Trading and Financing Update

RNS Number : 1509Y

Severfield-Rowen PLC

19 February 2013

 



Trading and Financing Update

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN OR INTO THE UNITED STATES, AUSTRALIA, CANADA OR JAPAN.

Severfield-Rowen Plc  (the "Group"), the UK market leading structural steel group, issues this further update on its trading position and the findings of the Board's review of the Group's contract base, referred to in the announcement on 23 January 2013.

Contract Review

The Board's review (the "Review") addressed 70 of the Group's contracts representing c. 90% of the Group's contracts by value, with a particular focus on the larger and more complex projects. The Review involved all key management responsible for the execution and performance of each contract. Detailed financial information on each contract was analysed, including revenue and cost position to date, forecasts to completion and the underlying progress of that contract. The inherent complexity and risk of each contract was also considered in determining the final financial outcome. Recently won contracts, at the initial stages of execution, have been subject to additional scrutiny, involving cross Group peer reviews.

122 Leadenhall Street Contract

The Review established that the technical challenges of the site works on this contract are significantly greater than originally estimated and will require longer timescales and greater resources to complete. In response to this finding, a comprehensive reassessment of the works required to complete has been undertaken, along with a detailed review of all other forecast costs still to be incurred. The result has been to change an expected profit on the overall life of the contract into a loss, with the Group incurring an incremental charge to the profit and loss account of £9.9 million in the 12 month period ended 31 December 2012.

Other Contract Cost Positions

In relation to a further three contracts, actual and potential cost overruns were identified totalling £2.9 million. These cost overruns will be charged to the profit and loss account in the 12 month period ended 31 December 2012.

Forecast Contract Value Positions

On a further five contracts the value that the Board expects to be realisable under the contracts has been reassessed and reduced. These contracts, three of which remain ongoing, have all been subject to significant variations from the terms agreed at the commencement of the contract. While much of the value of these variations has already been recovered by the Group (and this recovery process is continuing), the Board has taken a prudent approach in reducing the final account expectations, resulting in a reduction in the value realisable from these five contracts of £7.3 million. There is no cash impact on the Group as a result of this reduction in the balance sheet carrying value.

Remaining Contracts

The remaining 61 contracts were found to be performing in accordance with the Board's expectations and the Board is satisfied that the financial out turn on these contracts has been appropriately estimated.

Actions Arising from the Review

The Group's core strengths remain the design, fabrication and erection of steel structures. Since August 2012, the Board has been taking steps to improve its contracting estimating procedures, the efficacy of which was borne out in the review of contracts recently entered into. The Review has, however, identified a requirement for stronger contracting processes and discipline notably in execution and risk assessment, particularly in relation to its more complex contracts. The implementation of these improvements will be undertaken as expeditiously as possible.

The Review has confirmed the rationale for the previously announced reorganisation and integration of its two largest businesses, Severfield-Rowen Structures and Watson Steel Structures, along with its erection business, Steelcraft. The integration of the merged businesses creates a less complex and more efficient management structure, under Severfield-Watson Structures Ltd, and became effective according to plan on 1 January 2013. Its implementation will continue throughout 2013.

Financing Update

In the trading update on 23 January 2013, the Group announced it was in discussions with its lending banks regarding compliance with its covenants and that discussions with its lending banks and other stakeholders would continue with the objective of placing the Group on sound financial foundations that support its UK business and the further development of its Indian joint venture.

The Group has engaged in positive discussions with a number of its major shareholders representing in aggregate, 56.1% per cent of the Group's issued share capital.  As a result of these discussions, all of these shareholders have indicated that they are supportive of a potential equity fundraising by the Group of up to £50 million.  Any such fundraising would be subject to shareholder approval.

Constructive discussions are also continuing with the Group's lending banks who have agreed to waive certain financial covenants in the existing banking facilities, that were due to be tested on 31 December 2012, whilst discussions regarding amended banking facilities for the Group  are progressed.  These discussions continue positively and it is the Directors' intention to announce the Group's results for the interim period for the twelve months ended 31 December 2012 together with terms of the equity fundraising and the Group's amended banking facilities by 28 February 2013.

Financial Performance and Outlook

The financial outcome of the Review will result in a charge to the profit and loss account of £20.1 million in the 12 months ended 31 December 2012. A proportion of the related cashflows occurred within the 12 month period ended 31 December 2012, with a further £8 million of cash outflow anticipated in 2013.

Trading conditions are difficult as previously stated. However, the order book remains strong at £209 million, as announced on 23 January 2013, and the re-organisation of the Group's largest businesses into Severfield-Watson Structures Ltd is continuing in line with plan. More than half of the anticipated overhead savings of £2 million, previously announced on 5 November 2012, have now been realised and the programme will be largely complete by 30 June 2013.

The performance of the Indian joint venture for the 12 months ended 31 December 2012 was in line with the Board's expectations. The first phase of expansion of the Bellary site to lift output from 35,000 tonnes to 55,000 tonnes by summer 2013 is continuing and the order book at 31 December 2012 stood at £29 million.

As a result of the Review and the wider trading backdrop, the Board has taken a more prudent view of the overall prospects for the Group in 2013 and into 2014 and, accordingly, its expectations are now somewhat lower.  

Chairman quote

"Despite the disappointment of the financial impact on the Group from the findings of this review, I am encouraged by many of the conclusions drawn from it and by the actions we will be taking to improve our business. This is a good business which remains well supported by its customers. It is important to note that, following our rigorous review process the vast majority of the Group's contracts are progressing satisfactorily, with both Atlas Ward and Fisher Engineering performing particularly well.

I am also greatly encouraged by the strong and visible support we have received from our leading shareholders and the constructive discussions we continue to have with our lenders around the longer term financing of the Group. We believe that the Group can return operating margins to between 5% and 6% over time and I am confident that the longer term fundamentals of the Group remain strong."

John Dodds

Executive Chairman

For further information, please contact:

Severfield-Rowen Plc John Dodds Executive Chairman Alan Dunsmore Finance Director	01845 577896
Jefferies Hoare Govett Simon Hardy Lee Morton Harry Nicholas	020 7029 8000
Pelham Bell Pottinger Archie Berens Guy Scarborough	020 7861 3112 020 7861 3870

This announcement does not contain or constitute an offer of securities for sale to, or the solicitation of an offer to buy or subscribe for securities from any person in the United States, Australia, Canada or Japan or in any jurisdiction in which such offer or solicitation is unlawful.  The securities referred to herein may not be offered or sold in the United States absent registration under the US Securities Act of 1933, as amended (the "US Securities Act"), or an exemption therefrom.  The offer and sale of the securities referred to herein has not been and will not be registered under the US Securities Act or under the applicable securities laws of Australia, Canada or Japan.  There will be no public offer of the securities in the United States.  Subject to certain exceptions, the securities referred to herein may not be offered or sold in Australia, Canada or Japan or to, or for the account or benefit of, any national, resident or citizen of Australia, Canada or Japan.

Jefferies International Limited, which is authorised and regulated in the United Kingdom by the Financial Services Authority, is acting as financial adviser for Severfield-Rowen Plc and no one else and will not regard any other person (whether or not a recipient of this announcement) as a client in relation to any matter referred to in this announcement and will not be responsible to anyone other than Severfield-Rowen Plc for providing the protections afforded to its clients or for giving advice in connection with the contents of this announcement or any other arrangement or matter referred to herein.

 

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