Chief Executive's Review
A successful year with revenue and earnings showing resilience
The Company has reacted well to these challenges, scaling back the
business where appropriate, but continuing to pursue growth
opportunities
Chairman's Statement
The BSS Group (‘BSS’ or ‘the Group’) has faced challenging trading conditions throughout the financial year with a number of our principal markets contracting in reaction to the financial crisis followed by the impact of the recession in the wider economy. The Company has reacted well to these challenges, scaling back the business where appropriate, but continuing to pursue growth opportunities.
I am pleased to report that we have had a successful year with revenue and earnings showing resilience and underlying growth despite the adverse economic environment. The Group continues to benefit from being conservatively financed with net debt reduced to £86m (2008: £104m) and new borrowing facilities were put in place to provide secure funding of £162m for the next three years.
Demand for our product is primarily driven by repair and maintenance (‘R & M’) activity, much of which is considered essential. We expect the continuing recession will impact on our core markets in 2009/10, as funding becomes tighter in both the public and private sectors. The Group continues to win new contracts and has identified new growth opportunities that are being pursued. We believe that BSS remains well placed to trade through recessionary markets and to take advantage of the economic recovery but we expect a tougher year ahead.
Results and Dividend
Profit before tax for the financial year ended 31 March 2009 decreased by 0.9% to £57.8m (2008: £58.3m), after charging exceptional costs* of £1.2m (2008: £0.4m) and amortisation of intangibles of £2.5m (2008: £1.6m), on revenue of £1,340.6m (2008: £1,289.0m), an increase of 4.0%.
Earnings per share was in line with the prior year at 33.3p (2008: 33.3p) and the Board, in recognition of the resilient earnings performance, proposes to maintain the final dividend at 5.54p per share (2008: 5.54p) with a total dividend of 7.43p per share, in line with last year.
Strong cash performance is reflected in free cash flow of £27.9m (2008: £30.7m); after capital investment of £15.4m (2008: £15.6m) in new branches, infrastructure and systems that have enhanced growth potential.
Operating Performance
Both the Industrial and Domestic Divisions have delivered organic revenue growth of 3.9% and 3.3% respectively, increasing market share in tighter markets.
The Industrial Division has had another strong year with growth in revenue and operating profit increasing to record levels. The Division has benefited from investment in infrastructure, stock and people and its enhanced competitive position has been applied to good effect.
Improved service and product availability, supported from 63 branches and specialist sales teams, has resulted in increased sales to existing and new customers. The Division continues to successfully support projects to refurbish existing and build new schools, hospitals and prisons as well as support core customers maintaining manufacturing and processing facilities. New adjacent markets have been identified that are being developed that will provide new sources of revenue and growth.
The Domestic Division has absorbed the impact of a sharp slowdown in residential new build activity, which cost in excess of £35m in revenue, but also a tightening of its core R & M market. The Division has continued to expand and grow revenue and share of the R & M market with 30 new branches opened in the financial year taking the PTS branch network up to 307 branches. New growth opportunities are being pursued with the opening of our first dedicated renewables branch and the acquisition of Direct Heating Spares Limited (‘DHS’) in April 2009 to enhance our offering of spare parts. The F & P Wholesale (‘F & P’) business has enjoyed a successful year; its business model is to provide next day delivery from stock to the independent merchant sector and this proposition has strengthened as credit availability has tightened in the wider market.
Within the Specialist Division, Buck & Hickman (‘B & H’) has increased profitability despite tighter maintenance, repair and overhaul markets (‘MRO’) as end user customers have cut back orders in recessionary markets. Further improvements have been made in operating efficiency and procurement and the second stage of the recovery plan was completed in December 2008 with the successful replacement of B & H’s trading, operating and financial systems. We remain confident that B & H continues to provide excellent long term value for our shareholders.
With effect from 1 April 2009, the wholesale businesses of Price Tools and Birchwood Products were merged to form one company: Birchwood Price Tools (‘BPT’). The combined business provides a stronger product offer to our customers with greater geographic sales coverage at less cost. The Specialist Division continues to offer good growth potential despite a recessionary market.
People
As economic outlook has deteriorated, there has been a need to reduce the number of people employed in the Group to match the requirements of a contracting market. Wherever possible employees have been re-deployed and staff numbers reduced through natural wastage in order to avoid compulsory redundancies. We are grateful for the support and understanding shown.
In the last year, there have been no changes to the Board or the Executive Committee that manages the Group. This continuity has helped the business navigate through more challenging times, and has enabled the Company to remain close to its customers and suppliers in a changing and uncertain marketplace. The experience, knowledge and skills of all our employees continues to be a crucial element in the success of the Group. I take this opportunity to thank all our employees for their hard work and dedication throughout a challenging year.
The health and safety of our employees continues to be of great importance to the Board. Individual incidents are investigated and lessons learned documented and discussed at each Board meeting. Our aim continues to be to eliminate all lost time accidents and to ensure that the workplace is safe for all our employees with the emphasis on awareness and prevention. We continue to strive to achieve our objective.
Outlook
The Group anticipates that calendar year 2009 will be a year of slowing demand. Although a large element of the Group’s revenue is directly related to repair and maintenance activity, much of which is essential, the tightening of company budgets and uncertainty in the jobs market has had a negative impact on core demand in the Domestic, Industrial and Specialist Divisions. It is anticipated that this reduction will be partly offset by major contract wins relating to fully funded projects and a number of growth initiatives.
The Board remain confident that the Group can outperform the market but we expect revenue and earnings to be lower in 2009/10 than the prior year and have planned on this basis. The Company continues to keep close to its customers and the marketplace and continues to pursue new opportunities. Economic recovery is anticipated in 2010; the Group is conservatively financed and is well positioned to take advantage of that upturn.
* Exceptional charges comprise redundancy costs of £1.2m (2008: £0.4m comprising redundancy cost £1.2m offset by £0.8m of income from compulsory purchases).
Peter Warry
Chairman
27 May 2009