Final Results

SWP Group Plc

("SWP" or the "Group")

Final Results for the year ended 30 June 2011

SWP Group (AIM: SWP), the industrial engineering group, is pleased to announce its final results for the year ended 30 June 2011.

Highlights

n Group sales declined by 7.7% to £24.5M (2010 - £26.6M).

n Absence of major international infrastructure projects has meant reduced sales opportunities.

n Gross margins reduced by impact of significant increases in prices of certain globally sourced raw materials.

n Stringent cost control measures were applied during the year to maximise sales per employee and minimise the impact of these reduced margins.

n Operating profits, before exceptional costs, declined to £2.0M (2010 - £3.3M).

n An additional payment arising from the purchase of Ulva assets and the demonstrable success of the acquisition has given rise to a royalty payment of £701,000 written off in accordance with IFRS 3.

n Basic earnings per share reduced to 0.24p (2010 - 0.84p)

n Market conditions in the UK and Europe remain depressed as a result of general economic conditions and overall lack of confidence.

n Despite very challenging market conditions, Fullflow (Rainwater Management segment) and Ulva (Polymer Membrane segment) delivered commendable results and remain well positioned in their respective markets.

n Crescent endured a particularly difficult year due to market stagnation but has turned the corner since the financial year end.

n The debt reduction plans are still in place but progress impacted by one off factors.

n In light of current economic uncertainty your Board has taken the prudent step of recommending the payment of a reduced dividend.

Chairman's Statement

Corporate Review

As last year's annual results, for the period to 30th June 2010, showed the most successful set of results in the Group's history it was always going to be a difficult act to follow. This has been true for the year up to 30th June 2011 due to the state of the markets in which we operate, the economic outlook and the fact that, as a project driven network of businesses, we did not have the luxury of a further major international infrastructure project like Barajas Airport in Madrid. 

That said, however, our management teams have pulled together in these difficult economic times and made a good and pragmatic attempt to maximise profitability in each business unit. Back in 2010 it is fair to say that a disproportionate level of our profitability within Fullflow was earned by our Spanish subsidiary. This year, however, each of the operating units within Fullflow has operated profitably on an individual basis, contributing to the brand awareness that Fullflow represents as a European leader in the provision of Rainwater Management Systems to a wide range of customers located in a diverse number of international markets. Much has been done to cement Fullflow's market leading credentials in Europe which we anticipate will help to foster growth elsewhere in the world.

DRC-Ulva performed better than anticipated and continued to develop its role as a key provider of CUI (Corrosion Under Insulation). This is especially so given the profile of installation projects, their timing, specification requirements and the financial implications of the oil and gas companies when mobilising their investments all over the world. DRC-Ulva is a provider of CUI solutions to oil, gas and petrochemical companies in an increasing number of foreign jurisdictions. 

The Group remains a focused provider of industrial engineering based solutions driven by our highly respected brands which are synonymous with quality, reliability and a service-oriented culture which customers have come to expect and rely upon. Our strategy is to strive for market leading positions in niche markets and to work closely with key customers and strategic partners to deliver compelling business solutions and promote mutually beneficial long-term relationships.

As both Fullflow and Ulva grow internationally, future emphasis will be directed towards the choice of business partners so that our platform can be replicated in a controlled manner within a growing number of international territories particularly where we perceive growth opportunities to be more readily available than is currently the case in our main European markets. This approach to international development is likely to be the cornerstone of the Group's strategy in looking for growth in new markets such as South America, the United States and Asia whilst we wait patiently for signs of economic recovery more locally.

Results

Turnover in the year to 30th June 2011 fell by 7.7% to £24.5M (2010 £26.6M) due, in the main, to the absence of any major infrastructure projects in the year. This shortfall in revenue, together with the impact of a very difficult year at Crescent, resulted in a reduction in operating profits to £1.6M (2010 - £2.7m) and our results were further affected by four factors: firstly the payment of royalties arising from the acquisition of the Ulva business (£701,000 - see comment below), secondly exceptional redundancy costs (£287,000: 2010 £442,000), thirdly the application of IFRS based adjustments relating to the amortisation of intangible assets (£165,000: 2010 £165,000) and finally a non-cash item related to share options (£38,000: 2010 nil). As a result, pre-tax profits fell much more sharply to £548,000 (2010: £2,274,000).

The Ulva royalties payment was made to the liquidator of Ulva Limited under the terms of the Asset Purchase Agreement. This amount is refundable from any excess funds available at the conclusion of the liquidation process. Although this remains a contingent asset, which is not recognised in these financial statements, we remain optimistic that it will be recovered either in full or in part.

Business Review

Further progress has been made at Ulva whose target customers remain international oil, gas and petrochemical majors based in all corners of the world. Considerable work has been carried out in gaining additional product specification from customers in new and existing territories, which should lead to the award of new business as projects near commencement. As forecast in last year's Report, the year to 30th June 2011 has seen the continuation and completion of a number of ongoing projects abroad where our cladding system for CUI (Corrosion Under Insulation) has been specified as the system of choice. Greater emphasis will now be placed on further emerging markets in South and North America where, as ever, the growth period between product specification and the award of a supply contract can extend to a number of years. Product innovation is also high on Ulva's list of priorities. We face a number of technical challenges including the raw material price increases. These challenges will impact on margins and the constant need to refine product effectiveness in conditions where customers are continually looking for enhanced solutions to the prolonged protection of their pipework installations and the ultimate extension to the lifespan of their oil and gas assets.

Fullflow has experienced a difficult but robust year with considerable emphasis deployed towards the improvement of our internal process controls and methods by which we operate contracts within diverse markets. By the very nature of transacting within the construction sector, Fullflow has had to concentrate on its efficiency on site and to meet the demands of its valued customers in highly priced competitive market conditions. Much work remains to be done in terms of IT development, procurement and the establishment of a coherent sales and marketing strategy, not only in the UK market but also in France, Spain and further afield where the choice of strategic partners is important. New senior management have been introduced to run Fullflow and develop the platform which has been created. This new "leaner and meaner" team are ready, willing and able to drive Fullflow forward as and when the damages of the recession subside.

No better example of the economic downturn and its effect on the construction/building sector can be seen than in the markets served by Crescent. Crescent currently supplies spiral, helical and straight metal staircases to a wide range of customers throughout the UK. During this past year, it has proved difficult to shake off recurring losses from the lack of volume due to the state of the construction market. Despite these conditions, however, the management team at Crescent have worked tirelessly, under new leadership, to improve performance and greater productivity in its design office allied to the improvements from the use of "Solid Works" allowing the respected Crescent name to remain as a brand of choice in a market where brand leadership is concentrated in only a few leading suppliers amongst whom Crescent rank.

In anticipation of the economic downturn, Crescent cut back its cost base two years ago and although still making a loss, as at 30th June 2011, it has been rewarded in the current financial year with an enhanced order book which has allowed Crescent to fight its way back into profit. Despite there being casualties in this niche sector, Crescent has every opportunity to grow profitability when market conditions improve and is currently focusing on sales opportunities.

Borrowings

As shareholders know it is one of the Board's foremost objectives that SWP achieves a debt free status at the earliest opportunity. Debt as at 30th June 2011 has fallen to £3.9M (2010 - £4.1M) or by 4.8% but this disguises the fact that cash generation by the overall business, and Ulva in particular, has been strong. During the year we have deployed significant resources into key areas of the business including, inter alia, £701,000 in royalties which is potentially recoverable, £287,000 into exceptional redundancy costs in order to reduce overheads, £310,000 in purchasing extra raw materials ahead of price increases and to ensure a continuous allocation from Japan, a further buy-in of shares £188,000 into our Treasury pot (taking this investment to just short of £525,000) and the payment of dividends of £402,000, taking approximately £2M out of our derived cash flow in the year.

Given the cash generative nature of SWP's businesses we taken the view that the application of these various funds has been in the Group's best short term interests and has merely served to delay by around one year the reduction in debt to nominal proportions. Since year end our term debt has been further reduced by around £659,000. The remainder of the Group's Statement of Financial Position remain in good order with reduced trade creditor days and the absorption of deferred tax assets and liabilities.

Cost Control

A feature of the results for the year to 30th June 2011 has been the stringent control over costs within each and every Group business. Operating expenses fell to £7.6M (2010 - £8.6M) a reduction of 11.7% at a time where turnover fell by 7.7%. From the table below shareholders will see that radical changes to our operating efficiencies have allowed both sales and operating profit per employee to advance strongly as detailed below:-

* - before adjusting for negative goodwill credited in the year

At the present time we have 145 full time employees engaged within the Group and it is envisaged that subject to changes in market dynamics this is not likely to exceed 150 during the financial year to 30th June 2012.

Dividend

Last year saw the payment of a maiden dividend of 0.2p per share, and at the date of our interim report we anticipated that we would be in a position to recommend a similar dividend in respect of the year to 30 June 2011. However in recent months the global economic situation has deteriorated significantly and even the most renowned economic forecasters are finding it almost impossible to look into the future with any degree of confidence. Although the Group's geographical base is broader now than it has ever been, and although our cost base enables us to be more competitive than ever before, we are by no means immune from the effects of the economic crisis which is affecting the majority of our markets.

Reluctantly therefore we have concluded that at this particular time it would be sensible for us to adopt a cautious and pragmatic approach to our cash resources based on a desire for self sufficiency and for this reason we wish to recommend the payment of reduced dividend of 0.075p.

We very much hope that this will be a temporary blip in what will otherwise be a progressive dividend trend, and we hope shareholders will support the decision we have reached.

Taxation

The Group continues to benefit from the utilisation of losses incurred in earlier years, although on a reducing basis due to the underlying profitability of the continuing activities of the Group. The net tax charge represents current taxation due and payable of £154,000 of which £144,000 is in the UK and £10,000 overseas. For Accounts purposes this is countered by a deferred tax credit of £76,000 arising out of timing differences and rate changes reflected through this years tax charge. This is in compliance with IFRS accounting standards and leaves the net tax charge for the year at £78,000 (2010 - £591,000).

Earnings per share

Basic and fully diluted earnings per share reduced to 0.24p (2010 - 0.84p).

Prospects

Despite a slightly disappointing result for the year under review, during what can best be described as an extremely difficult and challenging economic environment, the Group remains not only profitable but cash generative and poised for future success.

We continue to make progress in international markets and can see great potential for our products through oil and gas companies choosing to specify the use of Ulva as their insulation product of choice.

Radical process controls have been introduced to the entire Fullflow organisation which will prove highly beneficial as the concerted push for increased levels of business in existing and new territories begin to bear fruit. The significant turnaround in Crescent's fortunes and the increase in profitability at Plasflow are pleasing features of the current year.

We are unable to predict with any degree of certainty or accuracy when growth is likely to return to the markets in which we operate. What we can do is reinforce the dedication and commitment of our management teams in operating our various businesses, as efficiently as possible, and to take advantage of all opportunities which exist globally as the main driver to our own organic growth in the future.

Alan Walker

Chairman

 Operational Review

Operational Review

Recruitment, retention and development of the Group's management and employees is a work-in-progress that is delivering rewarding results but there is still much more to do with an important emphasis on the recruitment and development of the sales team generally across the Group. Construction markets remain tough. For the year under review the contribution from major infrastructure projects has been lower and is the major factor contributing to the decline of revenues in the period of 7.7%.

The four year period from 2008 to date has seen a significant change in the mix of business within the Group but overall revenues have remained relatively constant. With the pursuit of continuous improvement together with the benefit of improved management, the number of employees has fallen from 280 in 2008 to 178 in 2011 and, at the date of this announcement, 145. As a proud supporter of the British manufacturing industry it is sad to see this magnitude of reduction in the workforce, however, it is precisely this reduction and the corresponding improvement in effectiveness in each of the business units that underpins the performance of the group and offers the continuity of employment for those that remain.

The effect of the substantial price increases in key raw materials can be fully observed in these results. Although a portion of the increases have been recovered through increased selling prices, the magnitude of some of the raw material increases have been such that our markets would not be able to bear them being passed on in full, with the inevitable impact upon margins.

Crescent 

Despite the best efforts of the loyal Crescent team under its new leadership, revenues remained largely consistent with the prior year and the operating loss increased to 15% of sales at £274K excluding redundancy costs. This performance falls short of expectation but also fails to reflect the tremendous progress that has been achieved in broadening the scope of Crescent's activities along its supply chain and beyond the supply of designed to order stairs. The reward for Crescent's efforts is shown post year end as the order book has been doubled and the projection for the current year is much improved.

Crescent remains a strong brand in its sector and can realistically be expected to provide a return on the Group's investment in the future. Having supported the losses in the business during recent years management continues to extend the activities of the business as its traditional construction market begins to recover.

The continued development of Crescent's sales team remains the key short term challenge.

Polymer Membrane Division

It is within this division that key raw material price increases have had the most significant impact. Chlorosulphinated Polyethelene has increased by 140% during the last two years but has now stabilised, and special grades of Polypropelene have also seen substantial increases. High performance products such as Ulvashield and Drinking Water Inspectorate approved Hylam FPA serve discerning customers that value the benefits that these products deliver and it has been possible to partially pass on the increases to these customers. Some less differentiated products serving commodity applications are unable to bear the cost of such increases and it is likely that the business will be more profitable without these lines.

Development prototypes based on lower cost raw materials have been produced and found to perform well under test. They do not yet, however, match the truly outstanding performance of the current products and are more complex to process. These compounds are available if required and reduce the risk associated with the dependence on a single raw material. The strategy, however, is to continue to supply the products that are well known and valued in their markets, the performance of which has been proven by the passage of time.

Ulva

Ulva performed better than expected in the year under review, primarily due to growth within existing major projects. Additionally, progress has been made within geographic territories that have been the attention of business development efforts. Ulva's system for the management of Corrosion Under Insulation (CUI) in oil, gas and petrochemical applications continues to be increasingly specified for major projects. In spite of this the natural peaks and troughs associated with a project based business means long term growth remains the targeted outcome for the business.

Fullflow Group

Despite a significant reduction in major project volume in the period under review, revenues declined by only 7% to £14.7M. The substantial restructuring of the business completed at the end of the prior year has allowed every Fullflow business unit to operate profitably in difficult market conditions. Nevertheless, under new leadership, the business is not complacent and is continuing to drive improvements in operating performance and procurement strategy. This stable and profitable operating base provides a platform from which the business can explore growth opportunities in international markets.

The continued development of Fullflow's sales team, particularly for the UK and international activities is a key short term requirement.

As part of the Fullflow Group the Plasflow operations based in Rotherham have enjoyed a solid performance during the year. Operating from "state of the art" facilities significant growth opportunities are available to Plasflow born out of the strategic relationships that have been forged within the nuclear industry. Plasflow's ability to find engineering solutions at most of Britain's ageing nuclear plants forms a key part in this developing business's future plans.

Health & Safety

SWP's Group Health and Safety team, which comprises members from each of the operating business units, is to be congratulated on delivering further solid progress across the Group, particularly in the area of identifying and sharing best practice.

C A Stott

Managing Director  

Consolidated Statement of Comprehensive Income

Turnover and operating profit all derive from continuing operations.

There were no recognised gains and losses for 2011 or 2010 other than those included in the Group Income Statement.

Consolidated Statement of Changes in Equity

Consolidated Statement of Financial Position

Consolidated Statement of Cash Flows

Year ended 30 June 2011

Notes to the Financial Statements

1. BASIS OF PREPARATION

Whilst the information included in this final results announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ("IFRSs") as adopted for use in the European Union and as issued by the International Accounting Standards Board, this announcement does not itself contain sufficient information to comply with IFRSs.

The final results announcement for the 12 months to 30 June 2011 has been prepared on a consistent basis with the financial accounting policies set out in the Accounting Policies section of the SWP Group Plc Annual Report and Financial Statements 2010, except for the adoption of an accounting policy for share based payments following the issue of share options in the year.

2. SEGMENTAL REPORTING

BUSINESS SEGMENTS

SEGMENTAL REPORTING (CONTINUED)

SEGMENTAL REPORTING (CONTINUED)

Management has determined the operating segments based on the reports reviewed by the board that are used to make strategic decisions. The board reviews the results of each entity within the group on a regular basis and accordingly each entity is deemed to be an operating segment. The operating segments have been aggregated into the reportable segments disclosed above in accordance with IFRS 8 Operating Segments.

The Board are provided with financial reports for each of the reportable segments above on a regular basis. The United Kingdom is the home country of the group.

The directors consider that each entity within the group is an operating segment as information about each company is regularly presented to the board.

Sales between segments are carried out at arm's length. The revenue from external parties reported to the board is measured in a manner consistent with that in the statement of comprehensive income.

The amounts provided to the board with respect to total assets and total liabilities are measured in a manner consistent with that of the consolidated financial statements. Assets are allocated based on the operations of the segment and the physical location of the asset. Liabilities are allocated based on the operations of the segment.

Information in respect of revenues from external customers and detailed splits of revenues between individual foreign countries has not been disclosed. This type of information is not presented to the board when making strategic decisions and is not readily available.

There were no major clients or contracts representing more than 10% of group revenue in the current year. In the prior year, one contract in the year generated revenues of £3.3m in the rainwater management segment, which represented more than 10% of group income.

The accounting policies note for revenue gives further information about the classifications of revenue between the business segments for this and the comparative year. The rainwater management segment is construction contract based in nature and its revenue is accounted for in accordance with IAS11, Construction Contracts. The staircases and polymer membrane segments relate principally to the supply of goods, accounted in accordance with IAS18, Revenue. The supply of services for these segments is incidental to the supply of goods.

GEOGRAPHICAL SEGMENTS

The Group's operations are located in the UK, France and Spain. 

The following table provides an analysis of the Group's sales by geographical market, irrespective of the origin of the goods/services

The following is an analysis of the carrying amount of segment net assets and additions to property, plant and equipment and intangible assets, analysed by the geographical area in which the assets are located.

3. ROYALTIES

Included within the Consolidated Statement of Comprehensive Income is a royalty payment of £701k. This payment was made under the terms of the trade and Asset Purchase Agreement for Ulva Limited entered into in 28 November 2007 and which gave rise to a £6.175m fair value gain in the June 2008 financial statements under IFRS3 (Business Combinations). Under the terms of this agreement a royalty payment related to income for the three years to 30 November 2010 would be payable in the event that sufficient assets had not been realised by the liquidator, from whom the trade and assets of Ulva Limited were purchased, to repay creditors in full.

In prior years the Directors were of the opinion that the chances of this liability crystallising were remote however during the year ended 30 June 2011 the liquidator requested payment. This amount will be repaid from any excess funds available at the conclusion of the liquidation process and hence is a contingent asset. Given the uncertainty concerning the amount of available funds the Directors do not consider it appropriate to recognise the contingent asset and have therefore expensed the payment in the year. No further amounts are due by SWP under the terms of the Asset Purchase Agreement.

4. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the parent company by the weighted average number of ordinary shares in issue during the year.

Diluted earnings per share is calculated by dividing the profit attributable to equity holders of the parent company by the weighted average number of ordinary shares in issue during the year shares plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares.

Treasury shares are deducted from total shares in issue for the purposes of calculating earnings per share.

The basic earnings per share is 0.24p (2010 - 0.84p).

The diluted earnings per share is 0.24p (2010 - 0.84p).

The basic earnings per share calculation for the year ended 30 June 2011 is based on the weighted average of 198,495,965 (2010 - 200,065,417) ordinary shares in issue during the year and the profit of £470,000 (2010 - £1,683,000).

The diluted earnings per share calculation for the year ended 30 June 2011 is based on the weighted average of 198,690,903 (2010 - 200,065,417) ordinary shares in issue during the year and the profit of £470,000 (2010 - £1,698,000).

A copy of the financial report and accounts will be dispatched to shareholders by no later than 16th December 2011 and a copy will also be available on the Group's website, www.swpgroupplc.com 

For further information or enquiries please contact:

J.A.F Walker D.J. Pett Richard Kauffer/Daniel Harris

Chairman Finance Director Nominated Advisor & Broker

SWP Group plc SWP Group plc Peel Hunt LLP

Tel office: 01353 723270 Tel office: 01353 723270 Tel office: 0207 418 8900

Mobile: 07800 951151 Mobile: 07940 523135