Interim Results

Inspace Plc 25 September 2007 Press Release 25 September 2007 Inspace plc ('Inspace' or 'the Company') Interim Results for the six months ended 30 June 2007 Inspace plc (AIM:INSP), one of the UK's leading specialist service providers to the social and affordable housing market, announces its Interim Results for the six months ended 30 June 2007. Highlights Strong financial performance • Group revenue substantially up by 124% at £139.9 million (H1 2006: £62.6 million) • Operating profit up by 83% at £6.6 million (H1 2006: £3.6 million) • Earnings per share increased by 35% to 5.05 pence* • Interim dividend up 15% to 1.23 pence (H1 2006: 1.07 pence) • Cash conversion improved by 37% to 110% (H1 2006: 80%) ** Improved visibility of future earnings • 97% of social housing turnover for 2007 secured*** • 85% of social housing turnover for 2008 secured*** • 100% of corporate assets turnover for 2007 secured*** Positioned for future growth • Well positioned in maintenance and new build • Government planning 3 million new homes by 2020 * on a diluted and adjusted basis ** proportion of operating profit converted into cash from operating activities (before taxation paid) *** based on consensus forecasts at 24 September 2007 Commenting on the Results, Colin Enticknap, Executive Chairman of Inspace plc, said: 'We are extremely pleased with the way things have unfolded during the first half year. We have outperformed market forecasts, improved visibility of future revenues, and seen firm evidence that Government's social housing agenda is evolving in the way that we predicted. With significant emphasis now being placed on building affordable and sustainable new homes, we are well positioned to take full advantage of the next wave of public investment in this robust sector.' For further information: Inspace plc Colin Enticknap, Executive Chairman Tel: +44 (0) 1462 678 910 colin.enticknap@inspace.co.uk Andrew Telfer, Chief Financial Officer andrew.telfer@inspace.co.uk www.inspace.co.uk Dresdner Kleinwort Christian Littlewood Tel: +44 (0) 20 7623 8000 Media enquiries: Abchurch Henry Harrison-Topham Tel: +44 (0) 20 7398 7702 henry.ht@abchurch-group.com www.abchurch-group.com Executive Chairman's statement Overview The Group performed strongly during the period ending 30 June 2007 with visible benefits flowing from the strategic changes introduced last year. Results for the enlarged Group were ahead of consensus forecasts, already upgraded as we entered the close period, and significantly ahead of HY 2006 figures. The newly acquired social and affordable housing businesses made excellent contributions to both revenue and operating profit, complementing equally robust performances elsewhere. With almost all of our predicted revenue for 2007 now secured, we should be well placed for the full year. As regeneration and new build activity for registered social landlords (RSLs) now represents a material proportion of our overall workload, we are much less affected by the local authority budget cycle and can therefore expect to see much less seasonal distortion in revenue flows. Profit flows should, on the other hand, continue to be biased towards the second half of the year, influenced by the annual calendar for reconciling and agreeing performance based variable profit and shared savings. We still have some work to do to fully secure our target margins for 2007, particularly where that margin comes from performance based incentives, but our track record in this area has been good and we remain confident in our ability to achieve the right outcome. Looking further ahead, the social and affordable housing market has continued to evolve in the way we predicted, fully justifying our decision to accelerate growth in this sector and to expand into the increasingly important regeneration and new build arena. With Government emphasis now shifting away from 'decent home improvements' and towards building 'more affordable, more sustainable new homes', we should be well positioned to capitalise on the next generation of investment in public housing, supporting the Prime Minister's stated drive to build three million new homes by 2020. Results Revenue for the six months ended 30 June 2007 grew substantially by 124% to reach £139.9 million (2006: £62.6 million), driven by last year's acquisition of Widacre Limited and by strong underlying organic growth. Social and affordable housing represented 72% of overall activity, significantly enhancing our position as one of the UK's principal specialists in this high growth sector. Operating profit increased 83% to £6.6 million (2006: £3.6 million). Growth was lower compared to revenue, mainly reflecting the modified target margin for our new mix of business but also the accounting treatment of joint venture activity where operating profits are included on a post tax basis. Nevertheless, operating margin still sat at a healthy 4.7% (2006: 5.7%). After interest charges on the debt put in place to part finance the acquisition, pre-tax profit was 47% ahead at £5.4 million (2006: £3.7 million). Continued emphasis on effective cash management helped improve cash conversion once again to 110%, (2006: 80%) which, in turn, reduced bank borrowings at 30 June 2007 to £29.4 million (31 December 2006: £31.6 million). As a result, interest charges were slightly lower than expected at £1.2 million. The tax charge of £1.3 million (2006: £0.8 million) reflects an effective rate of 25% (2006: 23%). Adjusted diluted earnings per share, perhaps our most important performance measure, increased by 35% to 5.05 pence per share (2006: 3.73 pence) after taking into account the consideration shares also issued at the time of the acquisition. Interim Dividend The encouraging first half performance has allowed the Board to declare an interim dividend of 1.23 pence per share (2006: 1.07 pence) which will be paid on 2nd November 2007 to those Shareholders on the Register on 5th October 2007. This represents an increase of 15% over last year, and is consistent with current policy. Social and Affordable Housing Our social and affordable housing businesses, which trade as Inspace Partnerships and Inspace Homes, specialise in building, improving and maintaining rented housing for social landlords and also developing affordable housing for sale, often in joint venture with social landlords, to create sustainable, socially integrated communities precisely in line with current Government policy. These businesses collectively contributed £100.9 million (2006: £30.2 million) to first half Group revenues and £5.2 million (2006: £2.4 million) to first half operating profit. Having increased in scale so dramatically, they now form the backbone of our business and will remain our main growth driver moving forward. Our overall operating margin for social housing was 4.1% (2006: 8.0%), diluted as expected by the lower target margin on regeneration and new build activity which now accounts for about two thirds of revenue in this sector. There was also some margin pressure on maintenance and stock reinvestment activity where competition is growing and key performance indicator targets, which influence incentive payments, are becoming more stretching. Our aim for the full year will be to lift the level closer to our new blended target for operating margin of 4.5%. The operating margin for affordable housing was 19.5% (2006: nil). With all first half operating profit having been derived through our joint venture development model working alongside RSLs, this was subject to a joint venture tax charge of £0.4 million (2006: nil). As well as delivering good first half results, we have also made good progress in workload terms. As we closed our half year accounts, our social housing businesses had booked 97% of consensus 2007 revenues and already secured firm orders and preconstruction commissions for 85% of consensus 2008 revenues. Our regeneration and new build procurement team has continued to enjoy an exceptional track record securing term appointments under framework agreements with 6 further successes out of 6 submissions this year. They are equally adept at winning stand alone regeneration tenders, the most recent example being our selection as one of seven contractor partners by Clapham Park Homes for the £350 million regeneration of the Clapham Park Estate in London. With pricing becoming more competitive in their sub-sector, our maintenance and stock reinvestment team has been more selective in its tendering, prioritising like minded customers with schemes that offer scale. We see Birmingham City Council as a good example and were pleased to be short-listed amongst the four businesses from whom two will be selected later this year to maintain the majority of their housing stock. Considerable energy is being committed into the second stage negotiations, which offer the potential of a £100 million contract over eight years. In our affordable housing business, we have exchanged contracts on all unit sales required for 2007, and our sights have therefore turned to 2008 and beyond. Reservations on entry level homes for sale have remained strong despite the background of rising UK interest rates, suggesting that demand from first time buyers in London remains resilient. On our latest release, Scott House in Islington, 14 reservations were achieved in the first two weeks. Of more concern is the time taken to bring sites to market, with site acquisition and planning negotiations becoming increasingly protracted. New Government plans to accelerate the planning process and to free up land owned by various Ministries are welcome and not before time. Against this backcloth, we were pleased to secure planning permission for the London Wide Initiative site at West Middlesex Hospital during the period, where we are working with English Partnerships and Notting Hill Housing Group. Consistent with Government policy, the development will create an integrated, mixed tenure community with 280 open market homes for sale alongside homes for rent and subsidised homes for sale to eligible key workers. We are aiming to submit the planning application for the second London Wide Initiative site, which is expected to include 200 open market homes for sale, early next year. We were equally pleased to be recommended by Reading Borough Council as a preferred development partner for the £140 million regeneration of the Dee Park Estate. Once formally ratified, we shall be working in joint venture with Catalyst Housing Group, a leading London based RSL, to reach financial close on a major scheme that will see 480 new open market homes for sale, 280 new homes for rent and a community school to be finally completed by 2017. We see this as an important opportunity to establish our credentials in this growth market. Corporate Assets Our corporate assets businesses, trading as Inspace Maintain and Inspace Complete, provide a maintenance and interiors service to the workplace for both private and public sector customers. In first half revenue terms, they collectively contributed the balance of £39.0 million (2006: £32.5 million). Whilst, with our accelerated growth in social and affordable housing, this now represents only 28% of the enlarged business, it reflects an underlying annual growth rate for the division of 20%, a very encouraging sign for the future. The contribution to operating profit was £1.4 million (2006: £1.2 million). Margin was exactly in line with last year at 3.6% (2006: 3.6%), a strong performance from the interiors business balancing the effects of the change programme under way in the maintenance business. That programme, which involves the realignment of operating structures and introduction of new technology across the maintenance activity, is progressing satisfactorily. Whilst caution with the IT roll out is likely to extend the programme into Q1 2008, the early signs of potential efficiency improvements are encouraging. Demand for the interiors service remains particularly strong and the new furniture service has been well received. We have always emphasised that these businesses offer less workload visibility than in social housing. Maintenance contracts are usually shorter in duration and there is a greater dependence upon discretionary 'project' expenditure to supplement the core maintenance budgets; interiors work demands a constant throughput of intense, short term projects. Our declared aim has therefore been to progressively increase visibility through securing larger, longer term contracts. At this stage last year we still needed to secure 19% of consensus 2006 revenues. This year we have secured 100% of consensus 2007 revenue and with 37% of consensus 2008 revenue already booked, we are on track to lift that figure to our target of 75% by the time we close this year's accounts. Outlook 'Homes are the building blocks of our communities. They affect our health, our wealth, and our opportunities for happiness. For a generation, the supply of new homes has not kept up with rising demand. The past decade has seen house prices double in real terms and if we ignore the rising pressure for more homes, we will see widening wealth inequality, frustrated aspirations and damage to our economy. We need a new national drive to support more affordable housing and we need to act now. That's why the Prime Minister recently announced plans for three million new homes by 2020. Homes that reflect the diverse needs of all our communities.' Those are not my words; they are from Yvette Cooper, Minister for Housing, in the Housing Green Paper Homes for the future: more affordable, more sustainable published last month. With the number of households projected to grow at 223,000 a year and the housing stock presently growing by just 185,000 a year, there can be little doubt that 'new housing' will be at the centre of the political agenda for the foreseeable future, irrespective of whether we have a Labour or a Conservative Government. Current plans are to invest £8 billion in social and affordable housing over the next three years, a 60% increase over the previous period, delivering 180,000 new homes. By 2010/11, the annual build rate is expected to reach 75,000 with a further increase predicted in the next spending review. Of the three million new homes planned for 2020, two million are planned for 2016. That investment will be through integrated, mixed tenure communities, with increasing emphasis on sustainability, environmental efficiency and value for money - all areas where we are strong. Just as importantly, we do not expect this focus on new build to be at the expense of maintaining existing stock where the trend towards outsourcing continues apace, nor on stock reinvestment where natural deterioration, rising standards of living and evolving priorities will create continual demand. We are determined to play a leading part in this next wave of investment in public sector housing and confident that we are well placed to do so, alongside delivering renewed growth across our corporate assets businesses. Following last year's changes, we now have the structure, the relationships and the resources we need. Above all else, we have a fantastic team of people; enthusiastic, hardworking and totally committed to delivering great service and high quality product. It is them who make our Group what it is today; their votes and comments led to Inspace Partnerships being selected by Contracts Journal for its Best Place to Work in Construction award, and they will ultimately determine our success over the months and years ahead. My personal thanks and those of my Board colleagues go to all of them. We have enjoyed a good start to 2007. With their continued support, we have a very bright future ahead. Colin Enticknap Executive Chairman 24 September 2007 Consolidated Income Statement For the half year 30 June 2007 Unaudited Unaudited Unaudited half year half year full year 30 June 2007 30 June 2006 31 Dec 2006 Notes £000 £000 £000 Revenue Group and share of joint ventures 147,537 62,642 175,222 Less share of joint ventures (7,614) - (170) Group revenue 2 139,923 62,642 175,052 Cost of sales (114,805) (45,430) (133,413) Gross profit 25,118 17,212 41,639 Administrative expenses (19,618) (13,625) (30,555) Share of post tax profits of joint ventures 1,074 - 75 Operating profit 2 6,574 3,587 11,159 Finance income 32 91 112 Finance costs (1,199) - (835) Profit before tax 5,407 3,678 10,436 Tax expense 3 (1,344) (848) (2,889) Profit for the half year 4,063 2,830 7,547 Earnings per ordinary share: (pence) Basic 5 5.11 4.18 10.53 Diluted 5 5.05 4.17 10.49 Adjusted earnings per ordinary share: (pence) Basic 5 5.11 3.74 10.20 Diluted 5 5.05 3.73 10.16 Consolidated Balance Sheet As at 30 June 2007 Unaudited Unaudited Unaudited half year half year full year 30 June 2007 30 June 2006 31 Dec 2006 £000 £000 £000 Non-current assets Goodwill 61,949 - 61,949 Intangible assets 140 79 160 Property, plant and equipment 1,362 1,071 1,600 Financial assets 243 - 83 Investments in joint ventures 47 - 218 Deferred taxation 99 - 98 63,840 1,150 64,108 Current assets Inventories 2,056 464 1,680 Trade and other receivables 52,879 32,040 52,929 Cash and cash equivalents 75 6,728 51 55,010 39,232 54,660 Total assets 118,850 40,382 118,768 Current liabilities Trade and other payables 51,688 21,692 51,701 Current tax liabilities 1,688 850 1,932 Bank overdrafts and loans 4,800 - 2,300 58,176 22,542 55,933 Non-current liabilities Bank loans 24,601 - 29,274 Deferred taxation - 17 - Total liabilities 82,777 22,559 85,207 Net assets 36,073 17,823 33,561 Equity Share capital 1,620 1,356 1,620 Share premium account 23,390 10,387 23,390 Other reserves (1,330) 3 (1,511) Retained earnings 12,393 6,077 10,062 Total equity 36,073 17,823 33,561 Consolidated Cash Flow Statement For the half year ended 30 June 2007 Unaudited Unaudited Unaudited half year half year full year 30 June 2007 30 June 2006 31 Dec 2006 Notes £000 £000 £000 Net cash from operating activities 6 5,268 1,811 8,378 Investing activities Additions to property, plant and equipment (140) (287) (818) Proceeds from disposals of property, plant and equipment - - 13 Acquisition of subsidiary undertaking, net of cash - - (42,820) (140) (287) (43,625) Financing activities Proceeds from share issue - 284 293 Dividends paid to shareholders (1,732) (1,254) (1,980) Repayment of term loans and borrowings (2,173) - - Interest (1,199) 90 (673) Proceeds from term loans and borrowings - - 31,574 (5,104) (880) 29,214 Cash and cash equivalents, beginning of year 51 6,084 6,084 Net increase/(decrease) in cash and cash 24 644 (6,033) equivalents Cash and cash equivalents 75 6,728 51 Notes to the Interim Results For the half year ended 30 June 2007 1 Basis of preparation These financial statements do not comprise full UK statutory accounts and they have not been audited. These financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRS') adopted for use in the European Union and therefore comply with Article 4 of the EU IAS Regulation. The interim financial statements for the six months to 30 June 2007 have been prepared on the basis of the IFRS accounting policies included with the Group's financial statements for the year to 31 December 2006 which the Directors expect to apply for the year to 31 December 2007. These policies were reflected in the IFRS equity and profit reconciliations disclosed with the 2006 financial statements. Reconciliations of Group profit and Group equity prepared under IFRS with those previously disclosed under UK GAAP in the 2006 Interim Report are presented in these financial statements. At the date of authorisation of the financial statements IFRS 8 and IFRICs 11-14, which have not been applied in these financial statements, were in issue but not yet effective. The directors anticipate that the adoption of these standards and interpretations in future years will have no material impact on the financial statements of the Group. The adoption of IFRS has no impact on the underlying performance of the business and there is no impact on the underlying Group's cash flow. The audit report on the Group's 2006 financial statements was unqualified and did not contain any statements under section 237(2) or (3) of the Companies Act 1985. The accounts have been filed at Companies House. 2 Segmental analysis For management purposes the Group is organised into three operating divisions, and it is this basis on which the Group reports its primary segmental analysis. A description of each operating segment can be found within the Executive Chairman's Statement. Half year ended 30 June 2007 2006 Unaudited Unaudited Revenue Operating profit Revenue Operating profit £000 £000 £000 £000 Social Housing 100,917 4,091 30,171 2,416 Affordable Housing 7,614 1,484 - - Share of joint ventures' tax charge - (410) - - Share of joint ventures (7,614) - - - Social and Affordable Housing 100,917 5,165 30,171 2,416 Corporate Assets 39,006 1,409 32,471 1,171 139,923 6,574 62,642 3,587 Finance costs net (1,167) 91 Tax expense (1,344) (848) Profit for the period 4,063 2,830 Investments in joint ventures are all within the Affordable Housing business segment. Inter-segment revenue is not material and all inter-segment transfers are priced on an arm's length basis. The Group's activities are all within the United Kingdom, thus no geographical segmental analysis is required. 3 Tax expense The tax expense for the period has been applied at the current rate of corporation tax and includes appropriate allowance for items not deductible for corporation tax purposes and deferred taxation. 4 Dividends A final dividend of 2.18p per ordinary share was paid in respect of 2006 earnings on 25 May 2007 totalling £1.73 million. An interim dividend of 1.23p per ordinary share is proposed for payment on 2 November 2007 totalling £0.98 million. 5 Earnings per share Earnings per share are based upon the weighted average number of ordinary shares in issue during the period of 79,454,559 (2006: 67,737,067). The diluted earnings per share are based upon the weighted average number of 80,510,790 (2006: 67,848,547) ordinary shares. The earnings for the periods are set out in the table below. An adjusted earnings measure has been included to highlight the impact of tax relief on share based payments in respect of 2006. Half year ended 30 June Earnings Earnings per share Unaudited Unaudited 2007 2006 2007 2006 £000 £000 pence pence Earnings 4,063 2,830 Basic earnings per share 5.11 4.18 Diluted earnings per share 5.05 4.17 Tax relief on share based payments - (237) Adjusted earnings 4,063 2,593 Basic earnings per share 5.11 3.74 Diluted earnings per share 5.05 3.73 6 Cash flows Half year ended 30 June Unaudited 2007 2006 Operating activities £000 £000 Operating profit before interest and taxation 6,574 3,587 Share of tax attributable to joint ventures 351 - Depreciation 398 197 Non-cash cost of share based payments 51 9 Change in investment in joint ventures 171 - Change in payments on account 1,451 923 Change in inventories (376) (2,734) Change in operating receivables 51 917 Change in operating payables (1,463) (29) Cash inflow from operating activities before taxes paid 7,208 2,870 Tax paid (1,940) (1,059) Net cash from operating activities 5,268 1,811 7 Total recognised income and expenses Half year ended 30 June Unaudited 2007 2006 £000 £000 Increase in intrinsic value of interest rate hedge 130 - Share based payments charged in the half year 51 - Income and expense recognised directly in equity 181 - Profit for the half year 4,063 2,830 Total recognised income and expense for the half year attributable 4,244 2,830 to equity shareholders First time adoption of IFRS The Group adopted International Financial Reporting Standards (IFRS) in its Group financial statements with effect from 1 January 2007. For all previous periods, including the 2006 interim report, the Group prepared its financial statements in accordance with UK GAAP. The Group has applied IFRS1 in establishing the transitional requirements for the first time adoption of IFRS. IFRS1 requires that all changes applied at the first reporting date under IFRS are applied retrospectively to the opening balance sheet and to the comparative period. The first full year reporting date will be 31 December 2007 and the date of transition to IFRS adopted by the Group is therefore 1 January 2006. The full effect on the Group profit and Group equity as a result of the adoption of IFRS is shown on pages 14 and 15 in the Interim Report. Profit Reconciliation The effect of the changes in the Group's accounting policies on adoption of IFRS on profit for the half year ended 30 June 2006 were as follows: Unaudited Effect of UK GAAP IFRS adoption IFRS £000 £000 £000 Revenue 62,642 - 62,642 Cost of sales (45,430) - (45,430) Gross profit 17,212 - 17,212 Administrative expenses (13,625) - (13,625) Operating profit 3,587 - 3,587 Finance income 91 - 91 Profit before tax 3,678 - 3,678 Tax expense 1 (842) (6) (848) Profit for the half year 2,836 (6) 2,830 Earnings per ordinary share: (pence) Basic 4.19 4.18 Diluted 4.18 4.17 Adjusted earnings per ordinary share: (pence) Basic 3.75 3.74 Diluted 3.74 3.73 1 Under IFRS no deferred tax asset is recognised in respect of share based payments granted during the year and not yet exercised. Equity Reconciliation The effect of the changes in the Group's accounting policies on adoption of IFRS on total equity at 30 June 2006 were as follows: Unaudited Effect of UK GAAP IFRS adoption IFRS £000 £000 £000 Non-current assets Intangible assets 1 - 79 79 Property, plant and equipment 1 1,150 (79) 1,071 1,150 - 1,150 Current assets Inventories 464 - 464 Trade and other receivables 32,040 - 32,040 Cash and cash equivalents 6,728 - 6,728 39,232 - 39,232 Total assets 40,382 - 40,382 Current liabilities Trade and other payables 21,692 - 21,692 Current tax liabilities 850 - 850 22,542 22,542 Non-current liabilities Deferred tax 2 11 6 17 Total liabilities 22,553 6 22,559 Net assets 17,829 (6) 17,823 Equity Share capital 1,356 - 1,356 Share premium account 10,387 - 10,387 Other reserves 3 - 3 Retained earnings 2 6,083 (6) 6,077 Total equity 17,829 (6) 17,823 1 Under UK GAAP computer software was classified as a tangible fixed asset. Under IFRS it is classified as an intangible non-current asset. 2 Under IFRS no deferred tax asset is recognised in respect of share based payments granted during the year and not yet exercised. - Ends - This information is provided by RNS The company news service from the London Stock Exchange

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