Interim Report 2002/3

Transcription

1 Interim Report 2002/3

2 Highlights Financial results Turnover increased by 42% to 111.7m (2001: 78.6m) Profit before tax, goodwill and exceptional item increased by 2% to 15.3m (2001: 15.1m) Earnings per share before goodwill and exceptional item unchanged at 17.1p Dividend per share increased by 12% to 5.6p (2001: 5.0p) Expansion of operations 27% organic growth in Support Services turnover Three significant acquisitions in the period for an initial consideration of 81m Acquisitions have extended the service offering and customer base of Support Services businesses Trading performance Expenditure on customer acquisition in Home Service and on long term contract opportunities for Commercial Outsourcing have affected first half profitability to the benefit of the second half Home Service now have over 2m policies with continued high renewal rates OnSite continues to develop contracts with Thames Water and London Underground Rapid software installed at South West Water South Staffordshire Water achieving efficiency targets and ranked second in the industry for levels of service Investor profile and capital structure Placing of Vivendi's 31% shareholding with institutional investors removes uncertainty and improves liquidity Successful issue of 85m 23 year bond by South Staffordshire Water South Staffordshire Group Plc Interim Report 2002/3 1

3 Chairman s Statement The Group has significantly expanded its operations by a combination of strong organic growth and the completion of three significant acquisitions. The Group has significantly expanded its operations over the last six months by a combination of strong organic growth and the completion of three significant acquisitions which have extended the service offering and customer base of our Support Services businesses. The Group has also seen a change in its investor profile with Vivendi s 31% shareholding being placed with a number of institutional investors and the successful issue of the 85m 23 year bond by the Water Company. Interim Results In the six months ended 30 September 2002 the Group s turnover increased by 42% to 111.7m (2001: 78.6m). Turnover from Support Services increased by 67% to 82.4m (2001: 49.2m) of which organic growth accounts for 27% with the balance representing the contribution from the acquisitions. Group profit before tax, goodwill and exceptional item increased by 2% to 15.3m (2001: 15.1m). The Group has increased its expenditure on acquiring new policy holders within Home Service and on long term contract opportunities within our outsourcing businesses, which has affected profitability during the first half. The benefits of this increased investment are expected to be reflected in the second half, which typically enjoys stronger performance. Earnings per share before goodwill and exceptional item have remained at 17.1p, incorporating an anticipated increase in the tax rate to 28.5% (2001: 25.7%). The Board has approved an interim dividend of 5.6p (2001: 5.0p), an increase of 12%. 2

4 Chairman s Statement Net debt at 30 September 2002 was 115.2m (31 March 2002: 28.6m), including the 85m long term index linked bond issued in the period. The increase in net debt reflects the initial consideration of 81m invested by the Group on the acquisitions in the period. The Group remains conservatively financed: debt in the regulated water business amounts to approximately 70% of its Regulated Asset Value whilst the rest of the Group, which continues to generate strong cashflows, has annualised interest cover in excess of 20 times. New Business Investments The Home Service division, which provides emergency plumbing and electrical services on behalf of utility clients, has achieved strong organic growth since its inception in Over the last two years the Group has been seeking opportunities to expand the division by acquiring businesses that would increase the range of services it provides into the home and extend its client base. Similarly the OnSite division, which provides infrastructure maintenance services, has sought to broaden its service offering and continue to develop its client base outside of the water industry. Accordingly, the Group was pleased to announce in May 2002 the acquisition of Regency, the UK s leading retail furniture warranty business, for a consideration of up to 44.7m. Additionally in July 2002 the Group acquired Highway for an initial consideration of 27.6m, together with an earnout for management based upon achievement of significant growth in profitability over the next four years. Highway is one of the UK s leading suppliers of emergency repair services to household insurers provided on a national basis using directly employed tradesmen. In addition, Highway is developing a national directly employed emergency plumbing and drainage network working for both Home Service and for its own insurance customers. These two acquisitions have broadened the Home Service customer base to include retailers and insurers, provided a network of upholsterers, glaziers and locksmiths, and supplemented the existing subcontract repair network with a national directly employed operation. Regency and Highway have been brought together with Home Service as the HomeServe division which is now one of the UK s leading home assistance service businesses. In August 2002 OnSite acquired Middleton Doorman, which provides specialist infrastructure maintenance and mechanical, electrical and access door services, for a consideration of 15.4m. This has broadened the range of maintenance skills and the commercial customer base of the division, whilst strengthening the business in its key Midlands and South East operations. Following these acquisitions Support Services now represent 77% of group turnover and two thirds of profits on a pro forma basis. Group employees now total 3,400, compared to 1,800 a year ago, including over 1,000 employed tradesmen within the HomeServe and OnSite divisions. HomeServe HomeServe s turnover increased by 94% in the period to 43.6m (2001: 22.5m) including 26% organic revenue growth together with the contribution from acquisitions. The strong organic growth arises from increased marketing expenditure by Home Service to acquire new policies and increasing the scale of its telesales operation. This has resulted in new policy sales for the six months being 120,000 higher than for the same period last year, which will benefit second half trading performance. First half profits for Home Service have consequently reduced by 1.2m, being offset by a similar contribution from Regency and Highway since acquisition, giving a profit for the division of 3.9m (2001: 3.9m). The number of Home Service policies for plumbing and electrical assistance have increased to 2.04m at 30 September 2002 (31 March 2002: 1.85m). Retention rates in Home Service have remained high at 86% and cross selling to existing members has continued to be successful. The joint venture in France with Vivendi, the largest water provider in France, is progressing well, achieving good take up rates and its products are now being rolled out into all Generale des Eaux areas. South Staffordshire Group Plc Interim Report 2002/3 3

5 Chairman s Statement Regency has performed well since acquisition, providing new retailers with furniture warranty programmes and further developing its high quality repair operation for both retailers and manufacturers. Since acquisition Highway has been experiencing the seasonally low level of insurance leads, which has been particularly pronounced this year across the industry. However activity levels are increasing in the second half with the benefit of four new national commercial clients, the seasonal increase in leads which has been apparent in recent weeks and substantial work which has been secured from a new insurance client to commence in January Commercial Outsourcing The Group s outsourcing businesses (OnSite and Customer Solutions) have increased turnover by 31% to 47.3m (2001: 36.1m) comprising 18% organic growth, particularly from their largest customers, together with the contribution from Middleton Doorman. Operating profits have increased by 31% to 5.5m (2001: 4.2m), including 25% organic growth. The first half has benefited from initial licence fee revenue for our Rapid software, partly offset by reduced margins within OnSite and Echo due to increased expenditure on developing long term contracts. OnSite has increased turnover by 39% to 27.4m (2001: 19.7m). Since 1 April 2002 OnSite has been providing emergency drainage services to half of the Thames Water drainage network, more than doubling turnover on that contract. In addition, planned and reactive drainage work on half of the London Underground network has increased by over 50%. Increased expenditure on developing these major contracts and in the capability to win further long term contractual work has impacted on net margins in the period. An increased level of sewer relining work has also been undertaken in the period and new sewer investigation work for Welsh Water has been secured, together with a number of new contracts with water companies for water treatment work. Middleton Doorman has performed strongly since acquisition with high activity levels whilst pursuing opportunities to cross sell further services to existing customers. Customer Solutions has increased turnover by 21% to 19.9m (2001: 16.4m). Echo, the outsourced customer contact operation, now includes the joint venture with South West Water which was launched in February 2002, increasing turnover by 2.0m in the period. This business has invested in the capability to provide specialist work on inbound and outbound telephone campaigns which are expected to show benefits over the next 12 months. Our Rapid software has also been installed at South West Water and is expected to be fully operational by the end of November. Wessex Water and Bristol Water are currently extending their use of the Rapid system to their measured customers. Mail Solutions has benefited from improved efficiencies in the period and secured long term contract work for a number of new customers including Barclaycard and Vertis. Regulated Water Supply As a result of low inflation and the negative k factor of 1% set for South Staffordshire Water, turnover from Regulated Water Supply has reduced marginally to 29.3m (2001: 29.4m), with operating profits flat at 8.0m. A number of initiatives to reduce overheads have been implemented including the consolidation of the two divisional offices into one and the introduction of a new works management system. These will benefit the second half of the year and the business remains on target to achieve the 14% real reduction in overheads imposed by OFWAT for the five year review period to The latest levels of service report published by OFWAT has ranked South Staffordshire Water second highest in the industry. This is based upon OFWAT s assessment of water supply, water quality and customer service as provided by Echo. The Drinking Water Inspectorate has assessed our water quality at 99.91% compliance, the second highest in the industry. Our domestic customers continue to pay the second lowest charge in England and Wales, whilst industrial customers have the lowest volumetric rate in the country. South Staffordshire Water, with the support of Echo, is maintaining the historic level of debt collection despite the continued impact of not being able to disconnect customers for non-payment. The Company achieved its leakage target for last year and has now agreed with OFWAT that current levels are within the economic level of leakage. 4

6 Chairman s Statement The business is making good progress with its capital programme for the year which includes expanding capacity at one of its major treatment works and a number of treatment schemes for water quality. Capital expenditure during the current year is expected to be in the region of 25m, the highest annual level in the five year review period to 2005, before significant reductions over the next two years. Investor Profile and Capital Structure Vivendi has been a shareholder in the Group for 15 years, but in March 2002 revealed its intention to sell its 31% shareholding as part of the financing of their bid for Southern Water. Their shares were placed in October 2002 with a number of institutional investors, removing the uncertainty surrounding the shareholding and improving the liquidity of the Group s shares. During August and September 2002 South Staffordshire Water successfully issued an 85m 23 year index linked bond at a coupon of 3.75% to 17 financial institutions. The Water Company used 65m of the proceeds to repurchase its shares from its holding company, increasing gearing to approximately 70% of the Regulated Asset Value. The bond has secured long term finance for the Water business and provides a cost effective capital structure. Within HomeServe, Home Service is enjoying a good response to the Autumn mailings and continued high renewals, and both Regency and Highway have won important new contracts. OnSite and Customer Solutions are expected to benefit from the increased investment in long term contracts and the Regulated Water Supply business is expected to continue to achieve efficiency savings. A key focus in the short term is the integration of the acquired businesses into the Group and the realisation of the planned synergy benefits. The Group s businesses enjoy good visibility of earnings with stable profits from South Staffordshire Water combining with high and predictable retention rates in Home Service and long term contracts in the Support Services businesses. The Directors remain confident in the prospects for the Group for the full year. Lindsay Bury 12 November 2002 Prospects These results provide a sound base for the second half which typically enjoys stronger performance. In particular Home Service historically generates the majority of its profits in the second half due to a higher level of renewals in the Autumn and Winter period. South Staffordshire Group Plc Interim Report 2002/3 5

7 Consolidated Profit and Loss Account For the six months ended 30 September 2002 Six months Six months Year ended ended ended Note Turnover Existing operations 91,856 78, ,090 Acquisitions 19, ,689 78, ,090 Less share of joint ventures turnover (2,000) (676) Group turnover 109,689 78, ,414 Operating Profit Existing operations 15,911 16,113 38,319 Acquisitions 1,521 Operating profit 3 17,432 16,113 38,319 Goodwill (2,416) (627) (1,256) 15,016 15,486 37,063 Exceptional item - loss on disposal of subsidiary (611) (611) Net interest payable (2,097) (1,020) (1,912) Profit before tax, goodwill and exceptional item 15,335 15,093 36,407 Goodwill amortisation (2,416) (627) (1,256) Exceptional item - loss on disposal of subsidiary (611) (611) Profit on ordinary activities before taxation 12,919 13,855 34,540 Taxation on profit on ordinary activities 4 (4,370) (3,879) (9,844) Profit on ordinary activities after taxation 8,549 9,976 24,696 Minority shareholders equity interests 190 (559) (1,886) Profit for the financial period 8,739 9,417 22,810 Dividends paid and proposed 6 (3,516) (3,131) (10,097) Retained profit 5,223 6,286 12,713 Earnings per share Basic p 15.1p 36.6p Adjusted p 17.1p 39.6p Diluted p 14.9p 36.1p Dividend per share 6 5.6p 5.0p 16.1p 6

8 Fixed assets Consolidated Balance Sheet At 30 September 2002 (Restated) Intangible assets - goodwill 126,696 22,035 21,579 Tangible assets 168, , ,379 Investments , , ,978 Current Assets Stocks 5,440 3,779 3,062 Debtors 70,925 45,832 54,440 Cash at bank and in hand 9,649 5,062 6,967 86,014 54,673 64,469 Creditors - amounts falling due within one year Borrowings (34,671) (31,306) (30,313) Other creditors (100,940) (64,965) (77,988) (135,611) (96,271) (108,301) Net current liabilities (49,597) (41,598) (43,832) Total assets less current liabilities 245, , ,146 Creditors - amounts falling due after more than one year Borrowings (90,167) (5,791) (5,233) Other creditors - deferred consideration (23,473) (113,640) (5,791) (5,233) Deferred income (4,238) (2,628) (3,726) Provisions for liabilities and charges (7,885) (5,951) (7,043) Net assets 119, , ,144 Capital and reserves Ordinary share capital 6,282 6,267 6,280 Share premium 15,110 14,434 15,046 Capital redemption reserve 1,200 1,200 1,200 Profit and loss account 94,700 83,254 89,477 Equity shareholders funds 117, , ,003 Minority shareholders equity interests 2,373 2,097 3, , , ,144 South Staffordshire Group Plc Interim Report 2002/3 7

9 Consolidated Cash Flow Statement For the six months ended 30 September 2002 Net cash inflow from operating activities Six months Six months Year ended ended ended Note Operating profit 15,016 15,486 37,063 Depreciation and profit on disposals 7,810 6,230 13,100 Amortisation of goodwill 2, ,256 Share of operating loss in joint ventures Increase in working capital (392) (5,087) (2,207) Returns on investments and servicing of finance 25,186 17,256 49,471 Net interest paid (1,534) (1,020) (1,912) Dividends paid to minority interests (1,216) (901) (1,293) (2,750) (1,921) (3,205) Corporation tax paid (5,133) (2,990) (9,403) Capital expenditure and financial investment Purchase of tangible fixed assets (18,351) (17,019) (38,912) Investment in joint ventures (100) (314) (Purchase)/sale of own shares (32) Sale of tangible fixed assets ,191 Capital contributions received 2,727 2,380 6,001 (15,430) (13,785) (32,015) Acquisitions and disposals Investment in subsidiary undertakings 8 (76,019) Equity dividends paid (6,961) (6,212) (9,344) Financing Issue of ordinary share capital ,378 Proceeds from bond issue 83,712 Repayment of loan notes (401) (166) (219) Finance lease and hire purchase payments (181) (354) (1,053) 83, Increase/(decrease) in cash 2,089 (7,215) (4,390) Reconciliation of movement in net debt Increase/(decrease) in cash 2,682 (525) 1,380 Increase in bank overdraft (593) (6,690) (5,770) 2,089 (7,215) (4,390) Debt in companies acquired (1,455) Debt issued in respect of acquisitions (3,761) Assets purchased under finance leases (100) (154) (275) Index-linked bond - proceeds from issue (83,712) - indexation (253) Debt repayments ,272 Increase in net debt in period (86,610) (6,849) (3,393) Net debt brought forward (28,579) (25,186) (25,186) Net debt carried forward (115,189) (32,035) (28,579) 8

10 Notes 1 Financial reporting The group's principal accounting policies are consistent with those adopted in the financial statements for the year ended 31 March 2002 and, with the exception of deferred tax which is now calculated on a discounted basis, with those adopted in the interim financial statements for the six months ended 30 September In the interim financial statements for the six months ended 30 September 2001, deferred tax was provided on an undiscounted basis. The provision for deferred tax at 30 September 2001 has been restated accordingly, from 12,923,000 as previously reported to 5,951,000, resulting in an increase in net assets of 6,972,000 at that date. There was no impact on the tax charge for the six months ended 30 September This interim financial information is unaudited and does not constitute statutory accounts. Comparative figures for the year ended 31 March 2002 have been extracted from the latest published accounts which received an unqualified audit report and have been filed with the Registrar of Companies. 2 Turnover Six months Six months Year ended ended ended Existing operations Acquisitions Total Total Total HomeServe 28,257 15,343 43,600 22,469 60,281 Commercial outsourcing 42,831 4,490 47,321 36,176 77,852 Inter division (8,501) (8,501) (9,426) (20,168) Support services 62,587 19,833 82,420 49, ,965 Regulated water supply 29,269 29,269 29,400 59,125 91,856 19, ,689 78, ,090 Inter divisional turnover relates wholly to commercial outsourcing. 3 Operating profit Six months Six months Year ended ended ended Existing operations Acquisitions Total Total Total HomeServe 2,690 1,240 3,930 3,924 14,117 Commercial outsourcing 5, ,540 4,221 8,015 Support services 7,949 1,521 9,470 8,145 22,132 Regulated water supply 7,962 7,962 7,968 16,187 15,911 1,521 17,432 16,113 38,319 Goodwill amortisation (2,416) (627) (1,256) 15,016 15,486 37,063 Operating profit includes the group's share of losses in joint ventures of 336,000 for the period (six months ended 30 September 2001: nil, year ended 31 March 2002: 259,000). South Staffordshire Group Plc Interim Report 2002/3 9

11 Notes 4 Taxation The tax charge is based on the estimated effective tax rate, calculated on profit before goodwill and exceptional item, for the full year to 31 March 2003 of 28.5% (2002: 27.0%), including deferred tax. 5 Earnings per share Basic earnings per share is calculated by dividing the profit for the financial period by the weighted average number of shares in issue during the period. Adjusted earnings per share is calculated excluding goodwill and exceptional item. Six months Six months Year ended ended ended Profit for the financial period 8,739 9,417 22,810 Amortisation of goodwill - total 2, ,256 - relating to minority shareholders (451) Exceptional item Adjusted profit for the financial period 10,704 10,655 24,677 Weighted average number of shares (000 s) Basic 62,746 62,195 62,347 Diluted 63,504 63,107 63,272 6 Dividend per share An interim dividend of 5.6p (2001: 5.0p) per share has been approved and will be paid on 2 January 2003 to shareholders on the register at the close of business on 22 November The dividend from the regulated water business to the ultimate parent company was 2.05m (2001: 2.01m). 7 Reconciliation of movements in shareholders' funds Six months Six months Year ended ended ended (Restated) Profit for the financial period 8,739 9,417 22,810 Dividends (3,516) (3,131) (10,097) 5,223 6,286 12,713 New share capital subscribed ,378 Net additions to shareholders funds 5,289 7,243 14,091 Opening shareholders funds as previously stated 112,003 90,940 97,912 Prior period adjustment for deferred tax (note 1) 6,972 Opening shareholders funds as restated 112,003 97,912 97,912 Closing shareholders funds 117, , ,003 10

12 Notes 8 Acquisitions The following acquisitions were made during the financial period: Regency Highway Middleton Financial Emergency Maintenance Holdings Services Limited Plc Limited Date acquired: 14 May July August 2002 Acquired by: HomeServe HomeServe OnSite Division Division Division Total Consideration: Cash including acquisition expenses 38,564 29,028 12,042 79,634 Loan notes 3,761 3,761 Deferred consideration 6,700 19,473 26,173 45,264 48,501 15, ,568 Fair value of net assets acquired: Tangible fixed assets 3,954 1,252 1,625 6,831 Cash at bank and in hand 2, ,767 5,510 Debt (41) (26) (1,388) (1,455) Other net current assets/(liabilities) (9,045) 2,687 (848) (7,206) (2,618) 4,142 2,156 3,680 Goodwill on acquisition 47,882 44,359 13, ,888 The amounts stated above for consideration, fair value of net assets acquired and goodwill are provisional. Fair value adjustments totalling 99,000 have been made in respect of these acquisitions. Deferred consideration includes 13,500,000 payable after 31 March On 1 April 2002, the group acquired the 40% of Home Hotline Limited held by other shareholders for a consideration of 1,895,000. The fair value of the minority interest acquired was 250,000, resulting in goodwill of 1,645,000. Goodwill is being amortised over its estimated useful life of 20 years. 000 The net cash outflow in respect of the acquisitions comprised: Cash consideration 81,529 less cash balances acquired (5,510) 76,019 The increase in net debt resulting from the acquisitions comprised: Cash consideration less cash balances acquired 76,019 Loan notes issued 3,761 Debt acquired 1,455 81,235 South Staffordshire Group Plc Interim Report 2002/3 11

13 Notes 9 Analysis of net debt Cash at bank and bank overdraft (18,238) (23,152) (20,327) Irredeemable debenture stock (1,633) (1,633) (1,633) Bond (83,965) Obligations under finance leases (5,969) (5,173) (4,595) Loan notes (5,384) (2,077) (2,024) Net Debt (115,189) (32,035) (28,579) South Staffordshire Water PLC issued 85,000, % Retail Price Index - linked bonds in the period, 75,000,000 on 22 August 2002 and 10,000,000 on 26 September The bonds are repayable in The bonds are included in the balance sheet at an amount equal to the sum of the proceeds received on issue and indexation to date, less issue costs. 10 Other information This interim report is being sent to shareholders and further copies will be available from the registered office at Green Lane, Walsall, WS2 7PD. 12

14 South Staffordshire Group Plc Green Lane Walsall West Midlands WS2 7PD Tel: Fax: