Final Results

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

NORTH MIDLAND CONSTRUCTION PLC

FINAL RESULTS

North Midland Construction PLC ("the Company" or "the Group" or "NM Group"), the UK provider of civil engineering, building, mechanical and electrical services to public and private organisations, announces its final results for the year ended 31 December 2017.

Highlights from the results:-

* Before charges relating to legacy contracts. Legacy contracts are construction contracts entered into at the height of the recession, before 31 December 2013, and which carried a high commercial and contractual risk. These contracts have negatively impacted the Group's income statement in 2013 and subsequent years.

For further information:-

John Homer, Chief Executive - 01623 515008

Daniel Taylor, Finance Director - 01623 515008

Financial Highlights

· Underlying profit before tax increased to £8.30 million (increase of 40.4%).

· Revenue increased to £291.77 million (increase of 16.5%).

· Secured workload for 2018 at circa £299 million (2016 Secured workload for 2017: £225 million), which equates to circa 90% of 2018 budgeted revenue (2016 proportion of 2017 budgeted revenue: 80%).

· Increased total dividend proposed to 6.0p (2016: 4.5p).

· Cash position remains strong. Year-end balance of £17.01 million (2016: £11.41 million, increase of 49.2%).

John Homer - Chief Executive - Commented:

"It is disappointing that focus on a healthy underlying Group performance from our continuing operations appears to continue to be diverted by the outcome on the remaining legacy contract.

We are pleased by the underlying position and in particular the success achieved on driving our cash balance and the quality of the forward order book.

There are positive signs of continued growth in our chosen market sectors. Our strategy is focused on realising the potential that exists for us to prosper through careful selection and execution of the work that we take on. Our forward order book is at just over 90% of this year's budgeted turnover with a healthy pipeline of future opportunities visible.

Our people are the overarching differentiator and the driver for our continued success. We will maintain our investment in the development of our talent pool.

The outlook for our future trading remains positive and provides the opportunity to further improve the earnings from our operations."

OUR OPERATING AND FINANCIAL REVIEW

Overview of 2017

This year has been a period of continuing to strengthen the business in preparation for a sustainable growth in quality of earnings and respectable dividend yields. Further significant investment has been made in implementing 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 now well positioned to take advantage of the increase in infrastructure spending plans that prevail. The net return is disappointing and has been significantly impacted by the remaining legacy contract. The underlying profitability, cash generation and secured workload for 2018 are the significant positives which give the Board confidence for the Group's future.

Group structure

Our operational activities are divided into six operating divisions working in five distinct market sectors (our segments). Each segment has a clear, focused offering to the customers that they serve. These divisions have the skills and experience to meet the needs of our customers and work effectively in these markets. This allows them to provide expert contribution and innovation to achieve added value to the work streams. From 1 January 2018 the Civils division will be absorbed into the NMCNomenca division, which in turn forms part of the Water segment. From 1 January 2018 the Board will review the Group's operational performance via two segments; the Water segment (NMCNomenca and Nomenca divisions) and the Built Environment segment (Telecommunications, Highways and Construction divisions).

Overall co-ordination of our activities is carried out through the Executive Leadership Team (ELT) which is chaired by the Chief Executive. Membership consists of the Finance Director, Directors of the divisions and the central services functions.

The overarching purpose of this body is to ensure consistency of best practice and to drive performance improvement across all of our activities.

Group financial performance

The growth in turnover of 16.48% to £291.77 million (2016: £250.49 million) is encouraging and is borne from our vision of growing revenues in our chosen markets with our repeat and framework clients. It is also very encouraging to see the level of new customers and enquiries in 2017 achieved through the quality of customer experience that the Group delivers.

Although not at the level the Board finds acceptable, an operating profit of £1.19 million (2016: £2.24 million) has been achieved in the year. The underlying profitability in the year of £8.30 million (2016: £5.91 million) is a significant increase on the previous year and shows the exceptional performance, in the main, of the continuing business segments. The impact of the legacy contract has once again reduced the net margin return.

The current tax debit of £0.26 million (2016: £0.57 million credit) arises due to current tax on profits at 19.25% in addition to a reduction in the deferred tax rate applicable to taxable temporary differences. Total comprehensive income for the year has reduced to £0.74 million (2016: £2.63 million) and in turn earnings per share has reduced to 7.31p (2016: 25.95p).

The Board is proposing to retain the final dividend at 3.0p, taking the total dividend for the year to 6.0p (2016: 4.5p). The total dividend is only covered 1.22 times (2016: 5.80 times) and has been proposed as an exceptional dividend, as per the Group's dividend policy, and is due to the underlying performance of the Group, the cash generation and the secured workload for 2018. The Board anticipates an improving performance for 2018 and beyond.

Legacy

Legacy contracts are construction contracts entered into at the height of the recession, before 31 December 2013, and which carried a high contractual and commercial risk. These contracts have negatively impacted the Group's income statement in 2013 and subsequent years. As at 31 December 2017, there is only one legacy contract remaining.

In the year to 31 December 2017, the total loss before tax recognised on legacy contracts was £7.29 million (2016: £3.85 million). During the year to 31 December 2016 the Group completed all onsite works for the one remaining legacy contract, thereby removing any further uncertainty around costs to fulfil the contract.

Contract revenue on the one remaining legacy contract has been recognised based on the prudent best estimate of the Directors as at 31 December 2017 of the amount recoverable from the client, with an amount outstanding included within trade receivables. Following a High Court ruling towards the end of 2017, which did not support the application of the well-established 'prevention principle' in relation to this contract, the Company has been granted leave to appeal this decision by the Court of Appeal. On the advice of the Company's lawyers the Directors will vigorously pursue this appeal, but have decided to make a further provision against the outstanding debt. This matter will be kept under constant review and further announcements will be made if appropriate. The Group is and will be pursuing claims with the client for sums greater than the carrying value. 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 12 months to achieve.

Group financial position

It is very pleasing to report that our key strategic focus around driving cash is evident in the increase in the year end cash balance of £17.01 million (2016: £11.41 million). The Group has integrated further visibility for the divisions, highlighting the importance of cash and improved discipline around cash collection and upfront agreement of contractual terms.

This has meant that despite the 16.48% increase in revenue the Group has reduced the average credit period taken by its customers to 32 days (2016: 33 days), leading to a slight outflow of cash across construction contracts and trade and other receivables of £0.64 million (2016: £0.94 million). The average credit period taken on credit purchases has also reduced to 43 days (2016: 52 days) due to shorter terms being offered to maintain the best supply chain and achieve the most commercial pricing. The inflow of cash of £7.58 million (2016: £4.56 million) due to the increase in trade and other payables to £68.72 million (2016: £61.15 million) is also due to the increase in revenue and increase in cash collection in the fourth quarter, giving a higher other taxes and social security costs creditor of £6.73 million (2016: £4.67 million). The Group ensures it has a sustainable working capital mix to support our growth across all contracts and segments and has secured increased banking facilities in early 2018 to allow us to do this. We are also targeting reducing creditor payment terms further to allow our supply chain to grow with us.

It is also pleasing to report that the net cash has increased to £12.04 million (2016: £7.43 million) which is due to the increase in cash above and despite an increase in finance lease borrowings. As a result of the Group's growth the net investment during the year on property, plant and equipment increased to £2.90 million (2016: £1.30 million), in line with the Company's strategy to purchase equipment where possible, rather than expense through operating leases. Following this investment in capital assets the closing net book value of non-current assets stood at £17.12 million (2016: £13.65 million), which positions the Group to deliver its targeted growth through 2018 and beyond.

Outlook

The UK construction industry is struggling to keep up with the demand to maintain the existing infrastructure and the need for investment to support future economic growth. The Group has established positions in these markets and is well situated to take advantage of the potential for further growth.

In excess of 90% of our 2018 turnover has already been secured and it is expected that the balance will be achieved from carefully selected projects during the first half of this year.

We remain confident in the outlook for the Group and expect the positive progress achieved to continue into 2018 and beyond.

Construction

Overall segment performance

Our Building division has grown rapidly over the past three years, and is anticipated to be a £40m plus turnover business. With our key senior staff now in place, we have clearly set out our growth plans and have a real opportunity to progress our business through 2018 and beyond.

Trading in 2017 has seen us reach our profit target, with turnover exceeding budget. We currently have a number of projects on site: Denby Street, Sheffield - a £24m student accommodation development with the second site at £8.5m for Host Student Operators and at Grove Park, Leicester a £1.7m new office project for Stephen George and Partners (Architects). This is another scheme for us on this business complex. We also completed the £4m Selly Oak student accommodation project in Birmingham during 2017. These schemes, coupled with exciting enquiries means that we are set to have a successful 2018.

We have plenty of opportunities available to us as the market is relatively settled and should be able to support our planned growth. Both the student accommodation sector and residential markets are still strong with regular opportunities being received. Equally, enquiries from the health sector are still encouraging and university funding for site development is still at a high enabling us to target schemes in both areas.

Financial performance during the year (excluding legacy contracts)

Outlook for 2018

Our intention is to strengthen our brand within the construction marketplace to ensure our offering is visible to all our customers to encourage new opportunities and repeat business. We continue to foster relationships with developers operating locally, including a series of opportunities with our joint venture partner Earl and Pelham Limited across the region. The first scheme of this nature, Enderleigh Mews in Nottingham, is a development of 10, four-bedroom houses in the picturesque grounds of the house formerly known as Enderleigh. The partnership will bring high quality, bespoke developments to Nottingham and the wider area.

Key targets for 2018 include:

· Enhancement of customer experience and support

· Develop supply chain relationships and management

· Continue with our positive staff culture, supporting all our team in their development

Power

Overall segment performance

The current financial year has been challenging operationally in many aspects with a downturn in customer spend which is forecast to continue.

With an eye to the future we have made changes to our operational teams and have overhauled our strategy in accordance with customer spend profile and marketplace funding. We intend to fully incorporate Civil Engineering projects and work into the NMCNomenca delivery division. This refocused and rebranded approach will enable us to target, secure and deliver major schemes from the power, energy and water sectors. The new structure will continue to deliver our current framework commitments within the small works team.

For continuity of service for our customers we are utilising the existing teams from Civil Engineering to deliver new projects.

Financial performance during the year (excluding legacy contracts)

Outlook for 2018

Development of a fully integrated Power business servicing the following areas whilst continuing to foster relationships with our key customers:

· Power Distribution and Transmission

· Wind

· Combined Heat Power

· Anaerobic Digestion

· Waste to Energy

· Biomass Fuel Handling

Highways

Overall segment performance

The trading performance of our Highways division has seen budgeted targets exceeded. Work volumes were ahead of the forecast for the year at £45m and delivery margins were also ahead of budget projections at £639k. The division operates in three regions: East, West and South. Whilst planned activity in the East and West regions remains high, there is a current imbalance of work in the Southern region. Growth for the division has been very encouraging over the course of the year with key successes on frameworks coupled with wins of public realm and highway contracts.

The YORcivil2 construction framework win was a key success; covering civil engineering works for North and South Yorkshire, including major flood defence projects and highway and bridge works. It combines East Riding of Yorkshire Council, located in the North and East of the region, with Leeds City Council and Sheffield City Council in the South and West and includes projects ranging up to a value of £10m.

Another significant success is the Manchester City Council, four year supplier framework for highways and infrastructure projects. The entire framework is expected to deliver works to a value of £240m across the Greater Manchester region, including highways development, bridge construction and other civils works. This framework can also be used by other Association of Greater Manchester Authorities (AGMA) and having secured a place on all eight lots will see us work across the region through to 2022.

We have also successfully gained access to the following regional highways frameworks: Bristol City Council's Highways and Associated Works Framework; Lincolnshire County Council; and Nottingham and Derby Frameworks for Highway Works.

From a public realm perspective we have successfully delivered prestigious public realm schemes in Bristol, Stoke-on-Trent and Lincoln to improve roads and pavements in the cities' retail and commercial centres. We have also completed a number of large infrastructure projects for IKEA providing vital access to their new store in Sheffield and a £17m infrastructure project for York Potash in Whitby.

Financial performance during the year (excluding legacy contracts)

Outlook for 2018

Following the success of our key wins during 2017 we are looking forward to maximising our opportunities under these frameworks over the course of the coming year and have identified further areas of development:

· Highway maintenance for routine works in core geographical regions

· Further geographical expansion in the North‐West and into the Northern Home Counties

Telecommunications

Overall segment performance

This year has been focused on improving operational performance of the division. Network expansion projects are performing well with the necessary levels of control and governance in place to ensure targets are monitored and achieved.

Our framework contracts do have their challenges in terms of work volumes and process consistency, however we are working to improve this performance across the division to increase customer service. Due to the high volume of orders from existing telecoms customers, this work has been our focus. It remains a priority for the management team to diversify by developing our design and build capability.

At the interim update we announced that the division achieved a break even position for the first six months trading. Since that date we have experienced serious difficulties on the work stream undertaken for Virgin Media on the term contract for telecoms work. Our activities have become embroiled in the difficulties that this customer has been experiencing and this has led to fragmented and inefficient working patterns. The division is heavily engaged with dialogue with this customer to achieve a satisfactory resolution of this problem.

Our health and safety record and culture has significantly improved through an increase in and higher quality of reporting enabling us to make changes to keep our people safe. We have also been working hard on our customer experience; implementing new processes and procedures following external reviews. This has seen us restore our position as a partner of choice for Virgin Media which has in turn provided the opportunity for additional works particularly in the Midlands region.

Financial performance during the year (excluding legacy contracts)

Outlook for 2018

In order to drive further business improvement during the course of 2018, we have identified the following key areas we regard as critical to success:

· People - Ensuring the morale of our teams remains high

· Quality - Continue with implementing processes with continual review

· Programme - Balancing our standalone projects and our framework commitments

· Customer - Focus on our customer relationships and commercial performance

Water

Total Water Segment Financial Performance during the year (excluding legacy contracts)

We have two operating divisions called NMCNomenca and Nomenca.

Divisional segment performance - NMCNomenca

The NMCNomenca division has had another strong year being cash positive and turnover standing at £114m with notable progress on flagship schemes and significant wins.

We were successful in securing a new joint venture infrastructure contract for Severn Trent Water on the Birmingham Resilience Project. The design and construction of a new water treatment plant at Frankley is worth in excess of £100m over the duration of the contract and is being built out with our partner Doosan Enpure Limited. The scheme commenced on site in the third quarter of 2017 and will be delivered over the next three years.

The Elan Valley Aqueduct scheme, another key project for Severn Trent in the AMP6 programme of works, celebrated 365 days accident free and completed the first tunnelling phase of the project. This has culminated in being awarded the New Civil Engineer Tunnelling Award in the category of Specialist Tunnelling Project of the Year. It was a blend of the complex nature of the construction of three tunnels along with sustainability, community engagement and logistics that won the accolade.

Tunnelling also commenced on the Newark improvement scheme; Severn Trent's largest investment in the East Midlands to protect their customers from flooding. The new 4.5km of pipeline has a diameter of 3.2 metres and is the backbone of the scheme which runs underneath the town.

Outlook for 2018

To further build on the NMCNomenca foundation and operational model, the amalgamation of the Civil Engineering business into NMCNomenca will allow the continued delivery of non-regulatory projects.

· We have good visibility of Severn Trent Water's programme of work going forward

· Major Schemes Pipeline of work is well under way with a number of projects currently being tracked and tendered

· Fully incorporating Civil Engineering into the division to deliver major schemes

· Continuing with the AMP7 procurement process for Severn Trent Water.

Divisional segment performance - Nomenca

Due to improved order input in the second half of 2017 we have achieved our turnover of £55m. We instigated improvement plans across the division to improve our financial performance, to which we have seen a positive impact and the leadership team remain focused on continuous improvement. It is also heartening to note that we have seen a significant improvement in debtor day performance.

Prompted by a sustained increase in workload in the Yorkshire area we relocated our regional Yorkshire office to a larger complex in Normanton, south east Leeds. The facility comprises two-storey offices and warehouse, centrally located in our client's region, and will accommodate the ongoing team expansion.

To support company growth, we have also welcomed a new member to the Nomenca Board: Gavin Stonard, as Engineering Director. Gavin will lead and develop our technical services offering internally and externally and develop our full asset life cycle capabilities to provide a holistic asset life cycle service to our customers.

Our significant award wins for this year include the British Construction Industry Application of Technology Award 2017 for an Affinity Water Project. The pioneering Off Site Build Modular approach to a potable water treatment and pumping station upgrade minimised asset downtime, disruption and overall programme. We combined virtual design technology with modular offsite manufacturing - shifting the mainstay of the construction work to a controlled factory environment. The achievement is testament to our entire team including design, engineering and operations.

Outlook for 2018

We will look to continually enhance the current business to serve the UK Water Industry and other similar industries by:

· Focusing on providing additional technical services across all business streams

· Embedding a Factory Thinking process within the current frameworks

· Delivering further efficiency for clients and stakeholders

Group Statement of Comprehensive Income

Statements of changes in equity

Balance sheets as at 31 December 2017

Statement of cash flows for the year ended 31 December 2017

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

Segment revenue and profit

Year ended 31 December 2017

Year ended 31 December 2016

Segment assets