Interim results for the period ended 30 Sept 2018

27 November 2018

Interim results for the period ended 30 September 2018
 

Continued operational and strategic progress, UK order book of £230m, India expansion underway, full year results in line with expectations

Severfield plc, the market leading structural steel group, announces its results for the six month period ended 30 September 2018.

Highlights

§  Revenue up 9% to £149.1m (H1 2017: £137.1m)

§  Underlying* profit before tax up 2% to £13.1m against a particularly strong H1 2017 profit of £12.9m which included higher than normal profits from certain project completions

§  Interim dividend increased by 11% to 1.0p per share (H1 2017: 0.9p per share)

§  Continued cash generation, resulting in period-end net funds of £25.3m (31 March 2018: £33.0m) after the payment of 2018 final and special dividends (£10.3m)

§  Over 70 projects undertaken during the period in key market sectors including the new stadium for Tottenham Hotspur FC, the retractable roof for Wimbledon No. 1 Court and a new commercial tower in London at 22 Bishopsgate

§  UK order book of £230m at 1 November 2018 (1 June 2018: £237m) comprising more small, lower risk projects

§  Continued good performance from Indian joint venture - share of profit of £0.4m (H1 2017: £0.1m)

§  Improving Indian market position reflected in order book of £124m at 1 November 2018 (1 June 2018: £106m), expansion of Bellary facility now underway

* Underlying results are stated before non-underlying items of £nil (H1 2017: £1.3m):

-   Amortisation of acquired intangible assets - £nil (H1 2017: £1.3m)

-   The associated tax impact of the above - £nil (H1 2017: £0.3m)

Alan Dunsmore, Chief Executive Officer commented:

"Our continued operational and strategic progress has resulted in another period of growth for the Group. In addition to a high quality and stable UK order book, we continue to see good progress in India and have established exciting new organic opportunities for growth.

With our market-leading position, we are well placed to deliver on our strategic objectives and generate enhanced value for our shareholders."

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

Interim statement 2018

Introduction

The first six months of the year have seen good progress across the whole Group. We have delivered further revenue growth, continued to improve our underlying operating margin from the 2018 full year position and reported another period of cash generation. The half year results also show an increase in profit before tax but this was against a particularly strong first half profit performance in the prior period, which included higher than normal profits from certain project completions. Our UK order book and pipeline of potential future orders has remained stable with a good balance of work across all key market sectors. Both the quality of the order book and the strength of the UK pipeline are consistent with our continued progress towards our strategic targets.

The market position of our Indian joint venture ('JSSL'), continues to improve. This is reflected in JSSL's order book, which has increased again to £124m, and a growing pipeline of commercial opportunities, which positions the business well for the future. JSSL has continued to perform well and the results for the first six months of the year have benefited from revenue growth, good operational performance and lower financing costs following the repayment of the term debt in June 2017.

Financials

Revenue of £149.1m (2017: £137.1m) represents an increase of £12.0m (9 per cent) compared with the prior period, predominantly reflecting an increase in order flow and production activity during the period.

Underlying operating profit (before JVs and associates) of £12.5m (2017: £12.7m) represents a small decrease of £0.2m (2 per cent) over the prior period. This mainly reflects a lower underlying operating margin (before JVs and associates) of 8.4 per cent (2017: 9.3 per cent) which is predominantly due to the prior year benefitting from higher than normal profits from certain project completions. Notwithstanding this, the margin for the first six months of the year compares favourably to the 2018 full year underlying operating margin (before JVs and associates) of 8.3 per cent, demonstrating further margin progression and improvements to our operational execution.

The share of results of JVs and associates in the first half of the year was a profit of £0.7m (2017: £0.3m). This includes a share of profit from the Indian joint venture of £0.4m (2017: £0.1m), reflecting revenue growth, good operational performance and lower financing costs. The share of results of JVs and associates also includes those of Composite Metal Flooring ('CMF') Limited which has contributed a share of profit for the Group of £0.3m (2017: £0.2m).

The Group's underlying operating profit was £13.2m (2017: £13.0m) and underlying profit before tax was £13.1m (2017: £12.9m), an increase of 2 per cent compared to the previous period.

There were no non-underlying items in the period. Non-underlying items in the prior period included the amortisation of acquired intangible assets of £1.3m, identified on the acquisition of Fisher Engineering in 2007, which are now fully amortised. Non-underlying items are classified as such as they do not form part of the profit monitored in the ongoing management of the Group.

An underlying tax charge of £2.4m is shown for the period (2017: £2.4m). This tax charge is recognised based upon the best estimate of the average effective income tax rate on profit before tax for the full financial year and equates to the UK statutory rate of 19 per cent. The statutory profit before tax, which includes both underlying and non-underlying items, is £13.1m (2017: £11.5m). The statutory profit after tax is £10.8m (2017: £9.4m) and has been transferred to reserves.

Underlying basic earnings per share is 3.54p (2017: 3.50p). This calculation is based on the underlying profit after tax of £10.8m (2017: £10.5m) and 303,951,597 shares (2017: 299,555,911 shares), being the weighted average number of shares in issue during the period. Basic earnings per share, which is based on the statutory profit after tax, is 3.54p (2017: 3.14p). There are no contingent shares outstanding under share-based payment schemes and, accordingly, there is no difference between basic and diluted earnings per share.

Net funds at 30 September 2018 were £25.3m (31 March 2018: £33.0m) following the payment of the 2018 final dividend (£5.2m) and special dividend (£5.2m). Operating cash flow for the period before working capital movements was £13.9m (2017: £14.1m). Net working capital increased by £9.7m during the period reflecting the timing of ongoing contract works and the unwinding of advance payments from customers. Excluding advance payments, year-end net working capital represented approximately five per cent of revenue, which is within the four to six per cent range which we have been targeting over recent years.

Capital expenditure of £2.4m (2017: £3.3m) represents the continuation of the Group's capital investment programme. This predominantly included continued investment in new equipment for our fabrication lines and site infrastructure improvements. Depreciation in the period was £1.9m (2017: £1.8m).

The Group's defined benefit pension liability at 30 September 2018 was £16.7m, a decrease of £0.5m from the year-end position of £17.2m. The decrease in the liability is primarily the result of an increase in the assumption for corporate bond yields (used as the discount rate in the calculation of scheme liabilities) and ongoing deficit contributions made by the Group during the period. The triennial funding valuation of the scheme was carried out in 2018 with a valuation date of 5 April 2017.

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 financial covenants namely the cover of interest costs and the ratio of net debt to EBITDA.

Dividend

As part of the Group's commitment to a progressive dividend policy, the board has decided to increase the interim dividend by 11 per cent to 1.0p per share (2017: 0.9p per share). The dividend will be paid on 11 January 2019 to shareholders on the register on 14 December 2018.

UK review

The Group's main activities continue to be the design, fabrication and construction of structural steel for construction projects and more than 70 live projects were worked on during the period. These cover a wide range of sectors that the Group can service including commercial offices, industrial and distribution, data centres, transport and retail. During the period, we continued to work on three large projects in London, each of which have project revenues in excess of £20m. These comprise a new commercial tower at 22 Bishopsgate, where work remains ongoing, and two projects where work is substantially complete, namely the new stadium for Tottenham Hotspur FC and the retractable roof for Wimbledon No. 1 Court. A fourth large project, for a major new commercial head office building in London, was substantially completed in the previous financial year.

Other significant projects worked on in the period included commercial office developments in London and outside (including North Wharf Road, St. Giles Circus, One Crown Place, Birmingham Snowhill and Cardiff Central Square), two large data centres in Belgium and the Republic of Ireland, two large industrial and distribution projects for Amazon, and the Engineering Campus Development at Manchester University.
 

Revenue has increased by nine per cent from the prior period predominately reflecting an increase in order flow and production activity during the period. The UK order book of £230m at 1 November 2018 continues to include a high proportion of smaller projects, particularly in the industrial and distribution sector, which typically have shorter lead times than, for example, the large London projects (discussed above) which are either complete or nearing completion. The order book, of which £183m is for delivery over the next 12 months, remains in line with our normal order book levels, which typically equate to eight to ten months of annualised revenue. This provides us with good visibility of earnings and supports continued progress towards our strategic targets.

Significant new orders secured in the period include several commercial office developments in London and in Manchester, a significant number of industrial and distribution projects for a variety of clients, a large project at Heathrow airport and a car park development at Manchester airport. Furthermore, the new Google Headquarters, for which an order of £50m was secured in December 2017, will require us to provide over 15,000 tonnes of structural steelwork for an eleven storey head office building at Kings Cross in London. Work on this project is scheduled to commence in the second half of the current financial year.

Overall, the UK market continues to appear stable, with modest economic growth forecast, in tandem with our pipeline of potential future orders which also remains stable. We continue to see good opportunities across the commercial office, industrial and distribution, data centre and infrastructure sectors, together with those in Europe and the Republic of Ireland. Whilst we are currently seeing some lower tender margins on projects that we are bidding we have been able to offset these with efficiency improvements and other contract execution gains.

Looking further ahead, 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 caused by the UK's exit from the European Union. At this stage, we have seen no material impact from Brexit, however with continued uncertainty, 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.

The underlying operating margin (before JVs and associates) was 8.4 per cent (2017: 9.3 per cent) resulting in an underlying operating profit (before JVs and associates) of £12.5m (2017: £12.7m). Although underlying operating profit is broadly unchanged, it was against a strong comparator in the prior period, which included higher than normal profits from certain project completions. Notwithstanding this, we are pleased that the first half underlying operating margin has continued to improve from the 2018 full year position of 8.3 per cent, and remains firmly within the margin range of 8 to 10 per cent required to achieve our strategic profit target of doubling 2016 underlying profit before tax to £26m by 2020.

The margin performance continues to reflect 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. Our new dedicated 'SSS' team is working on improving many aspects of our internal operations, including the application of Lean manufacturing techniques, together with our engineering forum which is looking at new and innovative ways of working.
 

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

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 operational footprint has contributed to increased operational efficiencies which are benefitting operating margins. Furthermore, in February 2018, in response to changes in the current work mix which has changed the requirement for steel fabrication at our Lostock and Dalton facilities, we transitioned a number of job roles from Lostock to Dalton. This process has also been concluded successfully with both facilities now operating with workforce capacities which are more closely aligned with current and expected orders.

Our specialist cold rolled steel joint venture business, CMF, has continued to grow and has performed well during the period. 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.

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

India

The Indian joint venture has continued to grow and recorded a profit in the period, of which the Group's after tax share was £0.4m (2017: £0.1m). The higher profitability in the period reflects both a good operating performance, together with lower financing costs following the repayment of the term debt in June 2017. JSSL's revenue has increased to £32m compared with £22m in the previous period, assisted by the higher order book coming into the financial year. The impact of this has been offset by a reduction in the operating margin to 7.0 per cent compared to 9.3 per cent in the previous period. The lower margin is consistent with the ongoing fluctuations in the timing and mix of industrial and commercial work in a growing order book.

The market for structural steel in India continued to improve and we are seeing clear signs of the conversion of the market from concrete to steel, which is vital to the success and long term value of the business. This position is evident in an order book at 1 November 2018 of £124m (1 June 2018: £106m) which includes a large commercial order (Sattva) in the state of Hyderabad, along with a growing large number of potential higher margin commercial projects in the pipeline. In addition, we also have visibility of an increased pipeline of industrial work, including for our joint venture partner, JSW Steel ('JSW'), which is currently increasing its domestic steel output, a process which is expected to continue in the short to medium term.

As a result of these continued market improvements, we have agreed with JSW to increase factory capacity at the Bellary facility from c.60,000 tonnes to c.90,000 tonnes. This project will be financed by a combination of equity of c.£8m, provided in equal cash amounts of c.£4m by the Group and JSW, and debt of c.£8m, provided directly to JSSL by Indian lenders. Significant work on this expansion will commence in the second half of the year and will take around 12 to 18 months to complete. This will provide the business with the springboard to deliver future profitable growth, and its value will continue to build as it continues to expand and develop.

Strategy

In addition to making good progress towards our 2020 strategic profit target, we continue to pursue our three new areas of organic growth - Severfield (Products & Processing) ('SPP'), Europe and medium to high rise residential construction.

SPP, our new business venture at the Sherburn facility, commenced trading in April 2018. This business is allowing us to address smaller scale projects, a segment of the market that we have not historically focused on, and provides a one-stop shop for smaller fabricators to source high quality processed steel and ancillary products. The business is developing in line with expectations and has secured and delivered a number of orders to a variety of new customers in the first six months of the year. During this time, we have also gained more market intelligence on both our customers and competitors and are developing our customer relationships and pipeline of potential future orders.

We have continued to develop our European business venture, which is based in the Netherlands, aided by a small locally-based team which includes our business development director. During the period, we have submitted a number of 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 with in the UK. The European team's market knowledge and experience has also been invaluable to our UK business when tendering for and delivering European work, providing us with a competitive advantage and the ability to deliver excellent client service.

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 plenty of potential opportunities and discussions with a number of interested parties remain ongoing. We remain highly focused on this area of potential growth and are pushing hard to secure our first order which we believe will be an important step in establishing a track record in the sector.

Safety

The Group strategy continues to support health and safety as being at the forefront of everything we do.

There are now more than 150 behavioural safety coaches across the Group, encouraging ownership of safety across all levels of the business. The coaching programme has been extremely successful in engaging employees in our 'Six Life Saving Rules' and 'SLAM' messaging campaigns. This has positively contributed to the overall safety culture, encouraging and empowering employees to raise their concerns and highlight any best practise to coaches who can respond to queries giving more direct and personal feedback.

The number of visits to site by board members continues to grow year-on-year, and more emphasis is being given on employee engagement, enabling the Group to gain vital feedback and suggestions for improvement around safety. Work has finished on a new in-house audit system allowing better analysis of site visits, meaning prevention campaigns are better targeted to high potential for harm incidents and minor injuries. By identifying key areas within our working environment, we have been able to set out a programme of senior management led quarterly presentations, to deliver key messages across our employee network in our commitment to a 'safety first' culture.

We recognise that mental health is a major concern in our industry. In raising awareness of mental health, we have developed an internal campaign ('Head's Up') to communicate a 'door is always open' policy. We now have a growing community of over 25 mental health first aiders, and have signed up to the Build UK Charter to improve and promote positive mental health in construction. Alongside our occupational health we have introduced an employee helpline that gives those working with us and their families access to qualified councillors for anything they require help with.

Sustainability remains a key part of this strategy, with work being undertaken to develop a new all-encompassing policy which cascades from board level. Smarter, Safer, more Sustainable stays at the forefront of all new projects, with our dedicated team of in-house experts ensuring that we always put safety at the core of every decision whilst developing smarter ways of working.

Summary and outlook

The strong recent performance of the Group has continued in the first six months of the current financial year. The Group has delivered further revenue growth, a strong underlying profit performance and continued cash generation and we continue to see tangible benefits coming from our business improvement initiatives.

In India, with the expansion of the operations in Bellary now underway, an order book of £124m and a growing level of new opportunities, which includes a number of higher margin commercial projects, our joint venture business remains well positioned to take advantage of a market for structural steel which continues to improve.

With a quality order book and a stable pipeline of UK opportunities, the outlook for the Group remains good. As a result, we expect further progress during the second half of the financial year and remain confident that the Group's full year results will be in line with expectations.

Alan Dunsmore

Chief Executive Officer