2nd Jun 2005 06:00
Not for release or distribution in the United States of America, Australia,France, New Zealand, South Africa and Switzerland.Nothing in this press release constitutes an offer of or an invitation by or onbehalf of United Utilities PLC to subscribe for or purchase any securities ofUnited Utilities PLC. This press release is not an offer for sale within theUnited States of any ordinary shares, nil paid rights, fully paid rights, Ashares or any other security of United Utilities PLC. Securities of UnitedUtilities PLC, including any offering of its ordinary shares, nil paid rights,fully paid rights or A shares, may not be offered or sold in the United Statesabsent registration under U.S. securities laws or unless exempt fromregistration under such laws. There will be no public offer of securities inthe United States.This document includes "forward-looking statements" within the meaning ofSection 27A of the Securities Act and Section 21E of the Exchange Act. Allstatements other than statements of historical facts included in this document,including, without limitation, those regarding United Utilities PLC's financialposition, business strategy, plans and objectives of management for futureoperations, are forward-looking statements. Such forward-looking statementsinvolve known and unknown risks, uncertainties and other factors which maycause the actual results, performance or achievements of United Utilities PLC,or industry results, to be materially different from any future results,performance or achievements expressed or implied by such forward-lookingstatements. Such forward-looking statements are based on numerous assumptionsregarding United Utilities PLC's present and future business strategies and theenvironment in which it will operate in the future. These forward-lookingstatements speak only as of the date of this document. United Utilities PLCexpressly disclaims any obligation or undertaking to release publicly anyupdates or revisions to any forward-looking statement contained herein toreflect any change in its expectations with regard thereto or any change inevents, conditions or circumstances on which any such statement is based otherthan as required by law or regulation.The nil paid rights, fully paid rights, and A shares will not qualify fordistribution under any of the relevant securities laws of Australia, France,New Zealand, South Africa or Switzerland (the "Excluded Territories").Accordingly, subject to certain exceptions, the Securities may not be offered,sold, delivered, renounced or transferred, directly or indirectly, in or intothe Excluded Territories.Listing particulars relating to the issue of nil paid rights, fully paidrights, and A shares are expected to be sent to holders of A shares (other thanthose in the United States of America and certain other Excluded Territories)on 6 June 2005 and to be made available to the public for inspection in Londonat the document viewing facility nominated by the UK Listing Authority at 25The North Colonnade, Canary Wharf, London E14 5HS.2 June 2005 PRELIMINARY ANNOUNCEMENT OF AUDITED RESULTS FOR THE YEAR ENDED 31 MARCH 2005 A CONSISTENT STRATEGY FOR GROWTH * Profit before tax (before goodwill amortisation and exceptional items)* - increased by 17 per cent to ‚£408 million * Profit before tax - increased by 10 per cent to ‚£370 million * Licensed multi-utility operations - operating profit** increased by 13 per cent to ‚£588 million * Infrastructure management - operating profit** increased by 17 per cent to ‚£79 million * Business process outsourcing - operating profit** increased by 5 per cent to ‚£26 million * Telecommunications - substantially reduced operating losses** and break-even** achieved in the second half of the year * Total dividend for the year of 45.42 pence per ordinary share, an increase of 2.5 per cent * as shown on the face of the consolidated profit and loss account andreconciled to profit before tax in note 2 of this announcement** references to operating profit, operating loss and operating margin andrelated percentage movements are stated before goodwill amortisation andexceptional items as shown in the segmental analysis by class of businessChief Executive John Roberts said:"This set of results is a further milestone in the implementation of ourstrategy, which we put in place over five years ago. Progress in our supportservices businesses has been excellent. We have now established UnitedUtilities Contract Solutions as the UK's leading utility infrastructureoutsourcing business, and Vertex as the third largest business processoutsourcing company in the country."It has been an important year for our licensed multi-utility operationsbusiness. In addition to good profit growth, we accepted the final pricedeterminations for both our water and electricity businesses in December.Although the efficiency targets set are demanding, the final proposals allowalmost ‚£350 million more revenue than the initial draft determinations,reflecting welcome movement on the part of the regulators in response to ourrepresentations. Having made preparations in advance of receiving theseproposals, we have plans in place which we believe meet the challenges set forus."The second stage of our rights issue, which is due later this month, will makean important contribution to the funding of our regulated capital investmentprogrammes over the 2005-10 period. In addition to the ‚£2.9 billion programmethat was set out in its final determination, United Utilities Water isexpecting to spend approximately another ‚£200 million as a result of carry-overof obligations funded during the previous regulatory period. Furthermore, weestimate that there is potential for up to approximately ‚£500 million ofadditional investment relating to projects that were not part of our regulatorycontract for 2005-10. Including United Utilities Electricity's ‚£640 millioninvestment programme, our regulated businesses could be required to spend over‚£4 billion on capital investment over the next five years."Our non-regulated businesses now contribute over 40 per cent of the group'sexternal revenues, and for the first time have generated more than ‚£100 millionof operating profit** in a single year. During the past twelve months they'vealso secured a number of substantial new contracts with an expected total valueof around ‚£3.3 billion."Recent significant deals include a fifteen-year ‚£1.5 billion contract renewalwith Dwr Cymru Welsh Water, and a five-year contract win with Southern Water,which is worth around ‚£750 million to the consortium in which we're a majorpartner. Including our own operations in north west England, and our ongoingcontract to manage Scottish Water's capital investment programme, UnitedUtilities is involved in the operation or management of assets for four watercompanies in the UK, representing around 35 per cent of the industry's assetbase. This means we can target significant economies of scale, particularlythrough the procurement of materials and services and the transfer of bestoperational practice between the group and its partners."Having recently signed an eight-year ‚£1.1 billion contract to operate theNorth of England gas distribution network, the contract successfully commencedon 1 June, with around 1,100 employees transferring from National Grid Transcoto United Utilities. The network of around 36,000 km provides gas to more thansix million people across the region."During May, Vertex completed the acquisition of Marlborough Stirling, aprovider of outsourcing services and technology to clients in the financialservices sector, to give Vertex an entry point into this market. We believethat Marlborough Stirling has significant untapped potential that can beunlocked by combining its sector specific knowledge with Vertex's expertise inbusiness process outsourcing. We have identified immediate opportunities todeliver efficiencies of around ‚£6 million per annum, on a full year basis, fromthe acquisition, mainly derived from a reduction in central overheads."Despite difficult market conditions, our telecommunications business, YourCommunications substantially reduced operating losses** and achieved break-even** in the second half of the year. Our strategy for Your Communications remainsunchanged. We are continuing to develop the business with a view to itsdisposal when shareholder value can be maximised."Commenting on the outlook for United Utilities, John Roberts said:"With prices in our water and electricity businesses now fixed for the 2005-10period, and with plans in place which we believe will meet our operating andcapital efficiency targets, our regulated businesses benefit from some of themost predictable, index-linked income streams over the next five years."Growth in earnings from our licensed multi-utility operations business iscomplemented by growth in our non-regulated activities. Having recently securedsubstantial new long-term contract wins with public and utility sector clients,United Utilities Contract Solutions and Vertex have excellent prospects for thefuture. Looking forward, public sector outsourcing potential looks promising,offering good further growth prospects for our support services businesses inthe medium-term."In conclusion, the Chairman, Sir Richard Evans, said:"These results further demonstrate the success of the group's strategy. In linewith our target of maintaining dividends in real terms, the board is proposingto increase the final dividend by 2.5 per cent."Looking to the future, and following the conclusion of our regulatory reviews,the Board has set a target of maintaining dividends in real terms over the nextfive years. This target is dependent on the group's regulated business at leastmeeting its cost savings targets, and its non-regulated businesses continuingto perform at least in line with current levels."For further information on the day, please contact:John Roberts - Chief Executive +44 (0) 20 7307 0300 Simon Batey - Finance Director +44 (0) 20 7307 0300 Simon Bielecki - Investor Relations Manager +44 (0) 7810 157649 Evelyn Brodie - Head of Corporate and Financial +44 (0) 20 7307 0309 Communications A presentation to investors and analysts will commence at 10.00 am on Thursday,2 June 2005, at the City Presentation Centre, 4 Chiswell Street, London, EC1Y4UP. The presentation can also be accessed via a one-way listen in conferencecall facility, by dialling: 020 7162 0181.The presentation, together with further information on United Utilities, willbe available at 10.00am on the day on our web site at: http://www.unitedutilities.com and later during the day on Bloomberg at: UUIR,where a multimedia version will be available. Photographs for media usesupporting these results can be downloaded via http://www.vismedia.co.uk .DIVIDEND AND EQUITY RIGHTS ISSUEThe board is proposing a final dividend in respect of the year ended 31 March2005 of 30.63 pence per ordinary share, and 15.315 pence per A share. Togetherwith the interim dividend of 14.79 pence per ordinary share, and 7.395 penceper A share, the ordinary dividend for the year is 45.42 pence and the A sharedividend for the year is 22.71 pence.On 28 July 2003 United Utilities announced its intention to raise up toapproximately ‚£1 billion, net of expenses, by way of a two-stage rights issue,to fund in part its capital investment programmes. The first stage of the issuetook place in 2003. The initial offer of A shares in 2003 successfully raised ‚£501 million, net of expenses.The second stage of the rights issue, which, like the first stage, is notunderwritten, will commence next week and in accordance with the terms of therights issue, is only being made to holders of the A shares, who will beoffered the right to subscribe to one further A share for each A share held at165 pence per share. The documents for the second stage will be posted toholders of A shares on 6 June 2005.Following completion of the second stage of the rights issue, all A shares inissue will automatically be consolidated into and reclassified as ordinaryshares on the basis of one new ordinary share for every two A shares held. Ifsubscribed in full the further A shares rights issue will generate grossproceeds of up to approximately ‚£510 million.Key dates relating to the further A shares rights issue and 2004/05 finaldividend are:Record date for the second stage of the rights 2 June 2005 (close of issue business) Despatch of Provisional Allotment Letters for 6 June 2005 further A shares Dealings in further A shares nil paid commence 7 June 2005 Ex-dividend date for 2004/05 final dividend 8 June 2005 (A shares and ordinary shares) Record date for 2004/05 final dividend 10 June 2005 (A shares and ordinary shares) Latest time and date for payment in full of 29 June 2005 (11.00 am) subscription monies for further A shares Further A shares credited to CREST stock accounts 30 June 2005 and dealings in further A shares commence on London Stock Exchange Consolidation and reclassification of all A shares 6 July 2005 (close of into new ordinary shares business) DIVIDEND ENTITLEMENTS AND BONUS ELEMENT ADJUSTMENTAs indicated in the 2003 rights issue prospectus, and in line with marketpractice, to take account of the bonus element of the second stage of therights issue, the dividends totalling 45.42 pence per ordinary share for theyear ended 31 March 2005 will be rebased by a factor of 0.9342 to 42.43 pencefor reference purposes when determining dividends for the year ending 31 March2006. This follows the rebasing of dividends in 2003 by a factor of 0.9072 toreflect the bonus element of the first stage of the rights issue. Theunderlying principle behind the rights issue is that dividend yield will bemaintained to shareholders who take up their rights entitlement for both stagesin full.The further A shares will not rank for any dividend prior to theirconsolidation and reclassification as new ordinary shares at the close ofbusiness on 6 July 2005. The first dividend that new ordinary shares will rankfor will be the interim dividend payable for the year ending 31 March 2006.Neither the further A shares or new ordinary shares will rank for the finaldividend in respect of the year to 31 March 2005 which is expected to be paidin August 2005.FINANCIAL PERFORMANCETurnover (including share of joint ventures) rose 12 per cent to ‚£2,368million, reflecting growth across all businesses.Total operating profit** rose 16 per cent to ‚£692 million compared with lastyear. This increase reflects improved operating profits** in licensedmulti-utility operations, infrastructure management and business processoutsourcing, and reduced operating losses** in telecommunications. Totaloperating profit** is presented before goodwill amortisation and exceptionalitems to provide a better understanding of the trading position of the group.Total operating profit (after goodwill amortisation and exceptional items) rose11 per cent to ‚£646 million.After a 15 per cent increase to ‚£284 million in net interest payable, profitbefore tax (before goodwill amortisation and exceptional items)* increased by17 per cent to ‚£408 million. The increase in net interest payable isprincipally due to funding of the regulated businesses' capital expenditureprogrammes during the period. However, our cost of borrowing is expected tofall in 2005/06 as we have substantially fixed interest rates for the 2005-10regulatory period through the use of interest swaps.Goodwill amortisation was ‚£16 million, compared with ‚£9 million last year. Theincrease principally reflects the goodwill arising from the acquisition ofEurocall by Your Communications in March 2004.The group recorded a current tax credit of ‚£32 million during the period. Thedeferred tax charge on ordinary activities was ‚£75 million, compared with acredit of ‚£3 million last year. The increase in the deferred tax chargereflects the movement in the discounted deferred tax liability. There was nosignificant movement in long-term UK interest rates during the year, which areused to discount the liability.Basic earnings per share fell by 14 per cent to 46.8p, primarily as a result ofthe increase in the deferred tax charge. Adjusted basic earnings per share,excluding deferred tax, increased by 13 per cent to 61.4p.During the period there was a net exceptional charge to the profit and lossaccount of ‚£21 million. This principally relates to the restructuring of theregulated business in preparation for meeting its 2005-10 efficiencychallenges, offset by profit in respect of disposals of businesses andinvestments.The group raised ‚£584 million of new debt through the period, primarily throughthe sale of listed, long dated bonds via its medium term note programme. Partlyas a result of these new borrowings, the group finished the year withsubstantial pre-funding for its capital investment programme. Total availableliquidity as at 31 March 2005 totalled ‚£1,834 million, comprising ‚£861 millionof cash and short-term investments, ‚£773 million in unutilised medium termcommitted bank facilities expiring in more than one year and ‚£200 million ofnew loans available from the European Investment Bank.Net debt as at 31 March 2005 was ‚£4,141 million. The increase in net debtprincipally reflects expenditure on the regulated businesses' wastewater, waterand electricity capital programmes and United Utilities' decision to make alump-sum pensions contribution of ‚£320 million split between the group's twodefined benefit pension schemes. The group does not expect to make any furthercash contributions during the 2005-10 period, although the results of the nextactuarial valuation will be incorporated into the 2007/08 accounts.INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)From 1 April 2005 United Utilities will report its results in accordance withInternational Financial Reporting Standards (IFRS). The most significant areasof impact on the group's 2004/05 reported results are summarised below. Newstandards and interpretations that come into effect or that are adopted earlybefore the first reported results under IFRS may result in adjustments to thesenumbers.The full impact of the adoption of IFRS on our audited 2004/05 financialstatements will be communicated to the markets at an educational presentationon 19 July 2005.As infrastructure renewals accounting is not permitted under IAS 16, thegroup's 2004/05 depreciation charge is expected to increase by around ‚£25million.The adoption of IAS 19 means that any pension scheme surplus or deficit must beimmediately recognised as an asset or liability on the balance sheet. This isexpected to reduce the group's net assets at 31 March 2005 by around ‚£330million net of deferred tax. The adjustment comprises a SSAP 24 prepaymentreversal of around ‚£270 million and recognition of a deficit of around ‚£60million under IAS 19. Profit before tax is expected to increase by around ‚£5million.The final price determinations for both water and electricity make explicitallowance for funding of the relevant elements of the pension scheme deficit.United Utilities has elected to apply IAS 39 in relation to financialinstruments from 1 April 2005. This takes advantage of the exemption affordedby the standard, and it will therefore not be applied to the 2004/05 resultswhen presented in accordance with IFRS.Taking into account other less significant IFRS adjustments, the overall impactof the adoption of IFRS on the 2004/05 profit before tax is not expected to bematerial.As discounting of the deferred tax liability is not permitted under IAS 12 thedeferred tax provision is expected to increase by approximately ‚£950 million,with the 2004/05 tax charge expected to increase by around ‚£65 million. Theregulatory determinations for both water and electricity set prices allowingfor tax on an anticipated cash basis and are therefore unaffected by deferredtax.No material impact on the group's financing arrangements or cash flow isexpected as a result of the adoption of IFRS.OPERATING PERFORMANCELICENSED MULTI-UTILITY OPERATIONS * Turnover increased by 6 per cent to ‚£1,385 million * Operating profit** increased by 13 per cent to ‚£588 million * Operating cash inflow of ‚£919 million (excluding pensions prepayment) * Net capital expenditure cash outflow of ‚£856 million Turnover increased by 6 per cent to ‚£1,385 million, principally reflecting anallowed 8.9 per cent real price increase for United Utilities Water, offset bya 3 per cent real price reduction for United Utilities Electricity.Operating profit** increased by 13 per cent to ‚£588 million, mainly as a resultof the allowed real price increase for United Utilities Water.Capital investment (fixed asset additions) in the period was ‚£859 million, ofwhich ‚£707 million related to water and wastewater and ‚£152 million toelectricity distribution.In its final determination Ofwat granted United Utilities Water an averageannual real price increase of 4.5 per cent over the next five years. The priceprofile is front-end loaded, with the highest increases in the first two yearsof the review period.In its final proposals Ofgem allowed United Utilities Electricity a real priceincrease of 8.2 per cent in 2005/06, followed by constant real pricesthereafter, and is based on delivering a capital investment programme of around‚£640 million. This outcome means that, compared to Ofgem's initial proposals,United Utilities Electricity secured the largest revenue increase in theindustry.Having made preparations in advance of receiving the final regulatorydeterminations, which the group accepted in December 2004, the group has plansin place, which it believes, will enable it to meet the efficiency challengesover the 2005-10 period.In addition to its 2005-10 capital investment programme, which totals ‚£2.9billion, United Utilities Water is expecting to spend approximately ‚£200million as a result of carry-over of obligations funded in AMP3. Thisprincipally relates to its Unsatisfactory Intermittent Discharge (UID)programme, which was subject to revisions in scope and scheduling during thelatter stages of AMP3 in agreement with Ofwat and the Environment Agency.Furthermore, United Utilities Water estimates that there is potential for up toapproximately ‚£500 million of additional investment relating to projects thatwere not part of United Utilities' 2005-10 regulatory contract, but which maybe confirmed as additional obligations during the 2010-15 period by theregulators.To the extent that this additional expenditure, of up to approximately ‚£500million, represents new obligations on United Utilities Water, it will meet thecriterion for a "relevant change of circumstance" which means that it may beeligible for inclusion in any Interim Determination of K ("IDoK") applicationthat United Utilities Water might make during the AMP4 (2005-10) period. If anIDoK application is made and is successful, Ofwat would adjust United UtilitiesWater's price limits during the AMP4 period to provide additional revenues inrespect of this capital expenditure and any other items that are required to betaken into account in the IDoK. If United Utilities Water chose not to make anIDoK application during AMP4, either because the expenditure was notsufficiently material or it was offset by reduced costs in other areas, thenUnited Utilities Water expects that this expenditure, to the extent that itrepresents additional obligations, would be logged-up at the 2009 periodicreview. The additional expenditure would then be reflected in prices over the2010-15 period and beyond.During May 2005 United Utilities appointed partners to help deliver its ‚£2.9billion water and wastewater programme during the AMP4 regulatory period. Thiscovers the majority of United Utilities' water quality and environmentalimprovements that will be carried out on its treatment works and major seweroverflows over the next five years.The delivery of United Utilities' previous investment programme has confirmedthe success of its framework contractor approach, which was put in place duringAMP3. The delivery strategy for AMP4 builds on this success with UnitedUtilities taking a leading role in programme management, increasing ourinternal resources in engineering and design and placing a greater emphasis onperformance management through the alignment of financial targets with ourpartners and benchmarking outturn results. A key enabler is the creationof integrated work teams with responsibility for delivering projects fromconception through to commissioning. These changes will help the group deliverthe capital efficiencies required by Ofwat.For the first time the management of United Utilities' electricity distributioninvestment programme is being more closely aligned with the delivery of itswater and wastewater network programmes. The appointed partners, who will helpcarry out work on United Utilities' network of sewers, pipes and cables duringthe 2005-10 period, are Balfour Beatty and Morgan Est. This approach shouldenable us to target significant cost savings through the use of common systems,improved scheduling and more integrated supply chain management. Ourcontractors will also be better incentivised to make cost savings, withoutcompromising on quality, by aligning the sharing of efficiencies.United Utilities Water has migrated the vast majority of its customers onto anew billing system, and this has been used to calculate and send customers'bills for 2005/06. The new system is targeted to deliver cost savings for thebusiness from this year as well as providing significant service improvementsfor customers.INFRASTRUCTURE MANAGEMENT * Turnover increased by 22 per cent to ‚£543 million * Operating profit** (including share of joint ventures) increased by 17 per cent to ‚£79 million * Operating margin** of 15 per cent * Operating cash inflow of ‚£62 million (excluding exceptional items and pensions prepayment) * Net capital expenditure cash inflow (including acquisitions, disposals and financial investments) of ‚£66 million United Utilities Contract Solutions applies the core infrastructure managementskills of the licensed multi-utility businesses to growth markets in the UK andoverseas.During December 2004, United Utilities sold its Green Energy operational assetsfor ‚£63 million in cash to Novera Macquarie Renewable Energy Limited, a companyjointly owned by Novera Energy and Macquarie Bank of Australia. Following thesale, United Utilities Contract Solutions was reorganised into three divisions,details of which are set out below.Utility SolutionsUtility Solutions is responsible for United Utilities' utility outsourcingcontracts in the UK. This business manages the group's contracts with SouthernWater, Scottish Water, Dwr Cymru Welsh Water, the North of England Gas Network,and the three Scottish PFI operations.During the year Utility Solutions signed two major outsourcing contracts withSouthern Water and Welsh Water, which have a combined total contract value of ‚£1.8 billion to United Utilities. Both contracts were successfully mobilised inApril 2005.The contract with Southern Water is being managed by a consortium consisting ofUnited Utilities and Costain, which each have shares of 40 per cent, andMontgomery Watson Harza, which has a 20 per cent share. The contract is wortharound ‚£750 million to the consortium, which is responsible for projectmanaging, designing and delivering more than 250 water and wastewaterimprovement schemes across parts of Hampshire, West and East Sussex, Kent andthe Isle of Wight.In Wales, United Utilities signed a new 15-year contract with Dwr Cymru WelshWater to continue to provide operations, maintenance and shared services. Thecontract is worth around ‚£1.5 billion in total, subject to five-yearlyperformance reviews to coincide with future price control periods.Under the new arrangement, United Utilities will supply and distribute water innorth and south Wales and treat wastewater in the north. It will also provideshared services throughout Wales including an operational activity centre,education and recreational facilities.In partnership, Utility Solutions is helping Scottish Water deliverapproximately ‚£1.1 billion of its capital investment programme. During theyear, the investment target of ‚£426 million including efficiencies wasachieved.Having recently signed an eight-year contract to operate the North of Englandgas distribution network, the contract successfully commenced on 1 June, witharound 1,100 employees transferring from National Grid Transco to UnitedUtilities. The contract is worth around ‚£1.1 billion and covers the managementof around 36,000 km of gas mains, serving a population of more than sixmillion. The North of England distribution network extends from the ScottishBorder to South Yorkshire and across to Carlisle and Cumbria. It includesNewcastle, Middlesbrough, Leeds and Bradford.Industrial and Commercial SolutionsIndustrial and Commercial Solutions is responsible for multi-utilityconnections and metering services to domestic, commercial and industrialdevelopers, and the provision of specialist water and liquid waste services toindustrial customers. The business also includes United Utilities ContractSolutions' facilities services and energy management services divisions.Industrial and Commercial Solutions is working alongside Vertex in providingThurrock Council with facilities and property management, highways engineeringand transportation services. This contract commenced on 1 April 2005 whenaround 130 employees were transferred to United Utilities Contract Solutionsfrom Thurrock Council.The business has also been named as preferred bidder in partnership withFujitsu and Vertex to provide a similar range of services to Walsall Council.This contract is expected to commence later in the year. The contracts withThurrock Council and Walsall Council, combined, are worth around ‚£200 millionto United Utilities Contract Solutions.InternationalInternational applies United Utilities' expertise in infrastructure managementand operations to develop and manage utility projects around the world. Itcurrently operates concessions in Bulgaria, Estonia, Poland, the Philippinesand Australia.In line with the group's strategy of recycling capital and managing, but notnecessarily owning, utility assets, two of the concessions in which UnitedUtilities has an equity interest, Manila Water and Tallinna Vesi, have recentlybeen the subject of successful Initial Public Offerings of their shares,raising around ‚£15 million for the group. Principally due to the flotations,United Utilities' stake in Manila Water has been reduced from around 18 percent to 12 per cent, and, as at 1 June, the group's stake in Tallinna Vesi hasbeen reduced from 38 per cent to around 27 per cent.BUSINESS PROCESS OUTSOURCING * Turnover increased by 8 per cent to ‚£396 million * Operating profit** increased by 5 per cent to ‚£26 million * Operating margin** of 6.7 per cent * Operating cash inflow of ‚£68 million (excluding pensions prepayment) * Net capital expenditure cash outflow (including acquisitions, disposals and financial investments) of ‚£64 million Vertex is a leading UK provider of business process outsourcing services and isalso one of the UK's major customer management service suppliers. Vertex is agrowth business with a highly visible income stream and good prospects, basedon a diversified portfolio of long-term contracts across multiple sectors. Thebusiness has clients in the private enterprise, financial services, utility,central and local government sectors.During April Vertex successfully commenced the first phase of its ‚£427 millioncontract to provide Thurrock Council with business process outsourcingservices, which aim to improve the way in which the council interacts with itscitizens. The contract is being managed in partnership with United UtilitiesContract Solutions, which is providing facilities management, highwaysengineering and transportation services to the Council.During the initial stages of the 15-year contract, around 500 council employeesworking on ten key council services are transferring to either Vertex or UnitedUtilities Contract Solutions, ranging from business accounting and financialservices to revenue services, procurement and human resources.Vertex, in partnership with United Utilities Contract Solutions, has also beennamed as preferred supplier to provide Walsall Council with services to meetits modernising and efficiency agendas, working as a subcontractor to FujitsuServices. This is a similar contract in size and scope to the contract withThurrock Council, and is expected to commence later in the year.Vertex's operating margin**, which was 6.7 per cent in 2004/05, reflects ahigher than normal level of bid costs, principally from the contracts withThurrock Council and Walsall Council, together with other contractopportunities that Vertex is pursuing. It is anticipated that Vertex's strongpublic sector pipeline will benefit the business over the medium term, givingthe business good prospects for the future.To support growth and new contract wins, Vertex has commissioned a secondcontact centre close to its established operations in New Delhi, India, whichemploys over 1,500 people and is now operating at full capacity. The new sitewill have a capacity of around 900 seats, and is being developed to accommodategrowth in Vertex's offshore business. It is envisaged that the centre willhandle work for a number of Vertex's private sector clients.Vertex has signed a new seven-year contract, with a review point after fouryears, with Powergen Retail Ltd, part of E.ON UK. This amends its currentagreement, which began in 2003. The new longer-term contract will redistributework on a functional basis to enable both companies to maximise economies ofscale.Vertex will nearly double its current printing activity by undertaking theprinting of bills and statements for Powergen's six million customers, whilstPowergen will take responsibility for the direct management of the majority ofits customer base. Vertex will also continue to manage activities for 430,000Powergen Staywarm customers. Powergen Staywarm offers a fixed price gas andelectricity service to customers aged over 60.In May 2005, Vertex acquired Marlborough Stirling, owners of the online portal`The Exchange' and market leading provider of software and services to thefinancial services sector. The acquisition creates a company with the skills,resources, technology and track record which we consider has the potential tobecome a major player in the fast growing business process outsourcingmarketplace within financial services. After accounting for MarlboroughStirling's cash balances as at 31 December 2004 and exercisable options, thetransaction equates to an enterprise value of approximately ‚£72.2 million.The acquisition will provide Vertex with an entry point into the businessprocess outsourcing segment of the financial services market. The appetite foroutsourcing among financial services companies is growing due to intensifyingcost pressures and competition within the industry. Vertex believes that theacquisition of Marlborough Stirling will create a scale player in the marketwhich is able to offer a broad combination of technology and outsourcingcapability. This level of expertise is needed to manage open and closed bookadministration and new business acquisition within both the life and pensions,and mortgages markets.Although the primary rationale underpinning the acquisition of MarlboroughStirling is to provide Vertex with a presence in the financial services sector,the merger of the two businesses provides opportunities to secure synergysavings. Vertex has already identified immediate opportunities to deliverefficiencies of around ‚£6 million per annum from the acquisition, on a fullyear basis. These savings will be derived from a reduction in centraloverheads, such as corporate costs, and the alignment and integration ofMarlborough Stirling's systems, processes and facilities with Vertex's existingoperations.Vertex now operates in 30 UK locations, as well as India, the USA and Canada.According to Ovum Holway, a leading market research company in the supportservices sector, Vertex was the third largest BPO company in the UK in 2004 byturnover.In order to accommodate the growth and broader business base of the company,Vertex has recently restructured from a functionally based organisation to adivisionalised structure, which better reflects the markets in which itoperates. The company now operates through four autonomous lines of businesswith the creation of a Public Sector Division, Financial Services Division,Utilities and Enterprise Division and North American Division. Vertex believesthat the reorganisation has positioned the company for further growth and willenable greater responsiveness to client requirements within the target sectors.TELECOMMUNICATIONS * Turnover increased by 26 per cent to ‚£234 million * Operating loss** reduced by 69 per cent to ‚£5 million * Operating cash outflow of ‚£2 million (excluding exceptional items and pensions prepayment) * Net capital expenditure cash outflow (including acquisitions, disposals and financial investments) of ‚£13 million Your Communications offers voice, data and mobile services to the public sectorand small and medium-sized corporate customers, predominantly in the Midlandsand North of England.Your Communications is now one of the largest alternative fixed line businesstelecoms providers, and Vodafone's largest independent business-to-businessservice provider, with over 71,000 mobile users, in the United Kingdom. It isalso the dominant alternative carrier in the North West for business customersand the public sector.The business continues to select its markets carefully, clearly focusing onbusiness customers and the public sector. It also has a strong focus oncustomer service. This has delivered a diverse and loyal customer base, with achurn rate averaging 1 per cent per month of revenue for business customers.This has helped Your Communications to maintain gross margins in a sector wheremargins have fallen for many of its competitors.Despite difficult market conditions, Your Communications substantially reducedoperating losses** for the full year and achieved break-even** in the secondhalf of the year. The group's strategy for Your Communications remainsunchanged. The business is continuing to be developed with a view to itsdisposal when shareholder value can be maximised.The industry-wide reductions in the prices of fixed to mobile calls, and thecontinued change in Your Communications' sales mix away from premium rateservices to higher margin business sales, have impacted on revenue growth,which increased by 25.9 per cent compared with last year. Excluding the impactof changes in fixed to mobile tariffs, which does not affect the profitabilityof the business, sales increased in the year by 28.3 per cent.As at 31 March 2005 the first three phases of Your Communications' contractwith the North West Development Agency to provide broadband access to Cumbriahad been completed, approximately one month ahead of schedule. To date serviceis available to over 50 per cent of the designated public sector sites.Consolidated profit and loss account Year ended 31 March Year ended 31 March 2005 2004 Before Before goodwill Goodwill goodwill Goodwill and and and and exceptional exceptional exceptional exceptional items items Total items items Total Note ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Turnover: group and 2,368.2 - 2,368.2 2,115.5 - 2,115.5share of joint ventures Less: share of joint (114.3) - (114.3) (55.5) - (55.5)venture turnover -------- -------- -------- -------- -------- -------- Group turnover 2,253.9 - 2,253.9 2,060.0 - 2,060.0 Net operating costs (1,585.5) (45.2) (1,630.7) (1,477.2) (12.7) (1,489.9) -------- -------- -------- -------- -------- -------- Group operating profit 668.4 (45.2) 623.2 582.8 (12.7) 570.1 Share of operating 23.4 (0.7) 22.7 14.3 (0.7) 13.6profit of joint ventures -------- -------- -------- -------- -------- -------- Total operating profit 691.8 (45.9) 645.9 597.1 (13.4) 583.7 Profit on sale or 2 - 4.5 4.5 - 4.3 4.3termination of operations Profit/(loss) on 2 - 4.1 4.1 - (2.4) (2.4)disposal of fixed assets -------- -------- -------- -------- -------- -------- Profit on ordinary 691.8 (37.3) 654.5 597.1 (11.5) 585.6activities before interest Net interest payable and similar charges: Group (270.9) - (270.9) (237.6) - (237.6) Joint ventures (13.2) - (13.2) (10.5) - (10.5) -------- -------- -------- -------- -------- -------- (284.1) - (284.1) (248.1) - (248.1) -------- -------- -------- -------- -------- -------- Profit on ordinary 2 407.7 (37.3) 370.4 349.0 (11.5) 337.5activities before taxation Current taxation credit 3 31.7 20.9 Deferred taxation 3 (75.3) 3.4(charge)/credit Exceptional taxation 3 8.1 0.8credit -------- -------- Taxation on profit on (35.5) 25.1ordinary activities -------- -------- Profit on ordinary 334.9 362.6activities after taxation Equity minority (1.8) (1.6)interest -------- -------- Profit for the 333.1 361.0financial year Dividends 9 (324.7) (315.3) -------- -------- Retained profit for the 8.4 45.7financial year -------- -------- Basic earnings per 4 46.8p 54.5pshare Adjusted basic earnings 5 61.4p 54.2pper share (revised) Diluted earnings per 4 42.2p 52.1pshare Dividends per ordinary 9 45.42p 44.31pshare Dividends per A share 9 22.71p 22.155p Dividend cover 7 1.1 1.2 Dividend cover (pre 8 1.3 1.2deferred tax) Interest cover 6 2.4 2.4Consolidated balance sheetAt 31 March 2005 2004 ‚£m ‚£mFixed assets Intangible assets 116.9 116.1 Tangible assets 8,234.9 7,769.4 Investments in joint ventures: -share of gross assets 281.0 300.5 -share of gross liabilities (210.5) (230.5) -------- -------- 70.5 70.0 Other investments 9.7 3.0 -------- -------- 8,432.0 7,958.5 -------- -------- Current assets Stocks 19.1 17.1 Debtors 774.9 493.9 Investments 833.3 1,007.8 Cash at bank and in hand 49.0 42.1 -------- -------- 1,676.3 1,560.9 Creditors: amounts falling due within one year (1,756.6) (1,374.8) -------- -------- Net current (liabilities)/assets (80.3) 186.1 -------- -------- Total assets less current liabilities 8,351.7 8,144.6 Creditors: amounts falling due after more than one (4,820.5) (4,702.0)year Provisions for liabilities and charges (412.5) (339.7) -------- -------- Net assets 3,118.7 3,102.9 -------- -------- Capital and reserves Called up share capital 716.2 711.8 Share premium account 1,038.7 1,023.1 Profit and loss account 1,362.5 1,348.4 -------- -------- Equity shareholders' funds 3,117.4 3,083.3 Equity minority interest 1.3 19.6 -------- -------- Capital employed 3,118.7 3,102.9 -------- --------Consolidated cash flow statementFor the year ended 31 March 2005 2004 ‚£m ‚£mNet cash inflow from operating activities 724.9 923.5 Income from joint ventures 3.1 1.2 Returns on investments and servicing of (263.1) (151.8)finance Taxation 0.9 (2.6) Capital expenditure and financial (883.8) (1,018.0)investment Acquisitions and disposals Acquisitions (48.2) (46.0) Disposals 65.2 - -------- -------- 17.0 (46.0) Equity dividends paid (317.5) (281.2) -------- -------- Cash outflow before use of liquid resources (718.5) (574.9)and financing Management of liquid resources 176.9 (338.4) Financing Issues of shares 20.0 504.1 Increase in debt 523.3 418.8 -------- -------- 543.3 922.9 -------- -------- Increase in cash 1.7 9.6 -------- --------Reconciliation of net cash flow to movement in net debtFor the year ended 31 March 2005 2004 ‚£m ‚£mIncrease in cash 1.7 9.6 Cash inflow from increase in debt and lease (523.3) (418.8)financing Cash (inflow)/outflow from management of (176.9) 338.4liquid resources -------- -------- Change in net debt resulting from cash (698.5) (70.8)flows Exchange and other non-cash adjustments (4.2) 6.3 -------- -------- Movement in net debt (702.7) (64.5) Opening net debt (3,438.4) (3,373.9) -------- -------- Closing net debt (4,141.1) (3,438.4) -------- --------Statement of total recognised gains and lossesFor the year ended 31 March 2005 2004 ‚£m ‚£mProfit for the year Group 321.4 360.3 Joint ventures 11.7 0.7 -------- -------- 333.1 361.0 Exchange adjusRelated Shares:
United Utilities