Severfield Regulatory News (SFR)

19 June 2019

Results for the year ended 31 March 2019

Continued operational and strategic progress, further profit growth, UK and Europe order book of £295m, India order book of £134m

Severfield plc, the market leading structural steel group, announces its results for the 12 month period ended 31 March 2019.

Highlights

§ Revenue of £274.9m (2018: £274.2m)

§ Underlying* profit before tax up 5% to £24.7m (2018: £23.5m)

§ Underlying* basic earnings per share up 5% at 6.7p (2018: 6.4p)

§ Year-end net funds of £25.1m (2018: £33.0m) after payment of 2018 special dividend (£5.2m) and equity investment (£4.2m) in India to finance expansion of the Bellary factory

§ Total dividend increased by 8% to 2.8p per share (2018: 2.6p per share), includes proposed final dividend of 1.8p per share (2018: 1.7p per share)

§ Over 100 projects undertaken during the year in diverse market sectors including the new stadium for Tottenham Hotspur FC, the retractable roof for Wimbledon No.1 Court and a new commercial tower at 22 Bishopsgate

§ UK and Europe order book of £295m at 1 June 2019 (1 November 2018: £230m), including the first orders secured by our new European business

§ Share of profit from Indian joint venture ('JSSL') up 140% at £1.2m (2018: £0.5m)

§ Step change in Indian market position reflected in order book of £134m at 1 June 2019 (1 November 2018: £124m), expansion of the Bellary factory in progress

* Underlying results are stated before non-underlying items of £nil (2018: £1.3m):

- Amortisation of acquired intangible assets - £nil (2018: £1.3m)

- The associated tax impact of the above, together with the impact of a reduction in future corporation tax rates on deferred tax liabilities - £nil (2018: £0.4m)

Alan Dunsmore, Chief Executive Officer commented:

'We are pleased to have delivered another year of good performance. Our UK and Europe order book of £295m contains a healthy mix of projects across a diverse range of sectors and we have made strategic progress in the UK, Europe and India.

There is now considerable positive momentum within the Group which, in combination with our cash generative nature and strong positions in our core markets, provides us with the platform for further operational and strategic progress. We remain on track to deliver on our strategic targets, including the doubling of underlying profit before tax to £26m by 2020 and we look forward to another positive year ahead.'

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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. The Group has four sites, c.1,200 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 a good set of results in 2019, with further profit growth in the UK assisted by strong project delivery and ongoing improvements in operational performance, together with improved profitable performance from our Indian joint venture.

In 2019, we have continued to grow our overall profitability with underlying profit before tax up five per cent to £24.7m (2018: £23.5m) against a particularly strong profit performance in the prior year, which included higher than normal profits from certain project completions in the first half of 2018. This improved profit performance has been achieved despite slightly softer market conditions in the UK.

Cash remains one of the main measures of our underlying financial performance and our year-end net funds of £25.1m (2018: £33.0m) reinforces our solid balance sheet and provides us with a competitive benefit with both clients and our supply chain. Our strong cash position has allowed us the flexibility to fund the 2018 special dividend and to continue to invest in our UK businesses and in India, where the expansion of the Bellary factory is now underway.

The Indian joint venture ('JSSL') has performed well in 2019. The market for structural steel in India continues to expand as evidenced in JSSL's order book of £134m (1 November 2018: £124m) and a growing pipeline of commercial and industrial opportunities, which will benefit the business in 2020 and beyond. JSSL's good operational performance, revenue growth and lower financing costs, following the repayment of the term debt, have resulted in a Group share of profit after tax of £1.2m (2018: £0.5m) which is now beginning to reflect the step change in the Indian market position.

We continue to exceed our return on capital employed ('ROCE') target of 10 per cent and have achieved a return of 15.7 per cent in the year (2018: 16.5 per cent), maintaining the Group's alignment with its construction and engineering clients and peers.

We have made 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, the board has recommended a final dividend of 1.8p per share, making a total for the year of 2.8p per share (2018: 2.6p per share), an eight per cent increase on the prior year.

