Final Results

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 2016.

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 contracted 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

· Operating profit up in the year to £2.24 million (increase of 164.6%)

· Revenue increased to £250.49 million (increase of 15.11%).

· Underlying profit before tax, excluding legacy contracts, increased to £5.91 million (increase of 32.9%).

· Secured workload for 2017 at circa £225 million (2015 Secured workload for 2016 - £181 million), which equates to circa 80% of 2017 budgeted revenue.

· Re-established an interim (1.5p) and proposed a final (3.0p) dividend payable.

· Cash position remains strong. Year-end balance of £11.41 million (2015 £6.62 million, (increase of 72.3%).

John Homer - Chief Executive - Commented:

"These results demonstrate the considerable strategic advancement made in the business over the last year. Progress is being made to strengthen the quality of the service that we provide to our customers. We continue to receive positive feedback on our operational performance from across our stakeholder base.

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 80% 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 2016

This year has been a period of strengthening 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.

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 the customers and work effectively in these markets. This allows them to provide expert contribution and innovation to achieve added value to the work streams.

Overall co-ordination of our activities is carried out through the Executive Administration Board (EAB) which is chaired by the Chief Executive. Membership consists of the 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 15.11% to £250.49 million (2015: £217.61 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 2016 achieved through the quality of customer experience NM Group deliver.

Although not at the level the Board finds acceptable, the operating profit of £2.24 million (2015: 0.85 million) is a significant increase on the previous year. The impact of the Legacy contracts has once again reduced the net margin return to shareholders as highlighted above.

The confidence of the Board in the Group continuing to report periods of profitability has led to the full recognition of the previous years' losses as a deferred tax asset. This has been the contributing factor on the current tax credit of £0.57 million (2015: 0.65 million).

The increased performance and recognition of the brought forward losses has meant the total comprehensive income for the year has more than doubled to £2.63 million (2015: £1.25 million) and in turn the earnings per share increased to 25.95p (2015: 12.32p).

It is therefore with great pleasure that the Board is proposing a restoration of the final dividend at 3.0p, taking the total dividend for the year to 4.5p. In the current period the total dividend for the year is covered 5.8 times (2015: N/A) by the total comprehensive income for the year.

The board anticipate an improving performance for 2017 and beyond.

Health and Safety

Unfortunately, we have seen an increase in our Accident Incident rate due to the number of RIDDOR (Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 1995) incidents during the year which is disappointing for the Group. These incidents have not shown any particular trend in cause or type other than the challenges faced by our industry as a whole as a consequence of the increase in demand for suitable labour. Corrective action was immediately taken to address any specific issues in the divisions concerned. We continue to focus on this as the subject of utmost priority with ongoing awareness and training programmes being provided.

These incidents all occurred in the first seven months of the year and since then we have seen a marked improvement in our performance.

To complement the traditional policing approach to health and safety we have embarked on a Behavioural Culture approach with representatives from across the business being trained and acting as advocates. This is to encourage people to think about the approach to inherent hazards that they come across in a much more proactive and conscious way. It is expected that this programme will further enhance our overall performance in this field.

People

There is no doubt that our people and our culture are the largest influence in the way that we serve our customers and ultimately to the overall success of the business. During the year we recruited a total of 413 new employees to the group. Against the backdrop of a very competitive market for resources we have managed to hold a steady position on our employee stability ratio. We continue to invest heavily in the development of our people across the complete spectrum of skills and experience. Our training and development academy approach continues to be refined and is delivering the results that are required. Our leadership across the business is clear that we constantly need to put people at the top of the agenda in order to achieve the best results.

Segment Performance

We continue to maintain our strong position of market leadership in the water sector. Both turnover and margin growth has been achieved and great potential exists for further progress. Our customers in this sector include Severn Trent Water, United Utilities, South West Water and Yorkshire Water. Notable project carried out in the period are the Elan Valley tunnel and the Ambergate reservoir both for Severn Trent. Investment is being made in our design capability, off-site manufacture and our product supply offering. Preparations are underway for the AMP7 renewal cycle which will come to the market in the next two years. We are well positioned to take advantage of this potential stream of work to fuel our future growth.

The Construction division has performed well in the year. We are now in a period of consolidation to ensure that we have the correct people and management systems in place to continue with this success. Notable projects undertaken in the year include the completion of the Allen House student accommodation scheme in the centre of Leicester. The division is well placed for further controlled growth in the regional building market.

Our activities in the power sector have achieved an improvement in performance over the year. Work continues to be carried out on our Western Power Distribution framework and key projects for Alstom and Siemens. Growth potential exists for the services that we provide into this market on a national basis.

Our Highways division has continued to improve performance over the year. Notable schemes completed include the Leeds to Bradford Cycle Superhighway and the Bristol Western relief road improvements. We have been successful in securing a place on a number of notable framework arrangements including Highways England Area 7 and Lincolnshire County Council.

The Utilities division has undergone considerable restructuring and change following several years of unsatisfactory performance. A new management structure is in place and relationships with all of the customers have been reviewed. Notable works have been carried out for Virgin Media on both their regular and strategic expansion programmes. The market is very strong in this sector with significant spending plans in place across the whole country. The performance of this division is under careful scrutiny to ensure that the changes made achieve the desired results and achieve an acceptable margin return.

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 2016, there is only one legacy contract remaining.

In the year to 31 December 2016, the total loss before tax recognised on legacy contracts was £3.85 million (2015: £3.84 million). As at 31 December 2015, onsite works were still ongoing and therefore there was uncertainty over costs to complete and a further loss was recognised in 2016. However, during the year the Group completed all onsite works for the one remaining legacy contract, therefore 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 2016 of the amount recoverable from the client, with an amount outstanding included with construction contract assets. The Group is and will be pursuing claims with the client for sums greater that the carrying value and is in negotiations to settle this balance. 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 in 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 £11.41 million (2015: £6.62 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 15.11% increase in revenue the Group has reduced the average credit period taken by its customers to 33 days (2015: 41 days) and the inflow of cash to £0.69 million (2015: £1.88 million). This inflow is due to trade and other receivables reducing to £30.71 million (2015: £31.40 million). The average credit period taken on credit purchases has also reduced to 52 days (2015: 60 days) due to shorter terms being offered to maintain the best supply chain and achieve the most commercial pricing. The inflow of cash of £4.56 million (2015: £5.12 million) due to the increase in trade and other payables to £61.15 million (2015: £56.59 million) is also due to the increase in revenue. The Group ensures it has a sustainable working capital mix for all contracts across all segments.

It is also pleasing to report that the net cash has increased to £7.43 million (2015: £2.39 million) which is due to the increase in cash above and a reduction in finance lease borrowings. The net investment during the year on fixed assets increased to £1.30 million (2015: £1.03 million) as a result of the Group's growth.

The investment in capital assets increased during the year with the closing net book value of £13.65 million (2015: £12.78 million), which again is down to the required growth and the company strategy to purchase equipment where possible rather than expense through operating leases.

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.

A significant proportion of our 2017 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 in the outlook and expect the positive progress achieved to continue into 2017 and beyond. Key successes will continue in water and improvement will be seen in the other divisions. The strategic focus in utilities will enhance the performance of the group in the short term.

Construction

Overall segment performance

Within the construction sector, the building division has had a good trading year with improved profitability on the back of a rapid period of growth over the last three years.

Notable schemes completed in 2016 have included: the £16 million Allen House student accommodation project for Victoria Halls, £3 million refurbishment of the North Laboratory for the University of Nottingham, the £2 million extension and external refurbishment for CARE partnerships in Edgbaston and a £1 million new training centre and kennels block for Nottinghamshire Police.

The pipeline of opportunities for this sector is increasing across our existing customer base and is also supported by a range of new customer prospects to strengthen the division's portfolio.

Our area of operation is predominantly in the Midlands region offering new build and refurbishment to the public and private sectors. Main contract capability for schemes to £50 million, focused general works operation for projects from £200k to £2 million.

Financial performance during the year

Key market trends

We have an expertise in delivering student accommodation projects and this market is still buoyant with a regular stream of enquiries for a variety of projects being received. Currently both university and further education providers have significant investments to make in their facilities and a general increase in student numbers is fuelling further need for suitable accommodations. This is a key target across the region moving forward.

Many education projects are carried out via regional or national frameworks, and the intent is to engage with a view to bidding for a place on such frameworks in the future to provide a robust stream of enquiries.

From a commercial and industrial perspective, there is activity within the regional market which we are well placed to bid for, with opportunities presenting themselves regularly.

Leisure providers are active and, with a shortage of regional contractors, this is an area of exploration which we are well placed to target.

Outlook for 2017

In line with our strategic focuses; the current actions to realise our potential to grow in this market include:

· Becoming a more prominent regional contractor by improving the divisions visibility within the locality

· Further grow the team with recruitment and the development of current staff

· Expanding client base with commercial opportunities, balancing the portfolio with public sector opportunities and enhancing existing relationships.

Power

Overall segment performance

The past financial year has seen the continued efforts in rejuvenating this part of the business to fulfil its true potential. This has included continued efficiencies in overhead and re-establishing a delivery model which complements the sectors in which the division operates. Our offering now also incorporates a full turnkey delivery model including design broadening the scope of opportunity greatly.

A fully implemented risk analysis procedure with regards to proposals, contract management and commercial assurance is ensuring that the financial return is optimised.

The successful delivery of the £13 million Biomethane to Grid project awarded by Severn Trent Green Power. The project was a fully integrated design and build contract delivered on 3 sites and is testament to the new delivery model now embedded in the division.

Financial performance during the year

Key market trends

The Power and Energy market is poised to rapidly expand and with core 'blue chip' clients currently in our portfolio we should be able to improve our client base and enhance our return to the business.

Within the power market we have identified a significant spend forecast with Regional Electricity Contractors, electricity distribution and network operators, Wind Energy and Engineering Procurement Contractors. This is currently visible until 2025 and we are well placed to compete in this arena.

Outlook for 2017

We have a strong opportunity to work in the non-regulated water market focusing on the waste to energy sector; taking waste products and converting to gas.

Additionally there is an emerging design capability that can be offered which broadens the scope of opportunities greatly.

In line with our strategic focuses; immediate actions for 2017 include:

· Continue to build successfully on our current contracts and relationships with existing key clients

· Develop current framework opportunities and reinforce our expertise

· Dedicated business development resource

· Effective debt collection

Highways

Overall segment performance

Work within this sector is based on the specialisms of highway construction and maintenance, public realm works, structures, drainage and environmental capabilities. We also provide specialist pre-construction Early Contractor Involvement (ECI) services to individual clients, as well as value engineering services during construction. Our work is currently a mixture of public and private sector with whom we have strong relationships.

Our particular area of expertise is focused on projects with logistical challenges. The Bristol City Centre public realm project required delicate coordination of pedestrian and traffic management interfaces.

We have experienced an imbalance of work, with the West region in particular, experiencing a slight downturn whereas planned activity in the East and South regions remains high.

Overall these regional variances are levelled out through the portfolio effect in the divisional structure.

Financial performance during the year

Key market trends

There is initial short term evidence of private sector investment caution due to Brexit and it is still early days in terms of gauging the impact of the referendum on the economy - it is generally accepted that any effects of Brexit on the UK economy will take months and possibly years to emerge. There are some concerns over the viability of some schemes without European funding, particularly in Northern cities. However, current outlook based on recent data is optimistic, with economists raising GDP growth forecasts and latest figures showing that the construction sector is growing.

Increased national infrastructure spend was reinforced by recent publication of the Government's 'National Infrastructure Delivery Plan 2016', together with the 'Roads Investment Strategy' (RIS) in 2014, which outlines a 25 year investment plan (2015-2040) for Britain's Strategic Road Network.

This details plans for £483 billion of investment in over 600 infrastructure projects across all sectors to 2020-21 and beyond, with £300 billion specifically committed to a pipeline of schemes to be delivered within the next five years.

Outlook for 2017

In line with our strategic focuses; immediate actions for 2017 include:

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

· Form strategic partnerships with the supply chain and consultants to improve collaboration and innovation.

· Secure existing frameworks due for renewal.

· Target new frameworks, whilst optimising the delivery of existing ones.

Telecommunications

Overall segment performance

The performance of the Utilities Division has been less than satisfactory for a significant number of years. Following careful review we have taken decisive action to address the underlying problems. A number of changes have taken place during 2016; seeing us reflect, assess and make the necessary improvements in which to take us forward.

There are a great many strengths to the division and a real drive to turn the situation to that of profitability. A significant restructure has taken place with the recruitment of key staff who are driven to bring about the necessary change. A business improvement specialist has been brought in to review and re-organise processes to create efficiency and introduce best practice. The trading relationship with each customer has been carefully reviewed to ensure we continue to deliver a high level of service. The Division is under the direct leadership of John Homer until we are confident of successful turnaround.

Currently we provide telecoms infrastructure services inclusive of network cable and small business installations in the Midlands, North West & North East predominantly to high profile customers. The market is currently rich with opportunities, and management are currently turning down some work to allow the necessary changes to be implemented.

Once the business has confidence that the processes and controls are right, then controlled growth of turnover and increased margins will be achievable. There is a strong belief in the market which has longevity, due to the insatiable demand for faster internet connectivity.

Financial performance during the year

Key market trends

Significant spend and legislation in the communications market demonstrates a buoyant industry that we are well placed to serve.

The UK Government are to implement the broadband Universal Service Obligation, making it a legal entitlement to have access to broadband at minimum 10Mbps. In addition the publicly available specification (PAS) 2016 provides a framework of requirements to install digital infrastructure into all new build domestic dwellings.

There are also significant investments to be made in the rural broadband programme from 2016-2021 and Project Lightning; which will see 17 million UK premises having access to 30Mbps by 2020.

Outlook for 2017

2017 is a year of consolidation with the following strategic aims:

· Grow our offering through relationships with existing customers

· Explore opportunities within the power distribution market

· Embed our refined systems and procedures to increase operational performance

· Closely monitor performance to ensure turnaround targets are achieved

Water

Total Water Segment Financial Performance during the year

We have two operating divisions called NMCNomenca and Nomenca.

Divisional segment performance - NMCNomenca

We have successfully developed a broad range of specialist services, specifically in Non-Infrastructure Clean Water where our skills are used across the Severn Trent Water (STW) region. We work closely and collaboratively with STW Operations from conception through construction to completion, delivering efficiency driving Water Quality Monitoring Services, Temporary Dosing Points, and Chemical Dosing Upgrades, SEMD services (Security) Borehole Refurbishment and ICA Services. The latest area we have expanded into is in Small Works/Asset Maintenance. We now, successfully provide a reactive and proactive service along with the upgrade and maintenance of private drains and pumping stations.

Key market trends

With a forecast sector spend of £4 billion per annum for the period of 2015-2020 excluding the Thames Tideway, there is a commitment to spend circa £2billion per annum on off-site build solutions, £1.2 billion per annum on Capital Maintenance and £500 million per annum on Infrastructure schemes. The water retail market opens in April 2017 to businesses, charities and public sector organisations. In 2016 STW entered into a joint venture agreement with United Utilities, combining their non-household water and wastewater retail businesses, principally comprising billing and customer service activities. This JV will deliver an attractive proposition for large and small business customers across England and Scotland.

Outlook for 2017

The first half of 2017 has seen the AMP7 procurement process begin for STW which will be a key focus. Operationally however we have good visibility of current and future workload with actions 2017 including:

· Exploring further opportunities for operation and maintenance

· Continue to deliver high quality, great value solutions to STW

· Develop the maturity of our processes and in house design capabilities.

Divisional segment performance - Nomenca

This year has seen profitable trading but below our own expectation for the expertise that we bring to our projects. Clear strategies are in place to improve the margin returns from our specialist area of expertise. We have a broad client base within the water sector and have been successful in gaining further frameworks with key water clients over the course of 2016 including Yorkshire Water, Affinity Water and South Staffordshire Water.

Although our current focus is UK Water Industry frameworks we experience downturns through the transition between AMP's. We have a drive and focus on business development in non-water opportunities and plant service and refurbishment for this period.

We are driving improvements and expanding our design capabilities such that we can capitalise on industry demand for engineering services and total expenditure (TOTEX) based solutions, both with existing customers and new market sectors.

Key market trends

Within the water industry there is a commitment to spend circa £2 billion per annum on upgrades and new works including circa 40% through off-site build solutions, £1.2 billion per annum on Capital Maintenance and £500 million per annum on Infrastructure schemes. Clearly the 'off-site build' element has to date not delivered to Government and OfWAT expectations. This is a concern which will probably only materialise towards the back end of AMP6 when greater efficiencies are required and proposals for PR19 need to be submitted, and provides a fantastic business opportunity.

The 4 regions of the Environment Agency spend circa £30 million per annum on MEICA works with the larger regions being the Northern and Midlands areas. The process for re-bidding the Northern area will commence in Quarter 2 of 2017.

Outlook for 2017

Development of high performing teams quickly and recruitment of skilled resources are proving a challenge to accommodate the water industry peaks and troughs. Our key focus areas are:

· Developing alternative business streams in products, service and design

· Further develop our existing business processes

Group Statement of Comprehensive Income

Statements of changes in equity

Balance sheets as at 31 December 2016

Statement of cash flows for the year ended 31 December 2016

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

Segment revenue and profit

Year ended 31 December 2016

Year ended 31 December 2015

Segment assets