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Severfield PLC  -  SFR   

Results for the year ended 31 March 2017

Released 07:00 14-Jun-2017

RNS Number : 0044I
Severfield PLC
14 June 2017
 

 

 

14 June 2017

Results for the year ended 31 March 2017

Continued strategic and operational progress across the Group with a 50% increase in underlying profit before tax and a 53% dividend increase

Severfield plc, the market leading structural steel group, announces its results for the 12 month period ended 31 March 2017.

 

Highlights

 

·   

Revenue up 10% to £262.2m (2016: £239.4m)

·   

Underlying* profit before tax up 50% to £19.8m (2016: £13.2m)

·   

Continued strong cash performance with operating cash conversion of 112% (2016: 150%), resulting in year-end net funds of £32.6m (2016: £18.7m)

·   

Total dividend increased by 53% to 2.3p per share (2016: 1.5p per share), includes proposed final dividend of 1.6p per share

·   

Return on capital employed ('ROCE') of 14.6% (2016: 9.7%)

·   

Over 110 projects undertaken during the year in key market sectors including Wimbledon No.1 Court, a major new commercial head office building in London, the new stadium for Tottenham Hotspur F.C. and a new commercial office tower at 22 Bishopsgate

·   

Share of profit from Indian joint venture of £0.2m (2016: loss of £0.3m) reflecting stability of the business and move to profit for the first time

·   

Equity investment in Indian joint venture of £5.3m being made post year-end to repay term debt

·   

UK order book of £229m at 1 June 2017 (1 November 2016: £315m), reflecting a return to more 'normal' order book levels

·   

India order book of £73m at 1 June 2017 (1 November 2016: £35m)

·   

Good progress made towards strategic objective of doubling underlying profit before tax by 2020

 

£m


12 months to

31 March 2017

12 months to

31 March 2016

 

Revenue


262.2

239.4

Underlying* operating profit

(before JVs and associates)


19.6

13.7

Underlying* operating margin

(before JVs and associates)


7.5%

5.7%

Operating profit (before JVs and associates)


17.8

10.1

Underlying* profit before tax


19.8

13.2

Profit before tax


18.1

9.6

Underlying* basic earnings per share


5.53p

3.67p

Basic earnings per share


5.13p

2.89p

 

* Underlying results are stated before non-underlying items of £1.8m (2016: £3.5m):

-   Amortisation of acquired intangible assets - £2.6m (2016: £2.6m)

-   Movement in fair value of derivative financial instruments - gain of £0.8m (2016: loss of £0.9m)

-   The associated tax impact of the above, together with the impact of a reduction in future corporation tax rates on deferred tax liabilities - £0.6m (2016: £1.2m)

 

Alan Dunsmore, acting Chief Executive Officer commented:

 

"I am delighted to announce another set of excellent results which keeps us on track towards our target of doubling our 2016 underlying pre-tax profit by 2020. Our strategy is well-flagged and it continues to deliver operationally and financially. We have worked on some major projects during the year, especially in London, including Wimbledon No. 1 Court, Tottenham Hotspur and 22 Bishopsgate. Our return on capital employed has risen to 14.6% and cash generation has been excellent.

 

The current order book and pipeline, coupled with a continued stable market environment, will support further progress in the current financial year towards our 2020 target."

 

 

 

 

For further information, please contact:

 

Severfield plc

Alan Dunsmore

Acting Chief Executive Officer

 

01845 577 896


Adam Semple

Acting Group Finance Director

 

01845 577 896

Jefferies International Limited

Simon Hardy

020 7029 8000


Harry Nicholas

 

020 7029 8000

Bell Pottinger

Nick Lambert

020 3772 2558


Dan de Belder

020 3772 2561


Zara de Belder

020 3772 2512

 

OPERATING REVIEW

 

Group overview

The year ended 31 March 2017 has been an excellent year for the Group with benefits coming from strong and good quality order inflow as well as continued improvements in operational performance.

 

Underlying profit before tax is up 50 per cent to £19.8m (2016: £13.2m) and revenue has increased by 10 per cent to £262.2m (2016: £239.4m). This performance has converted into cash, with operating cash conversion of 112 per cent (2016: 150 per cent), resulting in net funds at the year-end of £32.6m (2016: £18.7m).

 

The Indian joint venture delivered another year of stability producing, for the first time, a small profit after tax of £0.2m (2016: loss of £0.3m).

 

The first full year of Composite Metal Flooring Limited ('CMF') has contributed a Group share of £0.3m profit after tax, which is in addition to the commercial rebates we receive on products used by the Group and that have benefited our operating margin. CMF has integrated well into the Group and is continuing to invest in and develop its product range.

 

The Group has also exceeded its target ROCE of 10 per cent achieving a good return of 14.6 per cent in the period, bringing the Group more into line with its construction and engineering clients and peers.

 

The Group has continued to build on the strong commercial and risk management disciplines put in place over the past four years and we maintain our target to double 2016 profit before tax by 2020. Based on the Group's continued progress I am delighted that the board is recommending an increase in the final dividend to 1.6p per share, making a total for the year of 2.3p per share (2016 1.5p per share) a 53 per cent increase on the prior year.

 

UK review

Revenue is up 10 per cent over the prior year predominantly reflecting an increase in order flow and activity during the year, together with an increase in steel prices. This year we have worked on four large projects in London that have contributed to this increased activity level. The new roof for Wimbledon No. 1 Court, a major new commercial head office building in London, the new stadium for Tottenham Hotspur F.C. and a new commercial office tower at 22 Bishopsgate are all projects with revenues in excess of £20m.

 

Our operating margins have improved again to 7.5 per cent (2016: 5.7 per cent) resulting in an underlying operating profit (before JVs and associates) of £19.6m (2016: £13.7m). We continue to drive improvements to our operational execution, which includes better risk and contract management and developments to our production processes. These improvements have helped the Group deliver a better return on capital following the extensive investment in the business and we are also delivering real benefits for our clients in terms of the reliability and speed of project delivery, coupled with the quality of service we can offer. Operational improvements this year have included the roll out of a new material requirements planning system across the Group to allow seamless sharing of production and improved project data, reconfiguration of our Lostock facility and increased fabrication throughput at the Dalton facility.

 

Following on from the success of our operational improvement programme from 2014 to 2017, this year we launched a further programme of projects under the banner 'Smarter, Safer, more Sustainable', which includes improvements to our business processes, use of technology and operating efficiencies. This continuous improvement enhances the robustness of our processes and controls, drives operational efficiency and maximises productivity across the business.

 

Continued stability in our organisational structure and management team remain a key strength of the business. We continue to drive improvements in our people and processes and, importantly, embed these improvements in our organisational culture. During the year we introduced another two training programmes: one on 'lean' production techniques, which will lead to many of our employees developing new skills and achieving relevant qualifications; the other, an emerging leaders' programme to develop and deepen our management talent. In addition to the direct benefits, these programmes strengthen our ability to retain and attract high quality employees. This is also being reinforced through our apprenticeship and graduate recruitment programmes which have accepted 39 and five recruits this year, respectively.

                                                        

Our unique capability to deliver complex design solutions, our capacity and speed of fabrication and our management of the integrated construction process is important for our customers. This year we have delivered very challenging programmes for customers, reduced costs through both our pre-tender value engineering and also post-award engineering solutions, and developed innovative building solutions for temporary works and pre-assembled sections to work in live operating environments.

 

We have continued to work closely with customers across a broad range of sectors and regions. Our customers have included Multiplex, Sir Robert McAlpine, BAM, Skanska, MACE, Laing O'Rourke, Canary Wharf Contractors, McLaren, Winvic, Costain, Morgan Sindall, Carillion, Stanhope, Buckingham, GSE, Vinci, ISG, Interserve, Bowmer and Kirkland, Hochtief and Westfield. The Group worked on over 110 projects with our clients during the year including:

 

Major projects - over £20 million

Wimbledon (No. 1 Court roof), London

Tottenham Hotspur F.C., London

London Development Project, London

22 Bishopsgate, London

Commercial offices

Southbank Place, London

Principal Place, London

BBC, Cardiff

King's Cross S2, London

Stadia and leisure

Liverpool F.C. (Anfield stadium), Liverpool

Industrial and distribution

BAE Barrow, Cumbria

DHL, East Midlands

Nissan, Sunderland

Large distribution centre, Tilbury

Transport infrastructure

Ordsall Chord, Manchester

London Bridge Station Canopies, London

Ardleigh Green Bridge, London

Health and education

Kings College Hospital, London

Power and energy

Covanta, Dublin

Gladstone Biomass, Liverpool

Dunbar, Scotland

Ferrybridge, Yorkshire

 

This year also saw the first full year of trading from our specialist cold-rolled steel joint venture business, CMF. We are the only hot rolled steel fabricator in the UK to have this cold rolled manufacturing capability, which enables us to internalise a greater share of supply chain margin and develop new products to drive Group revenue and margin.

 

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

 

Our steel supply chain has remained stable during the year. The change of ownership at British Steel, previously TATA, has had no impact on service or capability for our steel sections. Our principal plate sourcing remains in Continental Europe but we endeavour to source UK plate from re-rollers including the reopened Liberty facility in Dalzell, Scotland.

 

Order book and market conditions

Whilst the most recent order book has reduced to £229m, the strong and good quality order inflow during 2017 will continue to support improving performance in the current financial year. Our normal order book levels typically equate to eight to ten months of annualised revenue so whilst, as expected, the order book has come off its peak, it remains at a level which supports good progress towards our strategic targets.

 

We remain pleased with the order book mix, which incorporates a diverse range of projects in the commercial office, industrial and distribution, and infrastructure sectors. Notwithstanding a reduction in new construction orders over the past few months and the impact of the general election, the UK market generally appears to be remaining stable. We have identified a number of significant projects across the commercial office, retail, industrial and distribution, and infrastructure sectors for the upcoming months. Many of these projects play to the Group's core competencies - large complex projects that require high quality, rapid throughput, on time performance and full co-ordination between stakeholders.

 

Although pricing will always be an important factor, and remains competitive, we continue to work with customers who recognise the additional value the Group brings to the outcome of projects. Our operational improvement programme is focused on establishing a cost platform that enables us to deliver high quality, value added services to our customers at market prices whilst maintaining our performance target commitments.

 

Looking further ahead we continue to see a significant increase in infrastructure projects including Hinkley Point nuclear power station, HS2 and the expansion of Heathrow airport. Our bridge team places us in a strong position for the HS2 bridge work and our historical record in transport infrastructure both in railway stations and airports, and Heathrow in particular, enables us to feel confident about the potential for our involvement in these major projects.

 

India

Our Indian joint venture, JSSL, has delivered another year of stability and its first profit after tax, of which the Group's share is £0.2m (2016: loss of £0.3m). JSSL generated strong operating margins which this year were 9.7 per cent (2016: 7.0 per cent). This excellent operating performance has been overshadowed by the high cost of financing the joint venture's local debt. Historically, debt servicing costs have offset most of this operating margin, however a post year-end decision, with our partner JSW, to invest additional equity to repay the joint venture's term debt of £10.6m, means that more of this underlying operating profit will contribute to Group earnings in future years. The immediate impact is expected to increase the Group's share of JSSL's profit by £0.5m per annum.

 

The JSSL order book has increased significantly over recent months and was £73m at 1 June 2017. During the year, the business has continued to generate a good balance between lower margin, more readily available industrial work and higher margin commercial work, which is generally secured from the conversion of projects from concrete to steel. This conversion remains key to the long term growth and value of the business and good progress continues to be made in persuading more clients of the benefits of steel. As in the UK, the business retains a strong focus on securing appropriate terms and conditions for its projects and some initially attractive projects have been declined on this basis.

 

Overall, we remain confident in the long term development of the market and of the business and this has led to the agreement with our joint venture partner, JSW, to each invest additional equity of £5.3m to help repay the business's outstanding term debt. The Indian government continues to reshape the economy to stimulate investment and these structural changes will support the long term growth of the business.

 

Business investment

The Group has invested £7.0m in capital expenditure during the year (2016: £5.0m) and received £1.2m from the sale of a non-core property.

 

The capital expenditure has been invested in a range of projects to improve our in-house painting capability in both Lostock and Ballinamallard, develop our bridge fabrication capability, further enhance our in-house fleet of construction site equipment and improve our staff welfare facilities. We also purchased a plot of land at our Dalton facility, which had previously been leased.

 

Painting has become an increasingly important part of our business in recent years and the investment in our painting capability will reduce our reliance on external suppliers and importantly, reduce product movement and processing times. We have also been developing our commercial capability in the bridge infrastructure market over the past couple of years, a market we see as increasingly important over the coming years. This investment will greatly enhance the speed and efficiency of our bridge fabrication.

 

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

 

Safety

The Group's Accident Frequency Rate for the year, which includes our Indian joint venture, was 0.24, a slight improvement on the 0.25 recorded last year. This improvement was driven by our UK operations which reduced from 0.44 to 0.42 in the year. Whilst this performance is industry leading, we are committed to making further improvements and continue to invest significant amounts of time and money in employee safety.

 

All members of our board participated in site safety visits during the year and we continue to develop the monitoring and analysis of all safety related incidents, including near misses. We have started implementing the next phase of our behavioural safety programme and increasing our level of focus on mental and physical health related issues. In light of this, we are supporting the newly established Mates in Mind charitable programme to improve and promote positive mental health in construction.

 

Strategy

Last year we introduced a target to double 2016 profit before tax to £26m over four years and are making good progress towards achieving this target. The core driver of this is the continuation of the operational improvement programme implemented over the previous three years and we are now capturing these ongoing initiatives under the banner of 'Smarter, Safer, more Sustainable'. There is a wide range of activities aimed at improving business processes, operational efficiency, use of technology and new product development all set within a framework of robust risk management and control. Having established a strong foundation over the past few years from which we and our customers have seen the benefits, we are continuing to work with our customer base to improve our ability to meet their evolving requirements. Joint value engineering, programme certainty, innovative engineering solutions and advanced construction management have long been part of what we do, but we are confident that we will deliver further improvements in these areas as we implement our strategy.

 

We continue to deliver on our additional strategic objectives. CMF has performed very well for the Group providing in-house supply of cold formed products. There are plans in place to develop the product range of CMF and the business is investing accordingly.

 

After undertaking a significant amount of research into the potential market opportunity in Continental Europe we have employed a European business development director based in the Netherlands, who will focus on tailoring our established UK offering for expansion into this market.

 

Summary and outlook

The business has had an excellent year with revenue and strong profit growth supported by strong cash generation. Overall this performance represents a significant step towards our 2020 target of doubling profits. The current order book and pipeline, coupled with a continued stable market environment, will support further progress towards this target in the current financial year.

 

In India, the strong operational performance, the record order book and the repayment of the high cost local debt makes us confident in the joint venture's future financial contribution to the Group and in its profitable growth potential in this large addressable market.

 

Finally I would like to thank all of our people for their continued hard work, innovation and commitment over the last year and we look forward together to another successful year in 2018.

 

Alan Dunsmore

Acting Chief Executive Officer

14 June 2017

 

FINANCIAL REVIEW


2017

2016

Revenue

£262.2m

£239.4m

Underlying* operating profit (before JVs and associates)

£19.6m

£13.7m

Underlying* operating margin (before JVs and associates)

7.5%

5.7%

Underlying* profit before tax

£19.8m

£13.2m

Underlying* basic earnings per share

5.53p

3.67p

Operating profit (before JVs and associates)

£17.8m

£10.1m

Profit before tax

£18.1m

£9.6m

Basic earnings per share

5.13p

2.89p

Return on capital employed ('ROCE')

14.6%

9.7%

 

*

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

Revenue for the year of £262.2m represents an increase of £22.8m (10 per cent) compared with the previous year. This is predominantly the result of an increase in production volumes, particularly in the second half of the year, mainly reflecting an order book which continued to grow until November 2016 until it reached a peak of £315m, its highest position for over six years. The Group's order book at 1 June 2017 of £229m represents the expected return to more normal order book levels following the mid-year peak. Historically, our June order book has represented approximately eight to ten months of future revenue.

 

Underlying operating profit (before JVs and associates) of £19.6m (2016: £13.7m) represents an increase of £5.9m since the prior year, reflecting an increased underlying operating margin (before JVs and associates) of 7.5 per cent (2016: 5.7 per cent). The operating margin has continued to benefit from the Group's operational improvement programme including ongoing improvements made to our contract management processes, improved flow of fabrication processes in our factories and the integration of our new joint venture, CMF, into our supply chain. CMF has benefited operating margins as well as the share of results from JVs and associates. The statutory operating profit (before JVs and associates), which includes the Group's non-underlying items, was £17.8m (2016: £10.1m).

 

The share of results of JVs and associates was a profit of £0.5m (2016: loss of £0.2m) and net finance costs were £0.2m (2016: £0.2m).

 

Underlying profit before tax, which is management's primary measure of Group profitability, was £19.8m (2016: £13.2m). The statutory profit before tax, reflecting both underlying and non-underlying items, was £18.1m (2016: £9.6m).

 

Share of results of JVs and associates

The Group's share of results from its Indian joint venture was a profit of £0.2m (2016: loss of £0.3m) reflecting another year of relative stability in the business. This is the first time that the Group has recorded a share of profits from the Indian joint venture which represents an operating margin of 9.7 per cent (2016: 7.0 per cent) less the finance expense associated with the debt structure at 31 March 2017.

 

Our new joint venture, CMF, contributed a Group share of profit of £0.3m (2016: £0.1m). Having successfully integrated the metal decking supply into our operations, CMF has invested further during the year allowing for the production of purlins and additional cold-formed products which will further expand the value offering and profit contribution from the business.

 

Non-underlying items

Non-underlying items for the year of £1.8m (2016: £3.5m) comprised:

 

§ Amortisation of acquired intangible assets - £2.6m (2016: £2.6m)

§ Movement in fair value of derivative financial instruments - gain of £0.8m (2016: loss of £0.9m)

 

Amortisation of acquired intangible assets represents the amortisation of customer relationships which were identified on the acquisition of Fisher Engineering in 2007. These relationships will be fully amortised during the 2018 financial 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, which represents the reversal of derivative liabilities held on the prior year balance sheet on maturity of the underlying contract in the year. The Group has adopted hedge accounting during the year for all material foreign currency hedging positions (cash flow hedges), thereby mitigating the impact of fair value changes in the income statement since to the extent that the hedge is effective, changes in the fair value of the hedging instrument will be recognised directly in other comprehensive income.

 

In 2015, the Group recorded a non-underlying cost of £6.0m associated with the programme of bolt replacement works at the Leadenhall building, a contract that was completed in 2013. This work is now complete and the actual costs of the programme were consistent with the non-underlying charge. Notwithstanding this, discussions remain ongoing between the Group and the other parties involved to determine where the ultimate liability for the programme costs should reside. Similar to previous years, no account has been taken of possible future cost recoveries from third parties, as these cannot be recognised under IFRS.

 

Finance costs

Net finance costs in the year were £0.2m (2016: £0.2m). The Group has been in a net funds position for all 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 associated with the refinancing in 2014.

 

Taxation

The underlying tax charge of £3.3m (2016: £2.3m) represents an effective tax rate of 17.1 per cent on the applicable profit (which excludes results from JVs and associates). This is consistent with an effective tax rate of 17.0 per cent in the prior year, reflecting an unchanged UK statutory corporation tax rate of 20 per cent over the same period. The Group's effective tax rate is lower than the UK statutory rate primarily due to the continued recognition of deferred tax assets on losses which arose in prior periods. Almost all of the Group's operations and profits are in the UK, and we maintain an open and constructive working relationship with HMRC.

 

The total tax charge for the year of £2.7m (2016: £1.0m) 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 in the deferred tax calculation. 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 51 per cent to 5.53p (2016: 3.67p) based on the underlying profit after tax of £16.5m (2016: £10.9m) and the weighted average number of shares in issue of 298.9m (2016: 297.5m). Basic earnings per share, which is based on the statutory profit after tax, was 5.13p (2016: 2.89p), this growth reflects the increased profit after tax and non-underlying fair value movements on derivative financial instruments which have moved from a loss in 2016 to a profit in 2017. Diluted earnings per share, including the effect of the Group's performance share plan was 5.09p (2016: 2.87p).

 

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 1.6p (2016: 1.0p) per share payable on 15 September 2017 to shareholders on the register at the close of business on 18 August 2017. This dividend is not reflected on the balance sheet at 31 March 2017 as it remains subject to shareholder approval. This, together with the Group's interim dividend of 0.7p (2016: 0.5p) per share, will result in a total dividend per share for 2017 of 2.3p (2016: 1.5p).

 

Shareholders' funds

Shareholders' funds at 31 March 2017 were £154.2m (2016: £148.2m). This equates to a total equity value per share at 31 March 2017 of 52p, compared to 50p at the end of 2016. The increase is primarily due to the increase in profit after tax for the year offset by an increase in the IAS 19 deficit on the Group's defined benefit pension scheme.

 

Goodwill and intangible assets

Goodwill on the balance sheet is valued at £54.7m (2016: £54.7m) and is subject to an annual impairment review under IFRS. No impairment was required either during the year ended 31 March 2017 or the year ended 31 March 2016.

 

Other intangible assets on the balance sheet are recorded at £1.6m (2016: £4.5m). This represents the net book value of the remaining intangible assets (customer relationships) identified on the acquisition of Fisher Engineering in 2007, along with certain software assets. Amortisation of £2.9m (2016: £2.8m) was charged in the year.

 

Capital investment

The Group has property, plant and equipment of £78.9m (2016: £77.4m).

 

Capital expenditure of £7.0m (2016: £5.0m) represents the continuation of the Group's capital investment programme. This included investment in the painting facilities at Lostock and Ballinamallard, development of our bridge fabrication capability, new equipment for our fabrication lines, additional investment in construction site equipment and improvements to our staff welfare facilities. We also purchased a plot of land at Dalton which had previously been leased. Depreciation in the year was £3.6m (2016: £3.7m).

 

Joint ventures

The carrying value of our investment in joint ventures and associates was £12.1m (2016: £11.6m) which consists of the investment in India of £4.6m (2016: £4.5m) and in CMF of £7.5m (2016: £7.1m).

 

The Indian joint venture business has continued to repay its term debt with £4.1m repaid during the year, leaving a balance of £10.6m at the year-end. The Group has now agreed with its joint venture partner, JSW, to repay early this outstanding term debt which will leave the business with existing working capital debt of £14.0m, a letter of credit facility and a more balanced capital structure as it enters the next phase of its development. For the Group, this also represents an attractive use of funds considering the differential between interest rates in the UK and India.

 

Pensions

The Group has a defined benefit pension scheme which, although closed to new members, had an IAS 19 deficit of £21.4m (2016: £14.6m). The increase in the liability is primarily the result of a reduction in the AA bond yield following the referendum vote to leave the European Union, as this is used as the discount rate in the calculation of scheme liabilities. The triennial funding valuation of the scheme will be carried out in 2018, with a valuation date of 31 March 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 shareholders' equity excluding retirement benefit obligations (net of tax), acquired intangible assets and net funds. For 2017, ROCE was 14.6 per cent (2016: 9.7 per cent) which exceeds the Group's target of 10 per cent through the economic cycle.

 

Cash flow


2017

2016

Operating cash flow (before working capital movements)

£25.1m

£17.9m

Cash generated from operations

£27.4m

£24.8m

Operating cash conversion

112%

150%

Net funds

£32.6m

£18.7m

 

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 £32.6m (2016: £18.7m).

 

Operating cash flow for the year before working capital movements was £25.1m (2016: £17.9m). Net working capital improved by £2.3m during the year mainly as a result of an increase in advance payments from customers. Excluding advance payments, year-end net working capital represented approximately 2 per cent of revenue. This is lower than the 4 to 6 per cent range which we have been targeting. Whilst some of this difference can be attributed to a better than normal contract payment profile around the year-end, there has also been some underlying improvement in working capital management.

 

In 2017, our cash generation KPI shows a conversion of 112 per cent (2016: 150 per cent) of underlying operating profit (before JVs and associates) into operating cash (cash generated from operations less net capital expenditure). This is the third successive year in which cash generation has exceeded 100 per cent and continues the Group's excellent recent record of converting profits into cash. Net investment during the year was £5.3m reflecting capital expenditure of £7.0m less proceeds from disposals of £1.7m (mainly arising on the sale of a non-core property).

 

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. These facilities are available until July 2019. There are two key financial covenants, with net debt: EBITDA of <2.5x, and interest cover of >4x. The Group operated well within these covenant limits throughout the year ended 31 March 2017.

 

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 contracts are taken out to convert into sterling at the expected date of receipt. The Group has now adopted hedge accounting for the majority of transaction hedging positions, thereby mitigating the impact of market value changes in the income statement.

 

IFRS 15

The Group is currently undertaking 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 involves 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 results of this assessment will drive the Group's choice of transition option.

 

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 2018 financial year and beyond;

·     

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

 

Based on the above, and 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 2020. 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 £32.6m, 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 also assessed the potential financial and operational impact of possible scenarios resulting from the crystallisation of one of more of the principal risks. In particular, the impact of a reduction in margin, a reduction in revenue, a deterioration in working capital, a period of business interruption and a significant one-off event. 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

Acting Group Finance Director

14 June 2017

 

Consolidated income statement

For the year ended 31 March 2017

 

 

 

 

 

 

 

 

 

Underlying

 2017

£000

 

 

Non-underlying

2017

£000

 

 

Total

2017

£000

 

 

Underlying

 2016

£000

 

 

Non-underlying

2016

£000

 

 

Total

2016

£000

Revenue

     262,224

               -

     262,224

     239,360

               -

     239,360

Operating costs

    (242,610)

       (1,790)

    (244,400)

    (225,674)

       (3,568)

    (229,242)

Operating profit before share of results of JVs and associates

      19,614

       (1,790)

      17,824

      13,686

       (3,568)

      10,118

Share of results of JVs and associates

           457

               -

           457

          (230)

               -

          (230)

Operating profit

      20,071

       (1,790)

      18,281

      13,456

       (3,568)

        9,888








Finance expense

          (226)

               -

          (226)

          (245)

               -

          (245)

Profit before tax

      19,845

       (1,790)

      18,055

      13,211

       (3,568)

        9,643








Tax

       (3,306)

           580

       (2,726)

       (2,280)

        1,237

       (1,043)

Profit for the year attributable to the equity holders of the parent

      16,539

       (1,210)

      15,329

      10,931

       (2,331)

        8,600















Earnings per share:







Basic

5.53p

        (0.40p)

5.13p

3.67p

(0.78p)

2.89p

Diluted

5.49p

(0.40p)

5.09p

3.65p

(0.78p)

2.87p

 

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 2017

 


Year ended

31 March 2017

£000

 

Year ended

31 March 2016

£000

 

Actuarial (loss)/gain on defined benefit

pension scheme*

                        (7,412)

                         1,300

Losses taken to equity on cash flow hedges

                            (93)

                                -

Reclassification adjustments on cash flow hedges

                           110

                                -

Tax relating to components of other comprehensive income*

                         1,071

                          (353)

Other comprehensive income for the year

                        (6,324)

                           947

Profit for the year from

continuing operations

                       15,329

                         8,600

Total comprehensive income for the

year attributable to equity shareholders

                         9,005

                         9,547




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

 

Consolidated balance sheet

As at 31 March 2017

 


                         2017

                         £000

                         2016

                         £000

ASSETS






Non-current assets



     Goodwill

                      54,712

                      54,712

     Other intangible assets

                        1,574

                        4,480

     Property, plant and equipment

                      78,909

                      77,362

     Interests in JVs and associates

                      12,068

                      11,611

     Deferred tax asset

                        1,029

                        1,100


                    148,292

                    149,265

Current assets



     Inventories

                        7,750

                        5,294

     Trade and other receivables

                      66,398

                      50,742

     Derivative financial instruments

                           109

                               -

     Cash and cash equivalents

                      32,849

                      19,033


                    107,106

                      75,069




Total assets

                    255,398

                    224,334




LIABILITIES






Current liabilities



     Trade and other payables

                     (75,673)

                     (55,311)

     Financial liabilities - derivatives

                               -

                          (830)

     Financial liabilities - finance leases

                          (180)

                          (180)

     Current tax liabilities

                       (2,862)

                       (1,911)


                     (78,715)

                     (58,232)

Non-current liabilities



     Retirement benefit obligations

                     (21,414)

                     (14,602)

     Financial liabilities - finance leases

                          (229)

                          (409)

     Deferred tax liabilities

                          (883)

                       (2,885)


                     (22,526)

                     (17,896)




Total liabilities

                   (101,241)

                     (76,128)




NET ASSETS

                    154,157

                    148,206




EQUITY






Share capital

                        7,471

                        7,437

Share premium

                      85,702

                      85,702

Other reserves

                        3,710

                        2,300

Retained earnings

                      57,274

                      52,767

TOTAL EQUITY

                    154,157

                    148,206

 

Consolidated statement of changes in equity

For the year ended 31 March 2017

 

 


      Share

     capital

         £000

      Share

premium

         £000

       Other

  reserves

         £000

Retained

  earnings

         £000

        Total

      equity

         £000







At 1 April 2016

        7,437

      85,702

        2,300

      52,767

    148,206

Total comprehensive income for the year

               -

               -

            17

        8,988

        9,005

Ordinary shares issued *

            34

               -

               -

               -

            34

Equity settled shared-based payments

               -

               -

        1,393

          597

        1,990

Dividend paid

               -

               -

               -

       (5,078)

       (5,078)

At 31 March 2017

        7,471

      85,702

        3,710

      57,274

    154,157







* The issue of shares represents shares allotted to satisfy the 2013 Performance Share Plan award which vested during the year.

 

 


       Share

      capital

         £000

       Share

   premium

         £000

        Other

    reserves

         £000

   Retained

   earnings

         £000

         Total

       equity

         £000







At 1 April 2015

        7,437

      85,702

        1,250

      46,195

    140,584

Total comprehensive income for the year

               -

               -

               -

        9,547

        9,547

Equity settled shared-based payments

               -

               -

        1,050

               -

        1,050

Dividend paid

               -

               -

               -

       (2,975)

       (2,975)

At 31 March 2016

        7,437

      85,702

        2,300

      52,767

    148,206







 

Consolidated cash flow statement

For the year ended 31 March 2017

 


              Year ended

        31 March 2017

                         £000

 

               Year ended

          31 March 2016

                         £000

 

Net cash flow from operating activities

                      24,977

                      23,888




Cash flows from investing activities



Proceeds on disposal of land and buildings

                        1,195

                           273

Proceeds on disposal of other property, plant and equipment

                           436

                           395

Purchases of land and buildings

                       (1,517)

                          (122)

Purchases of other property, plant and equipment

                       (5,442)

                       (4,676)

Purchases of intangible fixed assets

                               -

                          (150)

Investment in JVs and associates

                          (413)

                       (4,113)

Net cash used in investing activities

                       (5,741)

                       (8,393)




Cash flows from financing activities



Interest paid

                          (162)

                          (166)

Dividends paid

                       (5,078)

                       (2,975)

Repayment of obligations under finance leases

                          (180)

                          (205)

Net cash used in financing activities

                       (5,420)

                       (3,346)




Net increase in cash and

cash equivalents

                      13,816

                      12,149

Cash and cash equivalents at beginning of year

                      19,033

                        6,884

Cash and cash equivalents at end of year

                      32,849

                      19,033




1)         Basis of preparation

The preliminary announcement has been prepared in accordance with the Listing Rules of the FCA and is based on the 2017 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 2016.

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 2016 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 2017, 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 segments have been aggregated as they have businesses with similar products and services, production processes, types of customer, methods of distribution, regulatory environments and economic characteristics. Given that only one operating and reporting segment exists, the remaining disclosure requirements of IFRS 8 are provided within the consolidated income statement and balance sheet.

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

3)         Non-underlying items

 


2017

£000

2016

£000

Amortisation of acquired intangible assets

                 (2,620)

                 (2,620)

Movement in fair value of derivative financial instruments

                    830

                   (948)

Non-underlying items before tax

                 (1,790)

                 (3,568)

Tax on non-underlying items

                    580

                  1,237

Non-underlying items after tax

                 (1,210)

                 (2,331)

 

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 represents the amortisation of customer relationships which were identified on the acquisition of Fisher Engineering in 2007. These relationships will be fully amortised during the next financial 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, which represents the reversal of derivative liabilities held on the prior year balance sheet on maturity of the underlying contract in the year. The Group has adopted hedge accounting during the year for all material foreign currency hedging positions (cash flow hedges), thereby mitigating the impact of fair value changes in the income statement since to the extent that the hedge is effective, changes in the fair value of the hedging instrument will be recognised directly in other comprehensive income. When the hedged item is recognised in the financial statements, the accumulated gains and losses recognised in other comprehensive income will be recycled to the income statement. In accordance with the Group's revised accounting policy, these recycled gains or losses together with any movement in fair values associated with ineffective hedging positions will be treated as a component of underlying profit rather than separately disclosed as non-underlying items.

 

4)         Taxation

The taxation charge comprises:


                   2017

                   £000

2016

£000

Current tax






UK corporation tax

                 (3,465)

                 (1,607)

Adjustments to prior years' tax provision

                    (121)

                    (127)


                 (3,586)

                 (1,734)




Deferred tax






Current year credit/(charge)

                     577

                    (159)

Impact of reduction in future years' tax rates

                     222

                     523

Adjustments to prior years' tax provision

                      61

                     327


                     860

                     691




Total tax charge

                 (2,726)

                 (1,043)

 

5)         Dividends


                   2017

                   £000

2016

£000




2016 final - 1.0p per share (2015: 0.5p per share)

                 (2,985)

                 (1,487)

2017 interim - 0.7p per share (2016: 0.5p per share)

                 (2,093)

                 (1,487)


                 (5,078)

                 (2,975)


The directors are recommending a final dividend in respect of the financial year ended 31 March 2017 of 1.6p per share which will amount to an estimated dividend payment of £4.8m. If approved by the shareholders at the annual general meeting on 6 September 2017, this dividend will be paid on 15 September 2017 to shareholders who are on the register of members at 18 August 2017. This dividend is not reflected in the balance sheet as at 31 March 2017 as it is subject to shareholder approval.

 

6)         Earnings per share

Earnings per share is calculated as follows:


                   2017

                   £000

 

                   2016

                   £000

 

Earnings for the purposes of basic earnings per share being net profit attributable to equity holders of the parent company

                15,329

                  8,600




Earnings for the purposes of underlying basic earnings per share being underlying net profit attributable to equity holders of the parent company

                16,539

                10,931




Number of shares

             Number

               Number




Weighted average number of ordinary shares for the purposes of basic earnings per share

        298,855,911

        297,503,587

Effect of dilutive potential ordinary shares

            2,218,914

            1,715,818




Weighted average number of ordinary shares for the purposes of diluted earnings per share

        301,074,825

        299,219,405




 

Basic earnings per share

                       5.13p

                       2.89p

Underlying basic earnings per share

                       5.53p

                       3.67p

Diluted earnings per share

                       5.09p

                       2.87p

Underlying diluted earnings per share

                       5.49p

                       3.65p

 

7)         Net cash flow from operating activities

 


                    2017

                    £000

 

                    2016

                    £000

 

Operating profit from continuing operations

                  18,281

                   9,888

Adjustments:



Depreciation of property, plant and equipment

                   3,583

                   3,693

Loss/(gain) on disposal of land and buildings

                      271

                       (10)

Gain on disposal of other property, plant and equipment

                       (73)

                     (127)

Amortisation of intangible assets

                   2,906

                   2,758

Movements in pension scheme

                     (600)

                     (573)

Share of results of JVs and associates

                     (457)

                      230

Share-based payments

                   1,990

                   1,050

Movement in valuation of derivatives

                     (830)

                      948







Operating cash flows before movements

in working capital

                  25,071

                  17,857

Increase in inventories

                  (2,456)

                     (527)

(Increase)/decrease in receivables

                 (11,648)

                  13,725

Increase/(decrease) in payables

                  16,386

                  (6,221)




Cash generated from operations

                  27,353

                  24,834

Tax paid

                  (2,376)

                     (946)

Net cash flow from operating activities

                  24,977

                  23,888

 

8)         Net funds

The Group's net funds are as follows:


                          

                    2017

                    £000

 

                         

                   2016

                   £000

 

Cash and cash equivalents

                  32,849

                  19,033

Unamortised debt arrangement fees

                      146

                      210

Financial liabilities - finance leases

                     (409)

                     (589)




Net funds

                  32,586

                  18,654

 

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 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 17 August 2017.

§ The final dividend will be paid on 15 September 2017 to shareholders on the register at the close of business on 18 August 2017. Dividend warrants/vouchers will be posted on 13 September 2017.

§ The 2017 annual report and financial statements together with the notice of the annual general meeting will be posted to shareholders in July 2017.

§ The annual general meeting will be held on 6 September 2017 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:

 

Health and safety

Description

The Group works on significant, complex and potentially hazardous projects which require continuous monitoring and management of health and safety risks. Ineffective management of health and safety issues could lead to a serious injury, death or damage to property or equipment.

 

Impact

A serious health and safety incident could lead to the potential for legal proceedings, regulatory intervention, project delays, potential loss of reputation and ultimately exclusion from future business. New sentencing guidelines have come into force which have the potential to impose significant fines even where no actual harm has occurred.

 

Mitigation

·    

Established safety systems, site visits, safety audits, monitoring and reporting, and detailed health and safety policies and procedures, are in place across the Group.

·    

Thorough and regular employee training programmes (including behavioural safety training) under the leadership of the new Group SHE director (appointed in July 2016).

·    

Director-led safety leadership teams established to bring innovative solutions and to engage with all stakeholders to deliver continuous improvement in standards across the business and wider industry.

·    

Close monitoring of subcontractor safety performance.

·    

Priority board review of ongoing performance.

·    

Regular reporting of and investigation and root cause analysis of accidents and near misses.

·    

Achievement of challenging health and safety performance targets is a key element of management remuneration (and staff remuneration from March 2017 onwards).

 

Commercial and market environment

Description

Changes in government and client spending or other external factors could lead to programme and contract delays or cancellations, or changes in market growth. Whilst Brexit has to date not had a significant impact on the UK construction market, outcomes following the triggering of Article 50 remain difficult to predict and could affect investor confidence.

 

Lower than anticipated demand could result in increased competition, tighter margins and the transfer of commercial, technical and financial risk down the supply chain, through more demanding contract terms and longer payment cycles.

 

Impact

A significant fall in construction activity could adversely impact revenues, profits, ability to recover overheads and cash generation.

 

Mitigation

·    

Regular reviews of market trends are performed (as part of the Group's annual strategic planning process) to ensure actual and anticipated impacts from macroeconomic risks are minimised and managed effectively.

·    

Regular monitoring and reporting of financial performance, orders secured, prospects and the conversion rate of the pipeline of opportunities.

·    

Selection of opportunities that will provide sustainable margins and repeat business.

·    

Strategic planning is undertaken to identify and focus on the addressable market (including new overseas and domestic opportunities).

·    

Recruitment of a new European business development director to focus on markets and opportunities in mainland Europe which fit the Group's risk appetite.

·    

Close management of capital investment and focus on maximising asset utilisation to ensure alignment of our capacity and volume demand from clients.

·    

Close engagement with both customers and suppliers and monitoring of payment cycles.

·    

Ongoing assessment of financial solvency and strength of counterparties throughout the life of contracts.

·    

Continuing use of credit insurance to minimise impact of customer failure.

·    

Strong balance sheet (the Group has net funds in excess of £30m) supports the business through fluctuations in the economic conditions for the sector.

 

Mispricing a contract (at tender)

Description

Failure to accurately estimate and evaluate the contract risks, costs to complete, contract duration and the impact of price increases could result in a contract being mispriced. Execution failure on a high-profile contract could result in reputational damage.

 

Impact

If a contract is incorrectly priced, particularly on complex contracts, this could lead to loss of profitability, adverse business performance and missed performance targets. This could also damage relationships with clients and the supply chain.

 

Mitigation

·     

Improved contract selectivity (those that are right for the business and which match our risk appetite) has de-risked the order book and reduced the probability of poor contract execution

·     

Estimating processes are in place with approvals by appropriate levels of management.

·     

Tender settlement processes are in place to give senior management regular visibility of major tenders.

·     

Use of the tender review process to mitigate the impact of rising supply chain costs.

·     

Work performed under minimum standard terms (to mitigate onerous contract terms) where possible.

·     

Use of Group authorisation policy to ensure appropriate contract tendering and acceptance.

·     

Professional indemnity cover is in place to provide further safeguards.

 

Supply chain

Description

The Group is reliant on certain key supply chain partners for the successful operational delivery of contracts to meet client expectations. The failure of a key supplier or a breakdown in relationships with a key supplier could result in some short-term delay and disruption to the Group's operations. There is also a risk that credit checks undertaken in the past may no longer be valid.

 

Impact

Interruption of supply or poor performance by a supply chain partner could impact the Group's execution of existing contracts (including the costs of finding a replacement), its ability to bid for future contracts and its reputation, thereby adversely impacting financial performance.

 

Mitigation

·    

Initiatives are in place to select supply chain partners that match our expectations in terms of quality, sustainability and commitment to client service. New sources of supply are quality controlled.

·    

New Group head of procurement appointed to bring in best practice improvement initiatives.

·    

Strong relationships maintained with key suppliers including a programme of regular meetings and reviews.

·    

Contingency plans developed to address supplier and subcontractor failure.

·    

Ongoing reassessment of the strategic value of supply relationships and the potential to utilise alternative arrangements in particular for steel supply.

·    

Key supplier audits are performed within projects to ensure they are in a position to deliver consistently against requirements.

·    

Monthly review process to facilitate early warning of issues and subsequent mitigation strategies.

 

Indian joint venture

Description

The growth, management and performance of the business is a key element of the Group's overall performance. Effective management of the joint venture is therefore important to the Group's continuing success.

 

Crucial to the long-term success of the joint venture is the development of the market for steel (rather than concrete) construction.

 

Impact

Failure to effectively manage operations in India could lead to financial loss, reputational damage and a drain on cash resources to fund the operations.

 

Mitigation

·     

Robust joint venture agreement and strong governance structure is in place

·     

Two members of the Group's board of directors are members of the joint venture board.

·     

Regular formal and informal meetings held with both joint venture management and joint venture partners.

·     

Contract risk assessment, engagement and execution process now embedded in the joint venture.

·     

Market and operational plan now implemented; overhead reduction and operational improvement programmes remain ongoing.

·     

Close monitoring of cash flow and debt repayments.

 

Information technology resilience

Description

Technology failure, cyber-attack or property damage could lead to IT disruption with resultant loss of data, loss of system functionality and business interruption.

 

The Group's core IT systems must be managed effectively, to avoid interruptions, keep pace with new technologies and respond to threats to data and security.

 

Impact

Prolonged or major failure of IT systems could result in business interruption, financial losses, loss of confidential data, negative reputational impact and breaches of regulations. If the Group fails to invest in its IT systems, it will ultimately be unable to meet the future needs of the business and fulfil its strategy.

 

Mitigation

·    

IT is the responsibility of a central function which manages the majority of the systems across the Group. Other IT systems are managed locally by experienced IT personnel.

·    

Significant investments in IT systems are subject to board approval.

·    

Group IT committee ensures focused strategic development and resolution of issues impacting the Group's technology environment.

·    

Robust business continuity plans are in place and disaster recovery and penetration testing are undertaken on a systematic basis.

·    

Data protection and information security policies are in place across the Group, including anti-virus software, off-site and on-site backups, storage area networks, software maintenance agreements and virtualisation of the IT environment.

·    

Cyber-crimes and associated IT risks are assessed on a continual basis and additional technological safeguards introduced. Cyber-threats and how they manifest themselves are communicated regularly to all employees (including practical guidance on how to respond to perceived risks).

·    

ISO 27001 accreditation achieved for the Group's information security environment and regular employee engagement undertaken to reinforce key messages.

 

People

Description

The ability to identify, attract, develop and retain talent is crucial to satisfy the current and future needs of the business. Skills shortages in the construction industry are likely to remain an issue for the foreseeable future and it can become increasingly difficult to recruit capable people and retain key employees, especially those targeted by competitors.

 

Impact

Loss of key people could adversely impact the Group's existing market position and reputation. Insufficient growth and development of its people and skillsets could adversely affect its ability to deliver its strategic objectives.

 

A high level of staff turnover or low employee engagement could result in a drop in confidence in the business within the market, customer relationships being lost and an inability to focus on business improvements.

 

Mitigation

·    

Remuneration arrangements are regularly reviewed (and benchmarked where possible) to ensure that they are competitive and strike the appropriate balance between short and long-term rewards and incentives.

·    

Skills gaps are continually identified and actions put in place to bridge these by training, development or external recruitment.

·    

In 2017 we continued to focus on emerging talent, succession planning and career opportunity and launched our new Severfield Development Programme which will help us build sustainable leadership capability within our next generation of leaders. Other ongoing leadership and management development plans are also in place.

·    

We undertook a Group-wide employee engagement survey to measure engagement with the results being analysed and improvements identified and implemented.

·    

Annual appraisal process provides 360 degree feedback on performance for certain employees.

·    

Graduate, trainee and apprenticeship schemes are in place to safeguard an inflow of new talent.

·    

We undertook a thorough review of internal communications across the Group and improvements in this area are planned for 2018.

 

 

Industrial relations

Description

The Group (and the industry in general) has a significant number of members who are members of trade unions. Industrial action taken by employees could impact on the ability of the Group to maintain effective levels of production.

 

Impact

Interruption to production by industrial action could impact both the Group's performance on existing contracts, its ability to bid for future contracts and its reputation, thereby adversely impacting its financial performance.

 

Mitigation

·    

Employee and union engagement takes place on a regular basis.

·    

The Group has four main production facilities so interruption at one facility could to some extent be absorbed by increasing capacity at a sister facility.

·    

Processes are in place to mitigate disruptions as a result of industrial action.

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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Results for the year ended 31 March 2017 - RNS