UK and Europe

Revenue was broadly flat year-on-year, mainly as a result of the softer UK market conditions and some project delays, to both contracts within the order book and in the conversion of our pipeline of opportunities, which predominantly impacted volumes in the second half of 2019. During the year, we continued to work on three large projects in London, each of which had project revenues in excess of £20m. These comprised a new commercial tower at 22 Bishopsgate, the new stadium for Tottenham Hotspur FC and the retractable roof for Wimbledon No. 1 Court, all of which are either now complete or substantially complete.

The underlying operating margin (before JVs and associates) was 8.5 per cent (2018: 8.3 per cent) resulting in an underlying operating profit (before JVs and associates) of £23.3m (2018: £22.9m). Although underlying operating profit shows a moderate increase year-on-year, it was against a strong comparator in the prior year, which included higher than normal profits in the first half from certain project completions.

The UK margin performance continues to reflect better risk and contract management processes, which are now deeply embedded within the Group's methodologies, and improvements in our operational execution. This includes the benefits from our programme of projects categorised under the banner of 'Smarter, Safer, more Sustainable', which provides a framework for the ongoing improvements to our business and factory processes, use of technology and operating efficiencies.

'Smarter, Safer, more Sustainable'

Our 'SSS' initiatives continue to focus on improving many aspects of our internal operations. These include the application of Lean manufacturing techniques, further automation of factory processes and waste elimination initiatives, together with our engineering forum which is looking at new and innovative ways of working including the use of technology across a number of existing manual processes and enhanced BIM (3D) modelling.

During the year, we have continued to invest in research and development into advanced technologies (including virtual reality and digital technologies) to further improve efficiencies and client service. We have also now fully rolled out our new Group-wide production management system (StruMIS) which will help drive ongoing value through increased productivity coupled with greater transparency and assurance.

Following the improvements to our IT infrastructure and manufacturing processes over recent years, we are also continuing to take steps to better capture and utilise real-time data, to better inform decision-making and improve efficiencies both in our factories and on our construction sites. This will minimise time spent manually collating and processing data, freeing up resource to focus on project delivery and facilitating more streamlined ways of working.

In January 2018, we reorganised our factory operations in North Yorkshire to drive further operational improvements, resulting in the consolidation of steel fabrication at Dalton and Sherburn into the Dalton facility. This combined facility is now operating at scale and the reorganisation of our footprint has contributed to increased operational efficiencies which are benefitting the Group's profitability.

Underpinning our culture of continuous improvement is the ongoing focus on human resources and the training and development of our people and our priority is to recruit, train and retain the highest calibre of workforce. Throughout the year we have continued to strengthen our leadership at both executive committee and at business unit levels and we are in the process of refreshing our Group people strategy. We continue to work with industry bodies and have developed initiatives to encourage people into a career in construction. During 2019, the Group recruited a number of apprentices, graduates and trainees, another means of ensuring that we have all the desired skill bases available in the future.

In 2019, demonstrating our ongoing commitment to people development, we launched the second wave of the Severfield development programme, which focuses on emerging leaders who have the potential to move into senior positions. We have also 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.

Order book and market conditions

The order book of £295m at 1 June 2019 represents an increase of £65m from the position of £230m at the time of announcing the half year results and will generate higher production and therefore revenue in the second half of the 2020 financial year. Pleasingly, this increase in the order book has been achieved whilst maintaining our focus on contract selectivity to ensure that the Group wins work only at acceptable terms and conditions and with acceptable levels of risk.

The order book, of which £256m is for delivery over the next 12 months, continues to contain a high proportion of lower risk, regional projects with shorter lead times. In addition, our order book continues to include the new Google Headquarters, for which an order of £50m was secured in December 2017, and which will require us to provide over 15,000 tonnes of structural steelwork for an 11 storey head office building at Kings Cross. Work on this project commenced late in the 2019 financial year and is scheduled to be substantially completed in the 2020 financial year.

The order book contains a healthy mix of projects across a diverse range of sectors including commercial offices, industrial and distribution, data centres and transport infrastructure. In 2019, our teams have been successful in securing a number of projects in the regions including mid-sized commercial office developments in Manchester and Nottingham, together with several other office developments in London. Other significant orders secured in the year include a large project at Heathrow airport, a car park development at Manchester airport and two large data centres in Finland and the Republic of Ireland. We have also had success in continental Europe with our new European business and, accordingly, the order book now includes the first orders secured by the European team based in the Netherlands.

Overall, the UK market continues to appear largely stable, with modest economic growth forecast, however we have seen evidence of some UK investment decisions being delayed in some of our market sectors particularly in the second half of the year against a backdrop of a generally more cautious commercial investment climate. Pricing remains an important factor and we continue to see some tender margins tightening on projects that we are bidding in the UK where some spare fabrication capacity now exists in the market. The impact of these UK market conditions is being mitigated by the continued re-emergence of the market in the Republic of Ireland and certain other significant opportunities in continental Europe where we have demonstrated our ability to win more work, supported by our new European business.

In general, our pipeline of potential future orders remains stable with a good balance of work across all key market sectors. The market for data centres and the industrial and distribution sector continues to be strong, both in the UK and in Europe, and these projects play to our strengths, requiring high-quality, rapid throughput, on-time performance and full co-ordination between stakeholders.

Looking further ahead, we are now starting to see more bidding activity in the London commercial market, a trend which we expect to increase over the next few years. In addition, we continue to pursue a number of significant infrastructure opportunities, particularly in the transport sector, which are being driven by the UK government's investment in infrastructure commitment, which is targeted to increase over the next few years. This will include projects such as HS2 (both stations and bridges) and the expansion of Heathrow airport. In addition, we also see good opportunities from the government's ongoing Network Rail and Highways England investment programmes. The combination of the Group's historical track record in transport infrastructure, together with our in-house bridge operations, leaves us well positioned to win work from such projects, all of which have significant steelwork content.

The Group is working with industry bodies to identify and manage any challenges and opportunities which may result in the UK's exit from the European Union. Being a largely UK-centric business, no changes have been required to our operating model, however we continue to monitor the pace of conversion of our pipeline of opportunities and, amongst other things, the availability of materials from our suppliers. Whilst there remains a great deal of uncertainty as to what Brexit will mean for the construction industry, we are scenario-planning and working with our clients and others in the industry to ensure we are able to respond to any future changes in market conditions.

Clients - increasingly broad spread and diverse

We are known for our strong relationships with clients, working collaboratively with them, anticipating issues they face, providing problem-solving solutions and demonstrating our capability to deliver complex engineering solutions. Our management and integration of the construction process, our capacity and speed of fabrication, our engineering excellence and the expert capabilities of the Group and its employees has allowed us to improve project delivery times to meet and exceed the requirements of our clients.

We believe that working more closely with our clients provides the best outcomes and is critical to securing new work. We continue to work with a number of clients to use innovative and collaborative ways of contracting which have enabled risk and reward to be appropriately shared and to explore and develop cost effective solutions to overcome project challenges. These arrangements require early contract engagement with clients to ensure greater clarity around scope, programme and cost which, in combination, reduces delivery risk for all parties. 

During the year, we have focused on developing new client relationships both in the UK and also in Europe, where we are gaining good traction with our new European business. We believe that a stronger and wider client base and market focus will allow us to target an increased pipeline of opportunities, providing us with extra resilience and the ability to increase our market share.

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

Our specialist cold rolled steel joint venture business, Construction Metal Forming Limited ('CMF'), has continued to grow and has performed well during the year. We are the only fabricator in the UK to have both a hot and cold rolled manufacturing capability. We continue to look at ways to improve factory efficiencies at CMF and to expand the product range, which now includes a growing purlin business, allowing the Group to continue integrating elements of its supply chain.

Following extensive negotiations with all stakeholders, we have now agreed a final settlement for the remedial bolt replacement works at Leadenhall, resulting in no further costs for the Group.

India

JSSL performed strongly in 2019 and its results are now beginning to reflect the step change in the market for structural steel in India. The Indian market has continued to expand, and we are seeing clear signs of the conversion of the market from concrete to steel which will drive the success and long term value of the business. This position is evident in an order book at 1 June 2019 of £134m (1 November 2018: £124m), which now contains a stronger mix of higher margin commercial work. Significant new orders secured in the year include two large commercial projects - Sattva, in the state of Hyderabad, and Amaravati, in the state of Andhra Pradesh, together with numerous industrial projects, many of which are for our joint venture partner, JSW Steel ('JSW'). The expanding market position is also reflected in a pipeline which includes a growing large number of potentially interesting commercial projects for key developers and clients with whom we are now developing strong relationships. In addition, we also have visibility of an increased pipeline of industrial work, including those for JSW, which is currently expanding its domestic steel output, a process which we expect to continue for the foreseeable future. 

In 2019, JSSL continued to grow and has increased its profit during the year, of which the Group's after tax share was £1.2m (2018: £0.5m). The higher profitability in the year reflects both increased revenue and good operational performance, together with lower financing costs following the repayment of the term debt in June 2017. JSSL's revenue has increased significantly to £84m compared with £48m in the previous year, driven by higher volumes of industrial work in 2019, a position which was also manifest in the higher order book coming into the financial year. This greater mix of industrial work has resulted in a reduction in the operating margin to 6.4 per cent compared to 9.2 per cent in 2018, however, given the greater proportion of commercial work in the current order book, we expect to see an improvement in the operating margin in the 2020 financial year and beyond.

The expansion of the Bellary facility, which will increase factory capacity from c.60,000 tonnes to c.90,000 tonnes, is now well underway and is expected to be completed towards the end of the 2020 financial year. During the year, JSSL has strengthened its senior management team, enhanced and expanded its subcontracting supply chain partnerships and is upskilling its workforce, bringing people with new skills into the business to support the expansion and to provide the business with the springboard to deliver future profitable growth.

Overall, we remain excited about the long-term development of the market and of the business, especially considering the encouraging market developments and step up in the order book and we expect that value will continue to build in JSSL as it continues to expand and develop.

Safety

Health and safety continue to be at the forefront of everything we do and, for the third year running, 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 0.11, compared to 0.22 in 2018, mainly driven by our UK operations which reduced its AFR from 0.40 to 0.21 during the year. As a recognised measure of safety performance, our AFR not only reflects how we do business but is a key differentiator in the market. Indeed, safety is becoming increasingly important for our clients at the selection stage.

Our executive committee is focused on continually promoting and improving our safety culture. Reviews of safety performance are conducted monthly, with emphasis on not only RIDDORs but also high potential near miss incidents and minor injuries. All high potential incidents are investigated and resolved by our businesses, in conjunction with the Group SHE director, chief operating officer and the relevant managing director.

Behavioural safety continues to be an integral part of improving our safety culture and our behavioural safety coaches are empowered to encourage ownership of safety across all levels of the business. Escalating the programme to the senior management team has promoted better ownership and accountability and has allowed us to further embed our 'safety first' values and to see positive tangible changes in our culture.

Board members are engaging with employees and promoting our safety campaigns with positive results. The number of visits to site by board members has increased year-on-year and the content of these visits has been enhanced, encouraging suggestions for improvement and the sharing of best practise across the Group. Building on senior management's responsibility for safety, our management teams now deliver quarterly presentations which include 'lessons learned' from recent incidents and the reinforcement of our safety values.

In raising awareness of mental health, our internal 'heads up' campaign has now become embedded in our culture. Our commitment to mental health and well-being stems from a strong recognition of our responsibility to provide a safe working environment, which transcends physical health and actively promotes the importance of mental health and well-being. As an organisation, we have a responsibility to take care of each other and ourselves. Promotion of positive mental health is continual, and help is accessible to all with our 24-hour employee assistance line. All our employees have now attended an awareness session to assist them in understanding the signs and symptoms of poor mental health. 

Sustainability as a topic continues to be more prevalent within the Group. Employees are becoming more and more aware of what impact they can have on shaping our future, and making our business 'Smarter, Safer and more Sustainable'. Suggestions for sustainable improvements across the business are collected from colleagues and implemented where appropriate. Employees are given opportunities to support local and national charities through our social and charitable committees, creating better community relationships. The Group encourages employees to continue developing their skillsets through both our internal learning and development programmes, and through the achievement of appropriate professional qualifications. Apprenticeships are encouraged throughout the business, and we work closely with local college and university communities to attract the best and most diverse talent.

Strategy

We are continuing to deliver on our strategic objectives including making good progress towards our 2020 strategic profit target. In 2019, as part of the ongoing 'Smarter, Safer, more Sustainable' programme, we have continued to implement a number of operational, factory and technological improvements and supply chain enhancements as well as continuing to invest in our leadership teams and people to ensure we are well placed to capture the opportunities presented by our markets. The improvement in our safety performance during the year will also benefit future performance and productivity.

During the year, the continuation of the Group's capital investment programme, which includes new state-of-the-art, high speed and high performance equipment for our UK factories, is helping our operating businesses to be highly competitive and operationally efficient. We will continue to invest £6m to £7m per annum to support the development of our client service offering and to drive operational improvements and efficiencies.

Over the last two years, we have been targeting three new areas of organic growth - Europe, Severfield (Products & Processing) ('SPP') and medium to high-rise residential construction - and we are pleased to report good progress with the first two of these potential areas of growth.

Firstly, we have continued to develop our new European business, which is based in the Netherlands, aided by a small but growing locally-based team which includes our business development director. During the year, the business has been successful in securing its first orders which will generate incremental revenue for the Group in the 2020 financial year. The business also has a number of live tenders for work in continental Europe and there is now a growing pipeline of opportunities which includes many potentially interesting and high quality projects, certain of which are with clients with whom we are used to working in the UK. The European team's market knowledge and experience has also been invaluable to our UK business when tendering for and delivering an increased pipeline of European work, providing us with a competitive advantage and the ability to deliver excellent client service as we look to expand into new market sectors.

Secondly, SPP, our new business venture at the Sherburn facility, commenced trading in April 2018. This business is allowing us to address smaller scale projects and provides a one-stop shop for smaller fabricators to source high quality processed steel and ancillary products. Notwithstanding the slightly softer UK market conditions, which have resulted in a lower than expected number of enquiries in the second half of the year, the business has secured and successfully delivered a number of orders to a variety of new customers. During this time, we have also gained more intelligence on both our competitors and customers in what is clearly a competitive and lower margin marketplace. Notwithstanding this, we remain focused on improving our factory efficiency, client service and range of products and continue to develop our customer relationships and pipeline of potential future orders to enable us to increase our market share.

In addition, we have also maintained our focus on the market for medium to high-rise residential construction where we have developed a steel solution. We continue to see potential opportunities in what is an attractive market for us and discussions with a number of interested parties remain ongoing. We continue to push hard to secure our first order, which we believe will be an important step in establishing a track record in what is currently a concrete-dominated market sector. 

Summary and outlook

The Group has performed well in 2019, with good profit and margin growth in the UK, where we continue to see tangible benefits from our 'SSS' business improvement initiatives, coupled with a strong performance from our Indian joint venture. Whilst market conditions in the UK have been more challenging recently, the impact of this is being offset by an improved picture in the Republic of Ireland and in Europe and with an order book of £295m and a stable pipeline of opportunities, we expect 2020 to be another year of progress for our core businesses in the UK.

In India, with the expansion of the operations in Bellary now underway, an order book of £134m and a growing level of new opportunities which includes a number of interesting commercial projects, our joint venture business remains well positioned to take advantage of a market for structural steel which continues to expand.

There is now considerable positive momentum within the Group which, in combination with our cash generative nature and strong positions in our core markets, provides us with the platform for further operational and strategic progress. We remain on track to deliver on our strategic targets, including the doubling of 2016 underlying profit before tax to £26m by 2020 and we look forward to another positive year ahead.

Finally, I would like to thank all of our employees for their hard work and commitment during the year. The success of our business is without doubt dependent on their continued support.

Alan Dunsmore

Chief Executive Officer

19 June 2019

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

2019 has been another successful year for the Group. Revenue for the year ended 31 March 2019 of £274.9m represents a slight increase of £0.7m compared with the previous year reflecting a solid performance in the UK in light of softer market conditions, which particularly impacted the second half of the year. The Group's order book at 1 June 2019 of £295m represents an increase of £65m from the position at the time of announcing the half year results (1 November 2018: £230m) and will generate higher production and therefore revenue in the second half of the 2020 financial year.

Underlying operating profit (before JVs and associates) of £23.3m (2018: £22.9m) reflects an increase of £0.4m over the year. This mainly reflects a higher underlying operating margin (before JVs and associates) of 8.5 per cent (2018: 8.3 per cent) against a particularly strong margin comparator in 2018, which benefitted from higher than normal profits from certain project completions. The 2019 margin demonstrates further margin progression and improvements to our operational execution. The Group continues to maintain a high level of focus on operational efficiency through better risk and contract management processes as well as driving process improvements in the Group's production facilities. There were no non-underlying items in the year and accordingly no difference between underlying operating profit (before JVs and associates) and its statutory equivalent of £23.3m (2018: £21.5m).

The share of results of JVs and associates was a profit of £1.7m (2018: £0.9m) and net finance costs were £0.2m (2018: £0.2m).

Underlying profit before tax, which is management's primary measure of Group profitability, was £24.7m (2018: £23.5m). The statutory profit before tax, reflecting both underlying and non-underlying items, was £24.7m (2018: £22.2m).

Share of results of JVs and associates

The Group's share of results from its Indian joint venture was a profit of £1.2m (2018: £0.5m) with the improved result due to both good contract performance together with lower financing costs. The operating margin has decreased to 6.4 per cent (2018: 9.2 per cent) reflecting a significantly higher mix of (lower margin) industrial work in the order book coming into the 2019 financial year. The current order book now shows a higher proportion of commercial work, reflecting the award of several large commercial orders in 2019, which will benefit the operating margin in the 2020 financial year.

Our specialist cold rolled steel joint venture business, CMF, contributed a Group share of profit of £0.4m (2018: £0.4m). The business has continued to develop its product range, having expanded its metal decking supply to allow the production of purlins and additional cold formed products in 2018 to drive organic revenue growth. We continue to be the only hot rolled steel fabricator in the UK to have this cold rolled manufacturing capability.

Non-underlying items

Non-underlying items are classified as such as they do not form part of the profit monitored in the ongoing management of the Group. There were no non-underlying items in the current financial year (2018: £1.3m). The charge in the prior year represented the amortisation of customer relationships which were identified on the acquisition of Fisher Engineering in 2007 and are now fully amortised.

Finance costs

Net finance costs in the year were £0.2m (2018: £0.2m). The Group has been in a net funds position for the whole of the financial year; consequently, the finance costs of £0.2m primarily represent non-utilisation fees for the revolving credit facility and the amortisation of capitalised transaction costs.

Taxation

The Group's underlying taxable profits (which excludes results from the JVs and associates) of £23.1m (2018: £22.6m) resulted in an underlying tax charge of £4.5m (2018: £4.4m) which represents an effective tax rate of 19.7 per cent (2018: 19.4 per cent).

Earnings per share

Underlying basic earnings per share increased by five per cent to 6.7p (2018: 6.4p) based on the underlying profit after tax of £20.2m (2018: £19.1m) and the weighted average number of shares in issue of 303.1m (2018: 299.7m). Basic earnings per share, which is based on the statutory profit after tax, was 6.7p (2018: 6.1p), 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 6.6p (2018: 6.0p).

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 1.8p per share (2018: 1.7p), payable on 13 September 2019 to shareholders on the register at the close of business on 16 August 2019. This, together with the Group's interim dividend of 1.0p per share (2018: 0.9p), will result in a total dividend per share for 2019 of 2.8p (2018: 2.6p), an increase on the prior year of eight per cent. The final dividend is not reflected on the balance sheet at 31 March 2019 as it remains subject to shareholder approval.

A special dividend of 1.7p per share was recommended for the previous financial year, which was approved by shareholders and paid during the current financial year.

Goodwill and intangible assets

Goodwill on the balance sheet is valued at £54.7m (2018: £54.7m). In accordance with IFRS, an annual impairment review has been performed. No impairment was required either during the year ended 31 March 2019 or the year ended 31 March 2018.

Other intangible assets on the balance sheet are recorded at £nil (2018: £0.1m). Amortisation of £0.1m (2018: £1.5m) was charged in the year.

Capital investment

The Group has property, plant and equipment of £84.0m (2018: £81.2m). Capital expenditure of £7.0m (2018: £6.4m) represents the continuation of the Group's capital investment programme. This included investment in production machinery, site lifting equipment, yard improvements, and factory and site enhancements. Depreciation in the year was £3.6m (2018: £3.7m).

Joint ventures

The carrying value of our investment in joint ventures and associates was £24.3m (2018: £18.5m) which consists of the investment in India of £16.1m (2018: £10.7m) and in CMF of £8.2m (2018: £7.8m). During the year, we invested additional equity of £4.2m in the Indian joint venture business (matched by an equivalent investment by our joint venture partner JSW Steel) to support the expansion of the Bellary facility.

Pensions

The Group has a defined benefit pension scheme which, although closed to new members, had an IAS 19 deficit of £20.0m at 31 March 2019 (2018: £17.2m). The increase in the liability is mainly due to:

§ changes to the scheme's demographic assumptions (updated mortality assumptions and a lower proportion of members assumed to take tax-free cash at retirement, based on broader trends in the pensions market); and

§ changes to the scheme's financial assumptions (lower discount rate and higher RPI price inflation assumption, both of which increased liabilities).

The impact has been partly offset by the ongoing deficit contributions by the Group during the year. The last formal triennial funding valuation of the scheme was completed, with a valuation date of 5 April 2017. 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 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. For 2019, ROCE was 15.7 per cent (2018: 16.5 per cent), which exceeds the Group's target of 10 per cent through the economic cycle.

Cash flow

The Group has always placed a high priority on cash generation and the active management of working capital. The Group ended the financial year with net funds of £25.1m (2018: £33.0m), following capital expenditure of £7.0m, the payment of the 2018 special dividend of £5.2m and the investment of additional equity into the Indian joint venture of £4.2m.

Operating cash flow for the year before working capital movements was £25.8m (2018: £26.7m). Net working capital increased by £7.9m mainly due to movements in the phasing of contract cash flows and a normalisation of working capital following the atypically low working capital position (two per cent of sales) coming into the year. Excluding advance payments, year-end net working capital represented approximately five per cent of revenue (2018: two per cent). This is within the four to six per cent range which we have been targeting, reflecting our continued focus on working capital management. 

In 2019, our cash generation KPI shows a conversion of 50 per cent (2018: 77 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 increase in working capital as described above.

Net investment during the year was £6.3m (2018: £5.4m), reflecting capital expenditure of £7.0m (2018: £6.4m) less proceeds from disposals of £0.7m (2018: £1.0m).

Bank facilities committed until 2023

On 31 October 2018, the Group refinanced its existing borrowing facilities of £25m with HSBC Bank plc and Yorkshire Bank. This new facility, also a £25m revolving credit facility ('RCF'), matures in October 2023. The facility continues to include an accordion facility of £20m, which allows the Group to increase the aggregate available borrowings to £45m at the Group's request.

The facility is subject to two key financial covenants, namely net debt: EBITDA of 4x. The Group operated well within these covenant limits throughout the year ended 31 March 2019.

Due to the continued net funds position of the Group, the facilities were not utilised during the year and continue to provide ongoing funding headroom and financial security for the Group.

Treasury

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

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

The Group continues to have some exposure to exchange rate fluctuations, currently between sterling and the euro. In order to maintain the projected level of profit budgeted on contracts, foreign exchange forward contracts are taken out to convert into sterling at the expected date of receipt. The Group adopts hedge accounting for the majority of transaction hedging positions, thereby mitigating the impact of market value changes in the income statement.

New accounting standards

IFRS 15 - in the prior year, the Group undertook a detailed exercise comparing the existing revenue recognition policies against the requirements of IFRS 15, the new revenue accounting standard which is effective for the current financial year. 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 the assessment was that the directors are satisfied that no material adjustments were required on the initial application of the new standard. The standard has been implemented with full retrospective application in the financial statements. Additional disclosures, as required by IFRS 15, are incorporated into the financial statements.

IFRS 16 - during the current financial year, the Group assessed the impact of adopting IFRS 16, the new leasing standard which becomes effective for the 2020 financial year. The adoption of IFRS 16 will result in a right-of-use asset of approximately £11m and a lease liability of approximately £12m being brought onto the Group's balance sheet (based on the Group's leases as at 1 April 2019). The profit impact of the adoption of this new accounting standard is not expected to be material.

Impact of Brexit

Following the UK referendum vote to leave the European Union ('EU'), the UK government continues to negotiate the terms of the UK's future relationship with the EU, which has led to a period of economic uncertainty. The Group has taken steps to prepare for the potential outcomes of Brexit and has plans in place to ensure it can continue to deliver on current and future contractual commitments.

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 2020 financial year and beyond;

§ The Group's net funds position and its bank finance facilities which are committed until October 2023, 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 date of 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 2016 revision of the UK Corporate Governance Code (the 'Code'), the directors have carried out a robust assessment of the principal risks and uncertainties and assessed the Group's viability over a three-year period ending on 31 March 2022. The starting point in making this assessment was the annual strategic planning process. While this process and associated financial projections cover a period of four 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 October 2023.

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 and the uncertainties caused by the UK's pending exit from the EU) 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

19 June 2019

Consolidated income statement

For the year ended 31 March 2019

All of the above activities relate to continuing operations.

Further details of 2018 non-underlying items are disclosed in note 3.

Consolidated statement of comprehensive income

For the year ended 31 March 2019

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

Consolidated balance sheet

As at 31 March 2019

Consolidated statement of changes in equity

For the year ended 31 March 2019

* The issue of shares represents shares allotted to satisfy the 2015 performance share plan award which vested in June 2018 and the 2015 sharesave scheme.

** The issue of shares represents shares allotted to satisfy the 2014 performance share plan award which vested in June and November 2017.

Consolidated cash flow statement

For the year ended 31 March 2019

1) Basis of preparation

The preliminary announcement has been prepared in accordance with the Listing Rules of the FCA and is based on the 2019 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 2018, except as detailed below.

The Group has adopted IFRS 15, 'Revenue from Contracts with Customers' from 1 April 2018. The new standard modifies the determination of how much revenue to recognise, and when, and introduces a single, principles based five-step model to be applied to all contracts with customers. IFRS 15 replaces the separate models for goods, services and construction contracts currently included in IAS 11 'Construction Contracts' and IAS 18 'Revenue'. The implementation of IFRS 15 did not have a material impact on the timing or amount of revenue recognised by the Group in the current or comparative period.

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 2018 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 2019, 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, '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 customer, methods of distribution, regulatory environments and economic characteristics.

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.

In the prior year, 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 and no additional non-underlying items have been identified in the current year.

4) Taxation 

The taxation charge comprises:

5) Dividends 

The directors are recommending a final dividend in respect of the financial year ended 31 March 2019 of 1.8p per share, which will amount to an estimated dividend payment of £5.5m. If approved by the shareholders at the annual general meeting on 3 September 2019, this dividend will be paid on 13 September 2019 to shareholders who are on the register of members at 16 August 2019. The final dividend is not reflected in the balance sheet at 31 March 2019 as it remains 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 legal or contractual 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 15 August 2019.

§ The final dividend will be paid on 13 September 2019 to shareholders on the register at the close of business on 16 August 2019. Dividend warrants/vouchers will be posted on 11 September 2019.

§ The 2019 annual report and financial statements together with the notice of the annual general meeting will be posted to shareholders in July 2019.

§ The annual general meeting will be held on 3 September 2019 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: