UK review

Revenue is up 5 per cent over the prior year predominantly reflecting an increase in order flow and production activity, together with an increase in steel prices. During the year, we have continued to work on four large projects in London, each of which has project revenues in excess of £20m. These include three projects where work is ongoing and will continue into the next financial year, namely the new stadium for Tottenham Hotspur FC, the retractable roof for Wimbledon No. 1 Court and a new commercial office tower at 22 Bishopsgate. The fourth large project worked on during the year, which is now substantially complete, is for a major new commercial head office building in London.

Our operating margins have improved again to 8.3 per cent (2017: 7.5 per cent) resulting in an underlying operating profit (before JVs and associates) of £22.9m (2017: £19.6m). When we set our strategic 2020 profit target back in 2016, we anticipated that this would be achieved with revenues in the range of £270m to £300m and operating margins in the range of 8 to 10 per cent, depending on the mix of projects in the order book at the time. It is pleasing to us that the 2018 operating margin of 8.3 per cent is now within this strategic margin range for the first time, demonstrating that we remain firmly on course to achieve our strategic profit target.

The operating margin has continued to benefit from improvements to our operational execution including further developments to our factory processes to drive efficiencies and reduce costs, as well as better risk and contract management processes. In many cases, this execution improvement only becomes apparent towards the end of a contract and this is reflected in the improved 2018 results, together with higher profits from certain project completions which mainly benefitted the first half of the year. 

Operational improvements implemented during the period include the continued roll out of a new Group-wide production management system, the opening of our new paint facilities at Lostock and Ballinamallard which will shorten lead times, improve quality and reduce reliance on external suppliers, further investment in our factories and bridge capability to improve speed and efficiency and the upgrade of our haulage facilities at Dalton.

'Smarter, Safer, more Sustainable'

The Group continues to be shaped by the programme of projects launched in the previous year under the banner of 'Smarter, Safer, more Sustainable' which provides a framework for the ongoing improvements to our business processes, use of technology and operating efficiencies. Developments in 2018 include the launch of our Lean manufacturing programme and the establishment of a dedicated 'SSS' team to focus on improving many aspects of our internal operations.

In January 2018, to drive further operational improvements in line with the Group's strategy, we reorganised our factory operations in North Yorkshire. This resulted in steel fabrication at Dalton and Sherburn being consolidated into the Dalton facility, making better use of our operational footprint in Yorkshire, and the establishment of a new business venture in Sherburn, Severfield (Products & Processing) ('SPP'). SPP, which commenced trading in April 2018, has allowed us to address smaller scale projects, a segment of the market which we have not historically focused on. The business provides a one-stop shop to fabricators who specialise in smaller projects to source processed steel and ancillary products, all delivered to the Group's high standards of quality and service.

Underpinning our culture of continuous improvement is the ongoing focus on the training and development of our people and our priority is to recruit, train and retain the highest calibre of workforce. Notwithstanding Ian Lawson's departure which required us to implement our succession plans, the continued stability in our organisational structure and management team has been a key strength of the business for a number of years. During the year, we recruited over 200 people across the Group, strengthening a range of disciplines including our commercial and project management teams. We believe that the recruitment and training of graduates and apprentices is fundamental to business development, another means of ensuring that we have all the desired skill bases available in the future. During 2018, we recruited 66 apprentices and continued to invest in graduate trainees through our apprenticeship and graduate recruitment programmes.

In 2017, demonstrating our ongoing commitment to people development, we launched a training scheme on Lean production techniques (which forms part of our overall Lean manufacturing programme) and the Severfield development programme, which focuses on emerging leaders. In 2018, we have continued to develop and support our people to apply Lean manufacturing techniques to develop new skills, achieve new qualifications and, as part of the 'Smarter, Safer, more Sustainable' initiative, continually improve our businesses and client offering. The first cohort of employees have now completed the Severfield development programme, aimed at developing and deepening our management talent, which has delivered clear benefits both for the business and the people involved.

During 2018, to further improve efficiencies and client service, we have continued to invest in research and development into advanced technologies. We have also established an engineering forum to identify new and innovative ways of working which can then be embedded across the Group to become business as usual.

Clients

Working closely with our clients and project stakeholders we continue to demonstrate our capability to deliver complex design solutions and, in 2018, we have designed and delivered some of the most complex engineering solutions in the industry. Our management and integration of the construction process, our capacity and speed of fabrication and our use of technology has allowed us to improve project delivery times as well as meeting and often exceeding client service expectations. We have worked with a number of clients using innovative and collaborative ways of contracting which have enabled cost effective solutions to be developed to meet project challenges. 

Our client base, which represents a broad range of sectors and regions, includes Multiplex, Sir Robert McAlpine, LeadLease, Balfour Beatty, BAM, Skanska, Mace, Laing O'Rourke, Canary Wharf Contractors, McLaren, Winvic, Morgan Sindall, Stanhope, Buckingham, Vinci, Readie, Galliford Try, Hitachi, ISG, Interserve, Bowmer and Kirkland, John Sisk, John Graham, Hochtief and Westfield. The Group worked on over 100 projects with our clients during the year including:

Our specialist cold rolled steel joint venture business, CMF, has performed well during the year, having a beneficial impact both on operating margins and the share of results from JVs and associates. We continue to be the only hot rolled steel fabricator in the UK to have this cold rolled manufacturing capability, which has now been expanded to include purlins and additional cold formed products, allowing the Group to further integrate elements of its supply chain.

The remedial bolt replacement works at Leadenhall were completed in 2017 with the total expenditure being in line with the non-underlying charge made in 2015. Discussions continue with all stakeholders to determine where the financial liability for the remedial costs should ultimately rest.

Order book and market conditions

The UK order book at 1 June 2018 of £237m is consistent with the level that it has been for the past six months and reflects the anticipated increase from the position of £229m at the time of announcing the 2017 full year results. The order book, of which £200m is for delivery over the next 12 months, remains in line with our 'normal' order book levels, which typically equate to eight to ten months of annualised revenue. This provides us with good visibility of earnings into the next financial year and supports continued progress towards our strategic targets.

The order book contains a healthy mix of projects across a diverse range of sectors including commercial offices, industrial and distribution, data centres and retail. Significant new orders secured during the year include a number of commercial office developments in London and in the regions, including the landmark contract for the new Google Headquarters at Kings Cross, the Engineering Campus Development at Manchester University, the Westfield Stratford City expansion, industrial and distribution projects for a variety of clients, together with two large data centres in the Republic of Ireland and Belgium. 

The Google project, which was awarded in December 2017, represents an order in excess of £50m and will require us to provide over 15,000 tonnes of structural steelwork for a new eleven storey head office building. Work is scheduled to commence on site in the second half of the 2019 financial year.

Despite the uncertainties of Brexit, we continue to see a stable UK market, with modest economic growth forecast, and a pipeline of potential future orders that remains good. This pipeline includes a number of significant projects in the coming months across the commercial offices (both in London and outside), retail, industrial and distribution, data centres and infrastructure sectors. The market for data centres and industrial and distribution appears strong at present and although pricing remains competitive, the projects in these sectors play to our strengths requiring high quality, rapid throughput, on time performance and full co-ordination between stakeholders. Furthermore, we are seeing the continued re-emergence of the market in the Republic of Ireland, where we have historically had a strong presence, as well as a number of opportunities in mainland Europe.

In February 2018, in response to recent changes in the mix of work being experienced by the Group, which is substantially changing the requirement for steel fabrication at our Lostock and Dalton facilities, we transitioned a number of job roles from Lostock to Dalton. These changes will allow us to enhance our market leading position, whilst continuing to provide our clients and stakeholders with a high-quality cost-effective product and service.

Looking further ahead, UK Government policy is helping to drive a strong pipeline of major infrastructure projects particularly in the transport sector including HS2 stations and bridges, the expansion of Heathrow airport as well as the ongoing Network Rail and Highways England investment programmes. The combination of our in-house bridge capability, which has seen significant investment over recent years, and our historical record in transport infrastructure, leaves us well positioned to win work from such projects, all of which have a significant steel content.

India

In 2018, our Indian joint venture, JSSL, continued to grow, performing steadily and profitability. The business, once again, generated strong operating margins of 9.2 per cent (2017: 9.7 per cent) and a profit after tax, of which the Group's share is £0.5m (2017: £0.2m). The improved profitability in 2018 reflects both the good operational performance of the business coupled with lower financing costs following the repayment of the joint venture's term debt of £11.0m in June 2017.

The market for structural steel in India has improved significantly over recent months and we are now seeing clear signs of the conversion from concrete to steel which is vital to the long-term growth and value of JSSL. These market developments are evident in JSSL's record order book of £106m at 1 June 2018, which has increased significantly recently and compares favourably to the order book of £73m at 1 June 2017. There is also a growing pipeline of opportunities which mainly comprises higher margin commercial projects, where we now have visibility of a large number of potentially interesting developments, as well as industrial work, including for our joint venture partner, JSW Steel, which is seeking to substantially increase its domestic steel output in the short to medium term. The step up in the pipeline of opportunities is expected to benefit the business in the 2019 financial year and beyond, with demand at these levels likely to fill and exceed our current factory capacity levels. Accordingly, in tandem with our joint venture partner, we are currently reviewing certain incremental investment options for the business.

Overall, we remain confident in the long-term development of the market and of the business, especially considering the recent market upturn and step up in the order book. We believe that the business continues to have a solid foundation from which to deliver future profitable growth and value will continue to build in the business as it enters the next phase of its development.

Business investment

The Group has invested £6.4m in capital expenditure during the year (2017: £7.0m) representing the continuation of the Group's capital investment programme. The capital expenditure includes further investment in the new in-house painting facilities at Lostock and Ballinamallard, new equipment for our fabrication lines, further enhancement of our in-house fleet of on-site construction equipment and improvements to our site infrastructure and staff welfare facilities.

The cash generation of the Group remains strong and we will continue to invest £6m to £7m per annum to support the development of our client service offering and our operational improvements and efficiencies.

Safety

We are committed to the safety of all who come into contact with our business and over the past three years, we have seen an improvement in our overall safety performance. The Group's accident frequency rate ('AFR') for the year, which includes our Indian joint venture, was 0.22, compared to 0.24 recorded last year, which represents another year-on-year improvement. This improvement was again driven by our UK operations which reduced from 0.42 to 0.40 in the year. Whilst year-on-year improvements continue, health and safety continues to be central to all of the Group's activities and our strategic programme of activities and improvements has supported progress in the year.

All members of our board, once again, participated in site safety visits during the year and we continue to further develop the monitoring and analysis of all safety-related incidents, including near misses, high potential incidents and also minor injuries for prevention programmes and campaigns. We have commenced the next stage of our behavioural safety programme and are now seeing further enhancements around behaviour and cultural change.

Our occupational health programme continues to evolve with focus on prevention measures. We have further developed awareness and support protocols on mental and physical health-related issues. In light of this, in addition to supporting the Mates in Mind charitable programme we will also be signing up to the Build UK charter to improve and promote positive mental health in construction.

Sustainability remains a key part of the Group's strategy, aiming to create visible leadership and objectives at all levels and to all stakeholders. A number of projects have been identified and progressed through an established working group, for example emergency lighting upgrades.

Strategy

We have continued to deliver on our strategic objectives. During the year, as part of the 'Smarter, Safer, more Sustainable' programme, we have implemented a number of improvement initiatives aimed at business processes and operating efficiencies (including the reorganisation of our North Yorkshire factory operations), use of technology and new product development all set within our framework of robust risk management and control. We also continue to work closely with our existing client base, as well as developing new client relationships to target an increased pipeline of opportunities, to ensure that we are meeting their ever-changing requirements.

We continue to adopt an integrated solutions mindset, listening to clients' operational challenges and then designing a package of solutions to help them achieve their goals. Our engineers and designers remain focused on key areas such as value engineering, health and safety through design and the use of more cost-effective and innovative steel solutions, all for the benefit of our clients.

We are now actively pursuing three new areas of organic growth. During the year, we launched our new business venture at Sherburn, Severfield (Products & Processing), which commenced trading in April 2018. We continued to develop our European business venture and have commenced bidding for work in continental Europe, assisted by the new business development director who has now established a small team based in the Netherlands. Finally, we are also targeting the market for medium to high rise residential construction where we have developed a steel solution. In 2018, we have performed extensive market testing, have had positive discussions with interested parties and believe that we are now close to securing our first order. 

Summary and outlook

The strong performance of the Group has continued into 2018, with good revenue and profit growth supported by strong cash generation. The strategic and operational progress that we have made over recent years gives us confidence that the Group is well placed to deliver sustainable future profitable growth. With a high quality and stable order book of £237m and a strong UK pipeline of opportunities, we expect 2019 to be another year of progress in the UK.

In India, a significantly improving market position, a record order book of £106m and a growing pipeline of commercial opportunities, positions the business well to deliver future profitable growth. It is this improvement in the market which will really drive long term value in the business and, in tandem with our joint venture partner, we are currently reviewing certain incremental investment options for the business as it enters the next phase of its development.

Overall, both the performance of the UK business and the Indian joint venture, are consistent with the continued progress towards our strategic targets, including the doubling of 2016 underlying profit before tax to £26m by 2020.

Finally, I would like to thank all of our employees for their high level of commitment and professionalism during 2018, particularly during a period of change for some of our businesses, which has contributed to another successful year for the Group.

Alan Dunsmore

Chief Executive Officer

20 June 2018

FINANCIAL REVIEW

* The basis for stating results on an underlying basis is set out on the highlights page. The board believes that non-underlying items should be separately identified on the face of the income statement to assist in understanding the underlying performance of the Group. Accordingly, adjusted performance measures have been used throughout this report to describe the Group's underlying performance.

Trading performance

In 2018, we delivered a strong financial performance. Revenue for the year ended 31 March 2018 of £274.2m represents an increase of £12.0m (5 per cent) compared with the previous year. This is a result of an increase in production activity during the year (we continue to work on four large projects with revenues in excess of £20m), together with an increase in steel prices. The Group's order book at 1 June 2018 of £237m (1 June 2017: £229m) remains in line with our normal order book levels, which typically equate to eight to ten months of annualised revenue.

Underlying operating profit (before JVs and associates) of £22.9m (2017: £19.6m) reflects an increased underlying operating margin (before JVs and associates) of 8.3 per cent (2017: 7.5 per cent). The operating margin has continued to benefit from the embedding of operational efficiencies across the Group through better risk and contract management processes and production process improvements combined with higher profits from certain project completions which mainly benefitted the first half of the year. The statutory operating profit (before JVs and associates), which includes the Group's non-underlying items, was £21.5m (2017: £17.8m).

The share of results of JVs and associates was a profit of £0.9m (2017: £0.5m) and net finance costs were £0.2m (2017: £0.2m).

Underlying profit before tax, which is management's primary measure of Group profitability, was £23.5m (2017: £19.8m). The statutory profit before tax, reflecting both underlying and non-underlying items, was £22.2m (2017: £18.1m).

Share of results of JVs and associates

The Group's share of results from its Indian joint venture was a profit of £0.5m (2017: £0.2m) reflecting another year of profitability for the business. The profit is the result of a stable operating margin of 9.2 per cent (2017: 9.7 per cent) reflecting continued good operating performance, coupled with lower financing costs following the repayment of the joint venture's term debt in June 2017.

Our specialist cold rolled steel joint venture business, CMF, contributed a Group share of profit of £0.4m (2017: £0.3m). Having successfully integrated the metal decking supply into our operations in the prior year, CMF has invested further during the year. We continue to be the only hot rolled steel fabricator in the UK to have this cold rolled manufacturing capability, which has now been expanded to allow the production of purlins and additional cold formed products. This has further increased the value offering and profit contribution from the business.

Non-underlying items

Non-underlying items for the year of £1.3m (2017: £1.8m) comprised:

§ Amortisation of acquired intangible assets - £1.3m (2017: £2.6m)

§ Movement in fair value of derivative financial instruments - £nil (2017: gain of £0.8m)

Non-underlying items are classified as such as they do not form part of the profit monitored in the ongoing management of the Group.

Amortisation of acquired intangible assets represented the amortisation of customer relationships which were identified on the acquisition of Fisher Engineering in 2007. These customer relationships were fully amortised during the 2018 financial year.

In the prior year, a non-cash profit on derivative financial instruments of £0.8m was recognised in relation to the movement in fair values of foreign exchange contracts. No similar items have been recorded in the income statement for the current year following the adoption of hedge accounting at the 2017 financial year-end.

The associated tax impact of the above, together with the impact of a reduction in future corporation tax rates on deferred tax liabilities was £0.4m (2017: £0.6m).

Finance costs

Net finance costs in the year were £0.2m (2017: £0.2m). The Group has been in a net funds position for all of the financial year, consequently the finance costs primarily represent non-utilisation fees for the revolving credit facility and the amortisation of capitalised transaction costs associated with the refinancing in 2014.

Taxation

The Group's underlying taxable profits (which excludes results from the JVs and associates) of £22.6m (2017: £19.4m) resulted in an underlying tax charge of £4.4m (2017: £3.3m). This represented an effective tax rate of 19.4 per cent (2017: 17.1 per cent). The lower prior year effective tax rate reflected the recognition of deferred tax assets on historical trading losses. These losses are now fully utilised.

The total tax charge for the year of £4.0m (2017: £2.7m) reflects the underlying tax charge, offset by deferred tax benefits arising from the amortisation of intangible assets in the year, and also the benefit of the future reduction in UK corporation tax to 17 per cent in 2021 for certain deferred tax items. These rate changes are categorised as non-underlying and are included in non-underlying items.

Earnings per share

Underlying basic earnings per share increased by 15 per cent to 6.4p (2017: 5.5p) based on the underlying profit after tax of £19.1m (2017: £16.5m) and the weighted average number of shares in issue of 299.7m (2017: 298.9m). Basic earnings per share, which is based on the statutory profit after tax, was 6.1p (2017: 5.1p), this growth reflects the increased profit after tax and a reduction in non-underlying items. Diluted earnings per share, including the effect of the Group's performance share plan, was 6.0p (2017: 5.1p).

Goodwill and intangible assets

Goodwill on the balance sheet is valued at £54.7m (2017: £54.7m). In accordance with IFRS, an annual impairment review has been performed. No impairment was required either during the year ended 31 March 2018 or the year ended 31 March 2017.

Other intangible assets on the balance sheet are recorded at £0.1m (2017: £1.6m). The reduction in the year primarily represents the remaining intangible assets (customer relationships) identified on the acquisition of Fisher Engineering in 2007 being fully amortised. Amortisation of £1.5m (2017: £2.9m) was charged in the year.

Capital investment

The Group has property, plant and equipment of £81.2m (2017: £78.9m).

Capital expenditure of £6.4m (2017: £7.0m) represents the continuation of the Group's capital investment programme. This included continued investment in the painting facilities at Lostock and Ballinamallard, new equipment for our fabrication lines, further enhancement of our in-house fleet of construction site equipment, a new trailer park and improvements to our sites and staff welfare facilities. Depreciation in the year was £3.7m (2017: £3.6m).

Joint ventures

The carrying value of our investment in joint ventures and associates was £18.5m (2017: £12.1m) which consists of the investment in India of £10.7m (2017: £4.6m) and in CMF Limited of £7.9m (2017: £7.5m). During the year, we invested additional equity investment of £5.5m in the Indian joint venture business to support the full repayment of the joint venture's term debt of £11.0m in June 2017.

Pensions

The Group has a defined benefit pension scheme which, although closed to new members, had an IAS 19 deficit of £17.2m at 31 March 2018 (2017: £21.4m). The decrease in the liability is primarily the result of changes to the scheme's demographic assumptions (mainly updated mortality assumptions) and ongoing deficit contributions by the Group during the year. The triennial funding valuation of the scheme is currently ongoing, with a valuation date of 5 April 2017. All other pension arrangements in the Group are of a defined contribution nature.

Shareholders' funds

Shareholders' funds at 31 March 2018 were £169.0m (2017: £154.2m). The increase is primarily due to the increase in profit after tax for the year and a decrease in the IAS 19 deficit on the Group's defined benefit pension scheme.

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 as underlying operating profit divided by the average of opening and closing capital employed. Capital employed is defined as shareholders' equity excluding retirement benefit obligations (net of tax), acquired intangible assets and net funds (see note 20 of the 2018 annual report). For 2018, ROCE was 16.5 per cent (2017: 14.6 per cent) which exceeds the Group's target of 10 per cent through the economic cycle.

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 other possible strategic opportunities that meet the Group's investment criteria;

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

The board is recommending a final dividend of 1.7p (2017: 1.6p) per share payable on 14 September 2018 to shareholders on the register at the close of business on 17 August 2018. This, together with the interim dividend of 0.9p (2017: 0.7p) per share, will result in a total dividend per share for 2018 of 2.6p (2017: 2.3p), an increase on the prior year of 13 per cent. In addition, the board is also recommending a special dividend of 1.7p per share (2017: nil). The final and special dividends are not reflected on the balance sheet at 31 March 2018 as they remain subject to shareholder approval.

Cash flow

The Group has always placed a high priority on cash generation and the active management of working capital. The Group finished the year with net funds of £33.0m (2017: £32.6m), following dividend payments of £7.5m, capital expenditure of £6.4m and the investment of additional equity into the Indian joint venture of £5.5m.

Operating cash flow for the year before working capital movements was £26.7m (2017: £25.1m). Net working capital increased by £3.7m during the year mainly as a result of the unwinding of advance payments from customers. Excluding advance payments, year-end net working capital represented approximately two per cent of revenue (2017: two per cent). This is lower than the four to six per cent range which we have been targeting, mainly as a result of good payment terms on certain ongoing contracts and a continued focus on working capital management.

In 2018, our cash generation KPI shows a conversion of 77 per cent (2017: 112 per cent) of underlying operating profit (before JVs and associates) into operating cash (cash generated from operations less net capital expenditure). This is below our target conversion of 85 per cent largely as a result of the unwinding of advance payments as described above.

Net investment during the year was £5.4m reflecting capital expenditure of £6.4m less proceeds from disposals of £1.0m.

Bank facilities committed until 2019

The Group has a £25m borrowing facility with HSBC and Yorkshire Bank, with an accordion facility of a further £20m available at the Group's request. There are two key financial covenants, with net debt: EBITDA of 4x. The Group operated well within these covenant limits throughout the year ended 31 March 2018.

Due to the continued strong cash performance of the Group, the facilities were not utilised during the year and continue to provide ongoing funding headroom and financial security for the Group. At the time of this report, the Group has commenced discussions with its lenders to secure new facilities replacing the above facilities which are committed until July 2019.

IFRS 15

The Group has undertaken a detailed exercise comparing the current revenue recognition policies against the requirements of IFRS 15, the new revenue accounting standard which becomes effective for the Group's 2019 year-end. This assessment involved identifying the significant areas of difference and quantifying their effect on a sample of different types of contract to ensure that the impact of the new standard is fully understood and acted upon in advance of the effective date. The conclusion of this assessment is that the directors are satisfied that no material adjustments will be required on the initial application of the new standard. It is intended that the standard will be implemented with full retrospective application in the Group's 2019 financial statements.

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 UK order book and the pipeline of potential future orders;

§The Group's operational improvement programme which has delivered stronger financial performance and is expected to continue doing so in the 2019 financial year and beyond;

§The Group's net funds position and its bank finance facilities which are committed until July 2019, including both the level of those facilities and the covenants attached to them.

Based on the above, having made appropriate enquiries and reviewed medium-term cash forecasts, the directors consider it reasonable to assume that the Group has adequate resources to continue for at least 12 months from the approval of the financial statements and therefore that it is appropriate to continue to adopt the going concern basis in preparing the financial statements.

Viability statement

In accordance with provision C.2.2 of the 2014 revision of the UK Corporate Governance Code (the 'Code'), the directors have assessed the Group's viability over a three-year period ending on 31 March 2021. The starting point in making this assessment was the annual strategic planning process. While this process and associated financial projections cover a period of five years, the first three years of the plan are considered to contain all of the key underlying assumptions that will provide the most appropriate information on which to assess the Group's viability. This assessment also considered:

§The programmes associated with the majority of the Group's most significant construction contracts, the execution period of which is normally less than three years;

§The good visibility of the Group's future revenues for the next three years which is provided by external forecasts for the construction market, market surveys and our own order book and pipeline of opportunities (prospects).

In making their assessment, the directors took account of the Group's strategy, current strong financial position, recent and planned investments, together with the Group's main committed bank facilities. These committed bank facilities mature in July 2019. Notwithstanding the Group's current net funds position of £33.0m, the directors draw attention to the key assumption that there is a reasonable expectation that the facilities will be renewed at the appropriate time and that there will not be a significant reduction in the level of facilities made available to the Group or a significant change in the pricing.

The directors assessed the potential financial and operational impact of possible scenarios resulting from the crystallisation of one of more of the principal risks described in the annual report as well as taking into consideration recent issues (such as recent corporate failures) that are relevant to the industry sector in which the Group operates. In particular, the impact of a reduction in margin of 25 per cent, a reduction in revenue of 25 per cent, a deterioration in working capital (the extension of customer payment terms by one month), a period of business interruption (two months with no factory production) and a significant one-off event resulting in a cost to the Group of £15m. The range of scenarios tested was considered in detail by the directors, taking account of the probability of occurrence and the effectiveness of likely mitigation actions.

Based on this assessment, the directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.

Adam Semple

Group Finance Director

20 June 2018

Consolidated income statement

For the year ended 31 March 2018

All of the above activities relate to continuing operations.

Further details of non-underlying items are disclosed in note 3.

Consolidated statement of comprehensive income

For the year ended 31 March 2018

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

Consolidated balance sheet

As at 31 March 2018

Consolidated statement of changes in equity

For the year ended 31 March 2018

* The issue of shares represents shares allotted to satisfy the 2014 Performance Share Plan award which vested in June and November 2017.

** The issue of shares represents shares allotted to satisfy the 2013 Performance Share Plan award which vested in June, September and November 2016.

Consolidated cash flow statement

For the year ended 31 March 2018

1) Basis of preparation

The preliminary announcement has been prepared in accordance with the Listing Rules of the FCA and is based on the 2018 financial statements which have been prepared under International Financial Reporting Standards ('IFRS') as adopted by the European Union and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The accounting policies applied in preparing the preliminary announcement are consistent with those used in preparing the statutory financial statements for the year ended 31 March 2017.

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 31 March 2017 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 31 March 2018, 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 matters by way of emphasis, 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, 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 customer, methods of distribution, regulatory environments and economic characteristics.

Revenue, which relates wholly to construction contracts and related assets in both years, originated from the United Kingdom.

3) Non-underlying items 

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.

Amortisation of acquired intangible assets represented the amortisation of customer relationships which were identified on the acquisition of Fisher Engineering in 2007. These customer relationships were fully amortised during the 2018 financial year.

In the prior year, a non-cash profit on derivative financial instruments of £0.8m was recognised in relation to the movement in fair values of foreign exchange contracts. No similar items have been recorded in the income statement for the current year following the adoption of hedge accounting at the 2017 financial year-end.

The associated tax impact of the above, together with the impact of a reduction in future corporation tax rates on deferred tax liabilities was £0.4m (2017: £0.6m).

4) TaxationThe taxation charge comprises:

5) Dividends 

The directors are recommending a final dividend in respect of the financial year ended 31 March 2018 of 1.7p per share, which will amount to an estimated dividend payment of £5.2m. If approved by the shareholders at the annual general meeting on 4 September 2018, this dividend will be paid on 14 September 2018 to shareholders who are on the register of members at 17 August 2018. In addition, the board is also recommending a special dividend of 1.7p per share (2017: nil). The final and special dividends are not reflected on the balance sheet at 31 March 2018 as they remain subject to shareholder approval.

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

7) Net cash flow from operating activities

8) Net funds 

The Group's net funds are as follows:

9) 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 claim has been made and it is not possible to reliably estimate the potential obligation. 

Information for shareholders

§ The shares will be marked ex-dividend on 16 August 2018.

§ The final and special dividends will be paid on 14 September 2018 to shareholders on the register at the close of business on 17 August 2018. Dividend warrants/vouchers will be posted on 12 September 2018.

§ The 2018 annual report and financial statements together with the notice of the annual general meeting will be posted to shareholders in July 2018.

§ The annual general meeting will be held on 4 September 2018 at Aldwark Manor Hotel, Aldwark, York, YO61 1UF.

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: