Investor Relations

Chairmans Statement May 2011

On the 18th May an Interim Management Statement was issued, reporting a first quarter profit before tax increased by 10.6% to £0.62 million on revenue increased by 34.0% to £51.00 million over the comparable period last year.  The results do not incorporate any profit emanating from the result of the appeal against the OFT fine.

All the construction divisions within the PLC traded profitably, as did the Nomenca subsidiary.  However, the building subsidiary delivered a significant loss.  A detailed breakdown of the individual performance of each division and subsidiary will provide a greater insight into the overall Group performance.

The civil engineering division has returned a profit of £304,000 on a revenue of £15.5 million.  Increases of 16.5% and 24.0% respectively on the previous year.  The sub division NMCNomenca, established to undertake the AMP5 programme for Severn Trent Water, performed particularly well.  Orders received by NMCNomenca to date, to be undertaken this year, stand at £38 million and there is good visibility of a further £6 million, compared with the budget figure of £50 million.  A pro-active and innovative approach is being applied to the framework and this is delivering significant cost savings.  However, the remainder of the division is suffering from reduced tender opportunities and extremely competitive margins as clients, most particularly in the public sector, cut back expenditure.  Current workload for the year is £11 million and the division was recently successful in securing the LDP framework for Anglian Water, for which to date no orders have been forthcoming.  There is, therefore, an urgent need to secure more orders in the short term.  To achieve this a revised marketing strategy has been implemented.

The highways division has generated a first quarter profit increased by 92% of £75,000 on revenue increased by 6% at £3.5 million.  In spite of the cutbacks in public expenditure, the division continues to progress and the current 2011 order book stands at £17 million, compared with a budget target of £20 million.  The division has continued to consolidate on its previous geographical expansion, particularly in the North West and contracts of a higher notational value are now being secured, most notably £5 million at Doncaster for Muse Developments and £3 million for the design and construction of a new road at York University.  An area of expertise has been developed in public realm contracts and frameworks, such as that currently being undertaken for Liverpool City Council.  This type of contract, so far, seems to have escaped relatively unscathed the Local Authority expenditure cuts.  Confidence is high, therefore, that an improved performance over that of the previous year will be delivered.

The telecommunications sector, driven by the high demand for advanced broadband, continues to be very buoyant, and the utilities division has been a beneficiary.  It continues to serve most of the major
telecommunications companies and will complete this year the South Yorkshire Digital Region contract for Thales, which will have a final value of £30 million.  First quarter profit increased by 33.9% to £237,000 on revenue increased by 12.2% at £10.1 million.  The majority of the revenue is delivered from existing frameworks, but the SYDR contract is due to be completed in October this year.  Current revenue for this contract is circa £1 million per month and this will need to be replaced.  Single contracts of this type and scale are currently not available, but opportunities within the overall market exist to replace this revenue and achieve the budgeted revenue of £40 million.  The in-house cabling capability has been very well received by clients and it is the intention to expand this further.

North Midland Building continues to be the Group member most seriously affected by the current economic situation.  There is a reluctance by banks to support development, although in many instances the business case is valid.  Whilst the marketing strategy has been re-focussed to concentrate more on the public sector, government cutbacks have reduced tender opportunities.  Success has been forthcoming, though, in the health and defence sectors.  The current contract portfolio includes the construction of one of the largest private houses to be commissioned in the country in the last few years.  Design problems and delays in their resolution will result in the project being completed late with a significant cost overrun.  A significant claim for the reimbursement of these costs has been formulated and submitted.  The resolution of this will have a significant bearing on the year end result for the subsidiary.  As a consequence of this and the general low level of margin being generated elsewhere, a loss of £255,000 was generated on revenue of £6.5 million.  This compares with the previous year’s figures of a £21,000 loss on revenue of £5.3 million.  The current secured order book to be constructed during this year is £22 million and the budget of £39 million will not be achieved.  In spite of the aforementioned contractual problems and the current constraints in the construction market, the company has developed a high quality reputation and has developed a valued portfolio of blue chip clients.  This financial year will deliver an unsatisfactory result, but in the longer term the company will return to making a valuable contribution to the Group.

The previous year, in spite of its numerous frameworks, proved to be particularly difficult for Nomenca, as the anticipated expenditure on the AMP5 programme was particularly slow in forthcoming. The gestation period for mechanical and electrical work being longer than that for civil engineering.  It is, therefore, gratifying to report that the water companies’ programmes are now underway and Nomenca is a beneficiary.  The subsidiary currently has secured 24 No. frameworks, of which 21 No. are within the water industry.  First quarter profit increased by 152.5% to £255,000 on revenue increased by 92.5% at £15.4 million.  The AMP5 framework for South West Water has recently been secured and the current workload for this year is £55 million, including the contribution from NMCNomenca, against a budget target of £55 million.  However, a significant proportion of this will fall in the last quarter and will have to be completed before the financial year end for the budget to be achieved.  Confidence is high that Nomenca will deliver the forecast for this year and has returned to its previous path of growth.

The current economic climate is not only characterised by public expenditure cutbacks and the reluctance of banks to lend, but also rising inflation.  This is particularly prevalent in the price of commodities and fuel.  Constant pressure is also being exerted by clients, most particularly on frameworks, to deliver cost savings.  To deliver, the Group has to be innovative, highly focussed on cost, more efficient and work more closely with its supply chain.  This is being achieved and revenue is increasing, without a corresponding increase in overhead and operational costs.  Significant progress has been made with the implementation of the supply chain management system P4D (Partners for Delivery).  A reduced number of partners are embracing both the cultural changes and financial objectives that the Group is aiming to achieve.  The Group, however, is an anachronism in that, in spite of being a significant company in the construction industry, circa 50% of the work undertaken is executed by its own employees.  It is the quality, loyalty and skill of those employees that differentiates this Group from its competitors.  Significant progress has again been made in human resource performance, the statistics for employee days lost due to sickness and absence and employee retention are significantly superior to the national average.  It is pleasing to report that after last year’s reduction in headcount, recruitment has resumed and the employees’ response to last year’s pay freeze was both exemplary and commendable.  The retention of a quality workforce and the ability to attract employees and graduates to the Group of the required calibre and their future development is of paramount importance.  The Group has reinforced its commitment to training by outsourcing to an external partner to provide additional resource and expertise to the in-house capability.  University sponsorship, summer placements and the apprentice scheme have been maintained.  Support has also been given to the local campaign instigated by the Nottingham Evening Post to recruit 100 apprentices in 100 days and positive press coverage has been received.  394 No. training days were undertaken in the first quarter.  5 No. undergraduates are currently being sponsored at various universities and the apprentice scheme currently has 24 No. members, including 4 No. in the newly formed in-house cabling capability.  All the apprentices continue to have been recruited from recommendation within the Group, with no external advertising required.

In the past few years huge advances have been made in health and safety and environmental performance.  The “Just Culture” initiative is delivering significant improvements in both awareness and behaviour.  Statistically, performance well exceeds that of the UK construction industry and there have been no statutory reportable accidents since September 2009, which is a wonderful achievement, particularly as it equates to over 3 million working hours.  Since the last Annual General Meeting the Group in total has been the recipient of 9 No. awards for health and safety and 6 No. for environmental performance.  A further Considerate Construction Award has been won for the work undertaken by both the civil engineering division and North Midland Building, in addition to last year’s award, at Severn Trent Water’s offices in Raynesway, Derby.  NMCNomenca were also delighted to receive a commendation at the historic bridge and infrastructure awards for the renovation of Wilford Suspension Bridge in Nottingham.

Sustainability and reduction in carbon footprint, quite correctly, are high on the agenda these days and measures, in some cases showing great ingenuity and innovation, to reduce the effect of all operations are underway.  Two examples being the creation of our energy working party to examine all areas of energy consumption and the imminent installation of solar panels to the older office building on the other side of the road.  NMCNomenca, in particular, has delivered an innovative holistic approach to its business in the areas of design, new product introduction and construction.

The Group is proud of its commitment to the wider community and all shareholders should have received their copy of last year’s Corporate Social Responsibility report, which has been verbally praised by ROSPA.  The positive work detailed in the report is continuing and a close relationship has been forged with Business in the Community.

In the 2009 Annual Report and Accounts a full provision of £1,594,000 was made as an exceptional item for the fine levied by the Office of Fair Trading, together with the anticipated legal costs of the appeal.  That appeal has now been heard and the result published.  The stance adopted has been vindicated with one case being dismissed and the overall fine reduced to £300,000.  Sadly, a lack of supporting documentation precluded a similar result in the second case.  The tender concerned was submitted in 2004 and was unsuccessful.  As a consequence, all contract documentation was destroyed.  Ethical conduct has always been at the forefront of this business and the Tribunals findings endorse this.

Cash generation has been positive during the quarter and as several clients have introduced extended payment terms, this is a significant success.  The Group has only had a negative balance on its bank account for one week this calendar year.  The share price is obviously of major interest to shareholders and Brewin Dolphin have recently upgraded the shares to “buy” with a 12 month target price of 270p.  Copies of their latest investment update are available today.  The latest forecast to the market for this financial year, as detailed in that investment report, is for a pre-tax profit of £3.8 million for the full year.

In spite of the difficult overall economic climate, combined with its particular affect on the construction sector, your Board has no reason at this stage to revise this forecast.

R Moyle Chairman May 2011 North Midland Construction PLC

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