Interim results & update on the SFO investigation

2 December 2015

Sweett Group plc

("Sweett Group", the "Company" or the "Group")

Interim results for the six months ended 30 September 2015 and update regarding the SFO investigation

Sweett Group plc (AIM CSG.L), the international construction and property consultancy, announces its unaudited interim results for the six months ended 30 September 2015.

Douglas McCormick, Chief Executive Officer, said:

"I am encouraged by the progress made in my first nine months as CEO. In the spring we outlined our strategic objectives and I am pleased we have delivered the sale of the APAC and India businesses, we have made substantial progress in reorganising the Group and we have today announced our intention to exit the Middle East. 

"We have also announced this morning the admission by the Group of an offence under Section 7(1) of the UK Bribery Act 2010 in relation to two related contracts entered into in 2013 in the Middle East, identified by the Group and reported to the SFO. Today's announcement brings closure on the Middle East legacy issues a step closer, allowing the Group to progress unencumbered in the future. This is an important next step in the strategic turnaround of the business.

"Sweett Group is a great business, the outlook for our European and North American markets is strong and I am confident that we will see further benefit in the second half of the year."

Financial highlights

· Post period end, Asia Pacific ("APAC") and India businesses sold for £9.3m in cash (before transaction and separation costs). Accounted for in these results as held for sale discontinued operations giving rise to a £10.4m fair value charge;

· Profit before tax from continuing operations (adjusted for exceptional administrative expenses, amortisation of acquired intangibles and goodwill impairment losses) of £0.4m (H1 2015: £0.8m, FY 2015: £2.0m) includes MENA losses of £0.8m (H1 2015: £0.7m, FY 2015: £1.2m) and costs associated with refinancing the banking facilities of £0.2m;

· Net debt at 30 September 2015 increased slightly from £10.1m (at 31 March 2015) to £10.5m, now expected to be circa £4m at the year-end; and

· Material exceptional costs incurred of £0.9m (H1 2015: £0.8m, FY 2015: £1.7m) supporting the ongoing SFO investigation.

Operational highlights

· Significant development with the SFO investigation.

· Implementation of the revised strategy well underway - sale of APAC and India businesses completed and the remaining business restructured to reflect the new business shape;

· Decision taken to exit the Middle East with various options being considered;

· Future focus of Sweett on its UK and European businesses which are profitable, cash generative and have strong market positions and North America;

· Europe order book increased by £1.6m over 12 months to £53.5m as at 30 November 2015;

· UK economy is strong with a robust construction market. Continued growth across a number of sectors within the UK; and

· North American businesses gaining traction.

Enquiries

HALF YEAR MANAGEMENT REPORT

Summary

In April 2015, the Company announced that it would dispose of the APAC and India businesses and thereafter focus on its UK and European businesses which are profitable, cash generative and have strong market positions. Subsequently, in October 2015, the Company sold the APAC and India businesses (the "Sale") for £9.3m in cash (before transaction and separation costs).

As a result, the Group's balance sheet has been strengthened. Whilst there is more to do, we are confident that the Group is in a strong position to grow and benefit from our excellent and highly skilled team.

The European businesses continue to perform well in growing economies and construction markets. Following the Sale, the Group has been restructured into five new divisions, further details of which are set out below.

As anticipated, the MENA business has continued to struggle in the first half of the year and it has been decided to exit as soon as reasonably practicable.

SFO investigation

We continue to co-operate with the SFO. The SFO investigation with respect to Sweett Group into the allegations made in the Wall Street Journal in June 2013 is at an end. During the process of our own investigations two related contracts within the Middle East were identified as suspicious and were duly reported to the SFO. This has led to an admission by Sweett Group of an offence under Section 7(1) of the UK Bribery Act 2010 (failing to prevent an associated person bribing another to obtain or retain business for the company). Subsequent prosecution is expected, with the likely outcome of a fine, the quantum of which cannot be ascertained at the present time. Importantly, an offence under Section 7 (1) does not attract a mandatory debarment from public sector tendering under EU/UK law.

Strategy

We have made progress executing the strategy outlined in April 2015, most notably, the Sale, the net proceeds of which have been used to reduce the Group's net debt which currently stands at approximately £4m.

Given the Group's new strategic focus, the Board has decided to exit the Middle East and is currently reviewing options. While a sub-scale business for the Group, it continues to be staffed by good people working on interesting projects.

The Group's ongoing business has been re-organised into the following five business units:

· London

· England and Wales

· Scotland and Ireland

· Mainland Europe

· North America

Divisional heads have been identified for each of these business units (as outlined below) with the exception of North America and growth strategies are being developed by the new team.

Financial performance

As the Sale took place in October 2015, being after the period end, APAC and India have been reported in these results as discontinued operations.

Revenue from continuing operations for the first half of the year was £30.2m (H1 2015: £27.8m) and loss before tax was £0.5m (H1 2015: £0.1m), with profit before tax from continuing operations adjusted for exceptional administrative expenses and amortisation of acquired intangibles of £0.4m (H1 2015: £0.8m).

Exceptional administrative expenses during the first half were £0.9m (H1 2015: £0.8m) and comprised legal fees supporting the ongoing SFO investigation.

The balance sheet carrying value of the APAC and India businesses was approximately £18.2m at 30 September 2015 and as previously indicated, a non-cash write down of £10.4m including transaction and separation costs is being taken in the period of which £5.9m relates to goodwill and intangible assets.

Net debt at the end of the period was £10.5m (FY 2015: £10.1m), prior to receiving the proceeds from the Sale. As of today, following receipt of the sale proceeds, net debt is currently £4m. The balance of the term loan of £5.25m has been repaid and the related financial covenants are no longer required.

The order book of the ongoing business as at 30 November 2015 stood at £56.3 m (30 November 2014: £56.8m) with an increase of £1.6m in Europe and a decrease of £2.1m in MENA.

Due to the continued focus on reducing Group debt, the Directors are not declaring the payment of an interim dividend and will not be recommending the payment of a final dividend for the year.

People

The Group has made a number of important appointments to run the newly formed business units referred to above:

· Alan Manuel, currently deputy Managing Director of Europe, has been appointed as Regional Managing Director, London;

· Ken Wood, currently Managing Director of Middle East and India, has been appointed as Regional Managing Director, England and Wales;

· Willie Allan, currently Senior Director, Scotland, has been appointed as Regional Managing Director, Scotland and Ireland; and

· Paul Jamieson, currently Managing Director of Spain, has been appointed as Regional Managing Director, Europe.

In addition, James Grinnell has been appointed as Group HR Director.

Following completion of the Sale, Kim Berry, Managing Director of APAC stepped down from the Board as an Executive Director and left the Company. In addition, in light of the changes to the Group's operating and management structure, Derek Pitcher, Managing Director Europe, stepped down from the Board as an executive Director and has subsequently decided to leave the Company to pursue other opportunities. Also, following 12 years as a Non-Executive Director, Roger Mabey will retire from the Board on 31 December 2015.

By way of recognition for the excellent work being done by our team, we have won a number of awards this calendar year. We were the only consultant to win two awards in their respective categories being: Education Property Consultants at the EducationInvestor Awards; and Property Consultant of the Year at the HealthInvestor Awards. Sweett Investment Services won Gold on Wick Community Campus for 'Best Education Project' at the Partnerships Awards 2015.

In addition, our apprenticeship programme which has now entered its second year with the further appointment of 8 apprentices across the country, bringing the total up to 16 over the last 2 years, was highly-commended in The Rolls Royce Award for Newcomer Large Group, for the London region at the Apprenticeships Awards.

Operational performance

Europe

The European business continued to perform well in the first half of the year as the business benefited from its strong market position and range of services across a number of diverse sectors and markets which have continued to grow.

European revenue in the period was £27.7m (H1 2015: £24.5m), generating a segmental profit before exceptional administrative expenses and amortisation of acquired intangibles of £2.7m (H1 2015: £2.8m).

There has been a significant amount of positive activity in the retail sector. Our work with Primark on its expansion programme continues, including cost and project management services on its 17,000sqm flagship store in Gran Via Madrid, its second largest store.

The Group is also providing cost and project management services to Selfridges at its flagship store in London's Oxford Street, as well as its refurbishment programmes for the Birmingham and Manchester stores. We have recently commenced supporting its sister company, De Bijenkorf, on the refurbishment of its flagship department store in Amsterdam and other store locations throughout the Netherlands.

In the retail mixed use and residential sectors, the Group continues to specialise on large urban regeneration developments in and around London for Hammerson, Standard Life, Westfield, Intu and Bouygues Development, Some notable developments include Croydon, Westfield London and Brent Cross redevelopment .

The commercial sector, particularly office fit-out and refurbishment, has been a growth area for the Group in the first half, and we continue to win work for EDF Energy, Deutsche Bank, Barclays and M&G, amongst others.

In the hotels sector we are working with Starwood Capital and Hilton Worldwide International providing technical due diligence, project and cost management on a number of projects in Spain and Italy. We are also providing project management services to Hilton Worldwide in London.

In the education sector we secured a number of university projects for Robert Gordon, Glasgow, Edinburgh, Coventry, Warwick, St John's College and Bournemouth. The Schools sector is another strong growth area for the Group. We continue to win work with Hub Scotland frameworks, Cheshire East Council and the London Construction Programme framework.

More recently, we were appointed on Dudley House for Westminster City Council, which is a mixed-use development to include Marylebone Boys' School, together with a dedicated private rented sector (PRS) residential tower.

We continue to win significant work in health, which is our strongest performing sector, and earlier this year were part of the design team appointed on a redevelopment programme worth £130m for Frimley Health NHS Foundation Trust.

We were also appointed by Royal Free London NHS Foundation Trust on the redevelopment of Chase Farm Hospital in North London and we are Trust cost advisers for the £300m Midland Metropolitan Hospital PFI in Birmingham and a new £200m Treatment Centre for North Hampshire Hospital. We are also working on a variety of schemes to plan and develop primary and community care facilities for a number of clients, including Community Health Partnerships.

Within the infrastructure sector, we are working on Network Rail's £6bn Thameslink Programme, the Wales & West Electrification Programme and HS2 Euston Station Redevelopment. We have been appointed by Transport for London to provide commercial support on Docklands Light Railway and by Dragados for the Bank Station upgrade project.

MENA

Due to continued challenging trading conditions and a declining order book, the Board has decided to exit the region and is reviewing options. We will provide a further update in due course.

MENA revenue in the period was £2.6m (H1 2015: £3.3m), generating a segmental loss before amortisation of acquired intangibles of £0.8m (H1 2015: £0.7m).

APAC & India

APAC and India are classified as assets held for sale and appear in these results as discontinued operations. Revenue for the period was £15.3m (H1 2015: £14.7m) and the profit contribution in the first half was negligible (H1 2014: £595,000).

North America

The VVA Sweett joint venture's work with Primark in the US has continued and most recently we provided cost management services on its first US store in Boston and are supporting them on a number of other schemes including in Pennsylvania where they have just opened their second USA store, of 10,000sqm.

Our new joint venture company in Canada, Pelican Woodcliff Sweett, is continuing to perform well. It has secured its first P3 commission providing cost, value and risk management services for the City of Surrey's Biofuel Processing Facility in British Columbia on behalf of Orgaworld Canada Ltd and its parent company, Shanks plc.

Contribution to the results in the period of our joint venture with VVA was £53,000 (H1 2015 £35,000).

Outlook

The economies in which we now operate are growing steadily and we are very encouraged by our significant pipeline of projects. The order book for the European business in November 2015 was £53.5m (November 2014: £51.9m). Trading in Europe remains buoyant and the UK economy is strong with a robust construction market.

We are confident that the newly restructured business, alongside our highly skilled team creates a strong platform to deliver future growth and the Group remains focused on its core objectives of profitability, cash generation and margin improvement.

Sweett Group plc

Consolidated Income Statement (unaudited) for the six months ended 30 September 2015

Sweett Group plc

Consolidated Income Statement (unaudited) for the six months ended 30 September 2015 continued

Consolidated Statement of Comprehensive Income (unaudited) for the six months ended 30 September 2015

Sweett Group plc

Consolidated balance sheet (unaudited)

▲ At 30 September 2014 cash and cash equivalents were reclassified to exclude amounts held in bank accounts in the name of Group companies, but held for the benefit of clients and netted off against the respective payables. At 31 March 2015 these amounts were shown as other current assets and the 30 September 2014 comparative here has been amended to follow the 31 March 2015 classification. At 30 September 2015 these amounts are included within the assets and liabilities of the disposal group classified as held for sale.

Sweett Group plc

Consolidated balance sheet (unaudited)

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Consolidated Statement of Changes in Equity (unaudited)

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Consolidated Statement of Changes in Equity (unaudited)

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Consolidated Statement of Cash Flows (unaudited)

Sweett Group plc

Notes to the Financial Information

1. Basis of preparation

General information

Sweett Group plc (the "Company") is a company incorporated and domiciled in the United Kingdom. The address of the registered office is 60 Gray's Inn Road, London, WC1X 8AQ. The principal activities of the Group include the provision of construction cost consultancy, project management and other specialised consultancy services, including building surveying.

This financial information is presented in pounds sterling, the currency of the primary economic environment in which the Group operates. The Group comprises the Company and entities controlled by the Company (its subsidiaries).

Basis of preparation

The condensed consolidated financial information presented is for the six month periods to 30 September 2015 and 2014 and the full year to 31 March 2015.

The most recent statutory accounts of the Group, prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, are for the year ended 31 March 2015, which have been delivered to the Registrar of Companies. The audit opinion on the statutory accounts for the year ended 31 March 2015 was unqualified and unmodified.

This condensed interim consolidated financial information has been prepared in accordance with the requirements of the AIM Rules and in accordance with IFRSs as adopted by the European Union and is presented on a basis consistent with the accounting policies adopted in the consolidated financial information of Sweett Group plc for the year ended 31 March 2015. It does not constitute accounts as defined by section 434 of the Companies Act 2006. This condensed interim consolidated financial information has not been reviewed or audited by the Group's auditors.

Estimates and judgements

The preparation of accounts in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the accounts and the reported amounts of revenues and expenses during the reporting period. These estimates are based on historical experience and various other assumptions that management and directors believe are reasonable under the circumstances, the results of which form the basis for making judgements about the carrying value of assets and liabilities that are not readily apparent from other sources.

Areas comprising critical judgements that may significantly affect the Group's earnings and financial position are revenue recognition, valuation of intangibles including goodwill, restructuring activities, provisions for bad debts, provisions for pensions, income taxes, and share-based payments.

After making enquiries, the Board has a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Interim results and financial statements.

Accounting policies

The accounting policies and methods of calculation adopted are consistent with those of the annual financial statements for the year ended 31 March 2015, as described in those annual financial statements. The Annual Report and Accounts for the year ended 31 March 2015 contain details of new standards, amendments and interpretations which have been adopted, none of which have had a significant effect on the reported results or financial position of the Group for the six months ended 30 September 2015. 

Sweett Group plc

Notes to the Financial Information continued

2. Segmental analysis

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as being the Board.

The Board considers Sweett Group's business and internal reporting by geography, being Europe, the Middle East and Africa, India and Asia Pacific. All four categories generate revenues from the provision of quantity surveying, project management and specialist services/management consultancy with the exception of India which generates revenue from the provision of quantity surveying and project management consultancy only.

The Board assesses performance based on a measure of earnings before interest, tax depreciation and amortisation (EBITDA). This measurement is net of intra-group trading balances and this basis excludes the effects of corporate and central costs. Interest income and expenditure are not included in the results for each operating segment that is reviewed by the Board.

The assets of the segments include intangible assets, property, plant and equipment, assets from finance leases, financial assets, trade receivables and other receivables, deferred tax assets and cash and cash equivalents. The liabilities comprise trade and other payables, current tax liabilities, financial liabilities, deferred tax liabilities, provisions and retirement benefit obligations.

Sales between segments are transacted at arm's-length. External revenue reported to the Board is measured in a manner consistent with that in the income statement.

In accordance with IFRS 5, the APAC and India segments meet the criteria required in order to be classified as assets held for sale and as a result form part of discontinued operations.

Sweett Group plc

Notes to the Financial Information continued

* Unallocated corporate costs comprise Directors' remuneration, advertising, public relations, corporate financing costs and legal and professional fees incurred by Sweett Group plc. The unallocated exceptional administrative expenses are those relating specifically to Sweett Group plc.

Sweett Group plc

Notes to the Financial Information continued

* Unallocated corporate costs comprise Directors' remuneration, advertising, public relations, corporate financing costs and legal and professional fees incurred by Sweett Group plc. The unallocated exceptional administrative expenses are those relating specifically to Sweett Group plc.

Sweett Group plc

Notes to the Financial Information continued

* Unallocated corporate costs comprise Directors' remuneration, advertising, public relations, corporate financing costs and legal and professional fees incurred by Sweett Group plc. The unallocated exceptional administrative expenses and Performance Share Plan credit are those relating specifically to Sweett Group plc.

Sweett Group plc

Notes to the Financial Information continued

3. Analysis of the result of discontinued operations and the result recognised on the re-measurement of assets of disposal groups:

Sweett Group plc

Notes to the Financial Information continued

4. Income taxes

Income tax expense is recognised based on management's best estimate of the weighted average annual income tax rate expected for the full financial year, applicable to those jurisdictions in which a tax charge is forecast. Apart from the loss primarily due to the sale of the APAC and India businesses, management expects an overall loss in respect of the continuing businesses, the majority of which is forecast to arise in MENA. Notwithstanding this, management expects an overall tax charge arising from profits in certain other tax jurisdictions and therefore there will be no effective tax rate for the year to 31 March 2016 (31 March 2015: 39%).

 5. Dividends

As part of the continued focus on reducing the Group's net debt, the Board has decided not to declare an interim dividend (2015: £nil) and the final dividend will be reviewed at the time of the full year results. The final dividend of 0.8p per share in respect of the year ended 31 March 2014 was paid on 12 September 2014. This amounted to £549,448.

6. Earnings per share

Sweett Group plc

Notes to the Financial Information continued

6. Earnings per share continued