2019 Final Results & Further COVID-19 Update

Dissemination of a Regulatory Announcement that contains inside information according to REGULATION (EU) No 596/2014 (MAR).

nmcn PLC

2019 FINAL RESULTS & FURTHER COVID-19 UPDATE

nmcn PLC ("the Company" or "the Group" or "nmcn"), is a leading engineering and construction company, delivering major water, built environment and critical national infrastructure projects across the UK. Before reporting and discussing the final results for the financial year ending December 31st 2019, we would like to provide a further update on the implications of the COVID-19 situation for the Company.

*Restatement in relation to IFRS 16 - Leases

For further information:

John Homer, Chief Executive - 01623 515008

Daniel Taylor, Chief Financial Officer - 01623 515008

Financial Highlights

· Revenue increased by 18.9% to £404.66m (£340.45m)

· Profit before tax increased to £7.44m, from £6.01m an increase of 23.9%

· Profit before tax and non-recurring items totalled £10.39m (£7.87m); solid progress across most business units

· Full year dividend of 9.0p (2018: 18.0p), based upon interim dividend paid and no recommended final dividend

· Cash position remains positive with year-end balance of £25.81m

· Secured workload, as at 31 March 2020, for work to be constructed during 2020 stood at £293.64m which represented just under 80% of anticipated revenue for 2020, and was in line with management's expectations for a transitional year in the Water Segment. This is currently under review due to the impact of COVID-19.

John Homer - Chief Executive - commented:

"The 2019 results reflected a strong underlying performance with good progress towards achieving the targets of our strategic plan and building a solid platform for further growth. The strength of our ongoing operations allowed us to continue to exercise rigour in the work that we chose to take on whilst our people remained the overarching differentiator and their performance in delivering our strategy continues to vindicate investment in the development of our talent pool.

Our focus on cash maintained positive balances throughout the year and culminated with a year-end balance of over £25m. This has enabled us to continue investing in our own development pipeline and complete our first acquisition for many years.

In the near-term we need collectively to focus on confronting the implications of COVID-19 and I am convinced that the commitment of our highly skilled and dedicated workforce will once again be a major factor in achieving this as a priority. But equally, we should not lose sight of the fact that the Company is increasingly well placed to address the growing opportunities that lie ahead in the markets it chooses to serve."

OUR OPERATING AND FINANCIAL REVIEW

Overview of 2019

The Group has delivered an acceptable financial performance within difficult market conditions for construction and the uncertainty that prevailed in the UK economy generally. Good progress has been made against our strategic plans.

Revenue has increased significantly, compared to the previous period, however the net return on these revenues has been impacted by non-recurring items in the Built Environment segment, where the Board has taken a considered approach to likely recoveries. The Water segment has seen significant growth in the second half of the year as Asset Management Period ("AMP") 6 Framework comes to its natural conclusion. Reduced returns in the segment reflect the tunnelling cost overruns on a major infrastructure scheme.

Further investment has been made in adherence of governance controls to manage risk, and into the development of our people to meet the increasing demands of our customers for a high-quality service. The Group is therefore well positioned to take advantage of the increase in infrastructure spending plans that is anticipated in the medium-term.

The continuing successes in securing framework places for all our business units, ongoing profitability and our cash position are further significant positives which give the Board confidence in the Group's long-term sustainable future.

Our operating structure

Our operational activities are divided into two operating segments, Water and Built Environment ("Our segments"). These segments are clearly defined, based on the differing services they provide to the distinct clients that they serve.

During 2019, the operating segments were serviced by five business units. Each business unit has a clear, focused offering to their customers. These business units have the skills and experience to meet the needs of our customers and work effectively in these markets. They provide expertise and innovation to deliver added-value to the projects they undertake.

From 1 January 2020 our two Water business units were amalgamated under one senior leadership team to provide a co-ordinated and cohesive approach, focused on the products and services which they provide to our customers. This structure will maximise the opportunities available to us in the Water industry and aligns to our strategic goals and direction. This will be complemented by the three existing business units in the Built Environment segment, and one additional business unit to service our Power & Industrial clients.

Our financial performance

The Group has delivered a significant increase in revenue of 18.9% year on year from £340.45m in 2018 to £404.66m in 2019. The revenue increase reflects additional turnover in both the Water and Built Environment segments of the Group and was in excess of management's expectations for the period.

Profit before tax for the year totalled £7.44m compared to a restated figure of £6.01m in 2018, an increase of 23.9%, and in line with the Board's expectations. The Group has implemented IFRS16 using the full retrospective method, which has had negligible impact on the prior year. Profit before tax and non-recurring items for the year ended 31 December 2019 amounted to £10.39m compared to £7.87m for 2018, as restated for IFRS 16, an encouraging 32.0% increase. Basic earnings per share reflected a 20.8% increase to 57.36p (2018: 47.50p) on an unchanged tax rate of 19%.

Solid progress has been achieved across most business units and sectors. The Telecoms business unit results were a significant improvement from 2018, with excellent opportunities for 2020 and beyond. Overall, the Board is satisfied with the results for 2019, however further improvements can be made to the net return on sales and this continues to be a key strategic focus.

Water segment

The growth in revenue within the Water segment has been significant in the year and is up 15.6% on last year, an increase of £38.05m. The growth principally reflects our focus on delivering exceptional customer service and has been achieved through new framework awards, an increase in major infrastructure works, and the ongoing performance on our Asset Management Period ("AMP") 6 Frameworks.

The operating profit of £7.58m is a slight decrease on last year's £8.10m with operating margins also lower as a result of the conclusion of the AMP cycle and close out of the remaining schemes. Tunnelling overrun costs on a major infrastructure scheme had an adverse effect in the year on the operating margin of the segment. The operating profit performance was in line with our anticipated strategic plans for the financial year.

There has been further investment in organisational capability during 2019, to maintain our competitive advantage and to ensure that we are best placed to deliver on the new major frameworks we have been awarded. This investment and the new Group operating structure will benefit risk management, project management and our customer focus.

The continued investment in our people and their development, to ensure the sustainability of the business, means the segment is cautiously optimistic for 2020, with a stronger outlook for future years when AMP7 is at full capacity. The number of water frameworks that have been retained and the increase in new frameworks awarded, with both new and existing customers, is extremely encouraging.

The acquisition of Lintott Environmental Technologies Limited ("LET") which has a wholly owned trading subsidiary called Lintott Control Systems Limited ("LCS"), was our first acquisition in recent years and one that offers an excellent opportunity for nmcn to strengthen and expand an already established offering to the UK water industry and potentially other markets in the future. A Cash consideration of £1 was paid on the acquisition, however further consideration may be due and an initial estimate of £2.18m has been recognised for contingent consideration, which is reflective of fair value as at the acquisition date. By providing off-site build, chemical dosing systems, motor control centres, and control systems, the acquisition complements our full asset lifecycle management offering to the water sector in offsite manufacture, production and maintenance of assets. LCS contributed positively to the Group's result in the final quarter of 2019.

As at 31 March 2020, the secured workload for construction during 2020 stood at £157.54m. This was behind the position for 2019 and in line with revenues achieved in 2018, but would still represent in excess of 70% of management's expectations for revenue in 2020. Opportunities are available for our people in the Built Environment segment due to the growth profile and additional potential workload. The anticipated reduction in revenue for 2020 is due to the current visibility of workload for the AMP transitional year, but we expect this to increase over the medium term. This is currently under review due to the impact of COVID-19.

Built Environment segment

*Before non-recurring items as defined

The Built Environment segment saw an increase in revenue in 2019 of 28.1% to £122.78m, which coupled with a significant turnaround in the Telecoms business unit to produce an operating profit before non-recurring items of £3.04m, compared to a marginal loss in 2018. 

As anticipated last year, a restructure of the Telecoms business unit, which included a new operating structure and a change in leadership to improve operating performance, was implemented. The restructuring also involved new commercial terms being agreed with the business unit's major client and a more appropriate cost base alignment. The benefits of these changes are evident, and we have seen an increase in operating profit for the business unit to £1.43m from a loss of £2.8m in 2018. The current operating performance has provided a better quality of earnings for the segment. The new frameworks agreed for both new build schemes and the ongoing maintenance of existing networks gives the Board the confidence in a positive outlook.

The Building business unit has continued to perform strongly in challenging market sectors, where delays from our customers due to the uncertainty surrounding Brexit have undoubtedly had an impact. The underlying performance of the business has been strong, excluding the non-recurring item outlined below relating to the administration of a member of our supply chain.

The nmcn Investments development portfolio has grown in 2019, however currently this is on hold and all sites suspended due to the impact of COVID-19.

The Highways business unit has suffered from a delay in local infrastructure expenditure against management's expectations for the year, but has nonetheless contributed positively.

The Built Environment segment, as at 31 March 2020, had secured work to be constructed during 2020 of £136.10m, an increase of 24.9% on the position last year. This represented slightly above 85% of management's revenue expectation, but is currently under review due to the impact of COVID-19. In 2020 it is anticipated that the Group will reflect a more balanced mix of turnover and profitability across the two business segments.

Non-recurring items

The non-recurring items in 2019 related to the issues described below and in total amounted to £2.95m (2018: £1.87m) before tax. These items are not attributed to the ongoing trading of the Group and are explained in the following paragraphs accordingly. The profit before non-recurring items is deemed by the Board to be an alternative performance measure ("APM"). The Group has used this APM to aid comparability of its performance and position between periods, but these metrics are not comparable with other businesses as they are specific to nmcn.

Legacy contract losses (see below) accounted for £1.49m of non-recurring costs and revenue adjustments in the period, £0.74m and £0.75m respectively (2018: £0.51m, solely costs). 

Non-recurring direct costs of £1.86m (2018: £Nil) relating to the administration process of a member of the Group's supply chain have been included as non-recurring. The Board has categorised these costs as non-recurring due to the size of the impact and the infrequent nature of the event. The Board continues to enhance the procedures and controls around the financial viability of its supply chain.

During 2018, the Group rectified significant defective work resulting from a substandard product of an aggregate supplier, at a cost of £0.47m. This situation is unlikely to be repeated and recovery is being progressed. In the previous year a contingent asset was not recognised in line with applicable accounting standards. In the current year the Board is satisfied, based on expert opinion, that the recovery of the direct costs of the asset should be recognised at £0.39m. For consistency with the prior year, the Board has classified this item as non-recurring.

Further details of non-recurring items can be found in note 2.5. 

Legacy contract

Legacy contracts are construction contracts entered into at the height of the recession, before 31 December 2013, and which carried a higher than normal contractual and commercial risk. These contracts negatively impacted the Group's income statement in 2013 and subsequent years. Only one legacy contract now remains to be resolved.

The Group has been pursuing claims on this contract with the client for sums greater than the carrying value and will continue to do so until the situation is resolved. The Directors have sought to make the estimate as precise as possible by reflecting the views of independent quantum and legal experts who were appointed by the Directors for their ability, qualifications and experience in this field.

The independent quantum and legal experts, in conjunction with management, considered a number of factors when making their assessment, such as contractual terms, work performed, claims for variations, submissions for extensions of time, claims for loss and expense and expected time frames in which settlement is likely.

Whilst the Directors are making every effort to seek a swift resolution to the matter, they are committed to achieving the best possible result for the Group. The ultimate settlement of this matter may take in excess of twelve months to achieve based on current expectations on Court hearing dates.

Risk

Operating in the construction industry presents inherent risks as one of the key components, by its nature. We therefore have robust risk identification, assessment and control processes to manage both material and day-to-day circumstances.

The Group's risk and governance model is designed so that the Board maintains overall responsibility for risk. Each business unit identifies, controls and mitigates threats within their own operations. The reporting structure ensures that once the risk appetite is determined by the Board, risks are managed within acceptable tolerance levels.

Tendering opportunities, including pre-qualification questionnaires and framework submissions, are assessed subject to the strategic objectives of the business units. Governance levels are set according to risk appetite, with significant involvement of the Chief Executive and Chief Financial Officer. At each Board meeting high risk opportunities are presented and if appropriate, ratified for the Company to progress.

The Chief Executive and Chief Financial Officer meet with the business units on a monthly basis throughout the year with an established agenda and reporting format covering a range of metrics. This allows the Executive to maintain oversight and control over the material aspects of strategy, financing, operations and risk.

The Board has taken action to enhance further its risk management processes and controls around the financial viability of its supply chain, to mitigate any future instances of loss as far as possible. The procurement and supply chain function has been strengthened by recruiting an experienced director to lead this significant central function and become part of the Executive Administration Board (EAB). The strategic direction of the function is to engage in longer term partnerships with key supply chain disciplines, as well as additional governance around significant work packages at the tender stage. Currently enhancements are being developed to the Approved Vendor List (AVL) and to introduce a balanced scorecard approach to our supply chain partners.

Financing

The Group seeks to maintain cash availability to support growth across all contracts and segments. It also targets further improvement to receivable payment terms to allow greater headroom. Where short-term fluctuations exist, opportunities to make early payments to our supply chain are explored. There is currently no overnight pooling or investment due to the small returns achievable.

The Company has an asset hire purchase facility in place to enable the ongoing capital expenditure for the Group's core assets, which it utilises across a large number of its contracts.

Taxation

The current tax charge of £1.53m (2018: £1.19m) relates to tax on profits at 19% in addition to a reduction in the deferred tax rate applicable to taxable temporary differences. All Group trading companies will continue to pay tax as quarterly payments on account.

Dividend

As part of a review of capital allocation across the business, and recognising the uncertainties posed by the COVID-19 crisis, in particular the possibility of further restrictions or extended time frames, the Board will not be recommending a final dividend for 2019 (2018: 12p). The Board is very mindful of the importance of dividends to all shareholders and, should circumstances permit, a special interim dividend may be made later this year.

Cash generation and working capital

The year-end cash balance remains positive and in line with the Board's expectations at £25.81 m (2018: £33.35m), a reduction from the previous year due to: significant revenue growth in the period; the mix of contract and client payment terms; and the continued strategic investment in nmcn Investments. There is also greater emphasis on cash management due to market conditions and high-profile mid-market failures in the construction industry.

The main drivers in relation to the reduction in operating cash flows relate to revenue increasing by 18.9% and an increase in contract assets during the final quarter, taking the average credit period extended to our customers to 33 days (2018: 28 days). The outflow of cash from the increased revenue and changes in average terms amounted to £11.39m (2018: £1.29m inflow) across trade and other receivables. Average receivable days increased during the year, as a reduction in favourable payment terms prevailed. This coupled with the growth in the Telecoms business unit, which due to the nature of the work and framework terms, has a longer cash conversion cycle, required an investment in working capital.

The Board's strategy to invest in nmcn Investments continued in 2019 with an outflow through investments in joint ventures of £5.83m (2018: £8.48m) which has also impacted operating cash flows. The ongoing schemes are anticipated to increase the quality of earnings going forwards. However, currently this is on hold and all sites suspended due to the impact of COVID-19.

The average credit period taken on purchases has remained consistent at 39 days (2018: 38 days) as we continue to ensure sufficient payment terms are offered to maintain the best supply chain and achieve the most commercial pricing. The inflow of cash of £4.29m (2018: £19.67m) is due to the increase in trade and other payables, excluding the acquisition of LCS.

As a result of the Group's continued growth, the net investment during the year on property, plant and equipment remained consistent at £3.07m (2018: £3.26m), in line with the Group's strategy to purchase equipment where possible. Following this investment in capital assets the closing net book value of property, plant and equipment stood at £28.78m (2018 restated: £22.59m), which positions the Group to deliver its targeted growth through 2020 and beyond.

The non-cash charge for share-based payment expense of £0.87m (2018: £1.07m) has added to the operating cash generation. This was an expense in the year through the statement of comprehensive income, and the same amount has been credited directly to equity in line with applicable accounting standards, increasing the Group's reserves. A cash outflow of £1.67m (2018: £Nil) to settle the tax liabilities due to net settling of the scheme was made during the year.

Cash allocation

The Group's approach to cash allocation continues to be a blend of investing in the business to support organic growth opportunities, preserving a prudent capital structure, and delivering returns to shareholders via a progressive dividend policy. 

Our operating model requires investment in the purchase of our own assets to ensure additional returns are made from the utilisation of the fleet across all business unit contracts. We therefore continue to invest in our fleet to provide both capacity and reliability. 

We have renewed our existing banking facilities for a further year on similar terms, with the opportunity to increase for an agreed 6 month period should there be a requirement.

The Water Segment, and the majority of the Built Environment segment, excluding the Building business, have been designated by the Government to be critical to the COVID-19 response. There is a clear commitment and ongoing demand for our directly delivered products and services from our customers. Key considerations around anticipated revenues and the covenants of our major customers, have driven additional scenario planning. These scenarios have taken into account the current and potential impacts of COVID-19 on the business. We seek to retain a sufficient cash balance to provide the business with a level of balance sheet resilience that the Board believes to be appropriate during these uncertain times.

As outlined above, different business segments reflect changes in average credit periods and prior to the emergence of COVID-19 we were seeing growing working capital requirements as a consequence of increasing organic growth opportunities.

Since the escalation of the COVID-19 pandemic, the Board has been focussed on taking actions to preserve cash and protect liquidity in a way that does not compromise the long-term prospects of the business. To this end we have implemented a temporary and voluntary reduction in the remuneration of the Executive Directors of 20% and a 10% reduction for the senior management team (effective 1 April 2020). All non-essential capital and overhead expenditure has now been deferred, and a hiring freeze has been implemented along with various other cost reduction initiatives. Measures taken to reduce cash outflows include the deferral of VAT payment, financing costs, and utilisation of the Government's Job Retention Scheme. Additional borrowing facilities are being considered by the Board and discussions are progressing with Lloyds Bank, and should it be required, to utilise the recently announced Coronavirus Large Business Interruption Loan Scheme (CLBILS).

The investments made in funding and constructing residential developments are due to crystallise in 2021 and beyond. However, this programme is currently on hold until clarity can be given on the COVID-19 position.

The Board seeks to maintain its policy of a progressive dividend, subject to COVID-19, and in line with shareholder expectations.

Restatements

During the year, the Group implemented IFRS 16 and has restated its 2018 results using the full retrospective approach. There was no significant impact on opening retained earnings as at 1 January 2018 or the income statement for the year ending 31 December 2018.

Details of the restatement are set out in note 2.

Summary and outlook

We identify our work carefully, from our chosen markets and in line with our vision and strategy, to ensure we deliver exceptionally for our customers.

Our continued focus on ensuring rigorous governance in contract selection and effective risk management coupled with the advancement of being an employer of choice for existing and new people will ensure that the momentum we have generated on achieving our goals, is maintained.

Concentration on the type of work to be undertaken will continue to build on the core strengths and capabilities of the Group. It is intended that we persist in playing to our strengths in the water sector while looking for growth in other areas to reduce our reliance on this market and mitigate the cyclical effects of the Asset Management Programme (AMP) procurement cycle.

The Board has taken a cautious view on the upcoming AMP transition year for our Water business segment which will give us the opportunity to position the Group to address the significant opportunities that are available to us in the medium to long term. The level of water frameworks that have been retained and the increase in new frameworks achieved with new and existing customers is extremely encouraging. 

The stated Government commitment to investment in national infrastructure gives us confidence in the medium-term workload opportunities for us to address. Of particular interest to us is the well published strategy for the immediate investment in broadband technology. We are very well positioned as one of a few companies with the necessary skill, critical mass and balance sheet strength to be able to leverage the potential for growth in this market in the immediate future.

We entered the current year with a robust operational and financial platform from which to address promising market opportunities. However, over recent weeks we have had to adjust to the rapidly evolving challenges of COVID-19 and our response will continue to balance self-help with Government initiatives in a holistic and fair manner. We are closely monitoring the COVID-19 situation, and following Government guidelines closely whilst communicating and collaborating with our colleagues, our customers, our supply chain partners and other stakeholders.

Group Statement of Comprehensive Income

Statements of changes in equity

Balance sheets as at 31 December 2019

Statement of cash flows for the year ended 31 December 2019

Cash and cash equivalents comprise funds held at the bank which are immediately accessible.

Segment revenue and profit

Year ended 31 December 2019

Year ended 31 December 2018

Segment assets

Other segment information

Joint ventures

E&P Enderleigh Ltd - (Development of residential property)

50% interest in a joint venture with Earl & Pelham Ltd

BENMC Alliance (Roundhills) Ltd - (Development of residential property)

50% interest in a joint venture with Brooklyn Ellis Ltd

Springfield ECO Ltd - (Development of residential property)

50% interest in a joint venture with Stagfield Group Ltd

BENMCN Alliance (Park Farm) Limited - (Development of residential property)

50% interest in a joint venture with Brooklyn Ellis Limited

During the year ended 31 December 2019 the Company provided services to its joint ventures as follows: