Interim Results

RNS Number : 0336E

Spice PLC

14 December 2009

 



14 December 2009

Spice plc 

Interim results - six months ended 31 October 2009

Spice plc ("Spice" or "the Group"), the provider of Total Utility Support Services, is pleased to announce its interim results for the period ended 31 October 2009.

Financial highlights

Revenue broadly unchanged at £193.4 million (2008: £192.6 million) results in 4% increase in adjusted* earnings per share of 3.32 pence (2008: 3.19 pence)

Increase in EBITA* to £21.8 million (2008: £17.5 million) from Supply Division and Utilities facing Distribution business (Electricity and Water businesses) demonstrates strong market positions - 25% increase

Non cash impairment charge of £42.9 million against continuing underperformance of Gas social housing business

Strong conversion of EBITA* into operating cash flow - 94% (2008: 100%) 

Profit before tax (before non cash amortisation/impairment of intangible fixed assets) of £16.0 million (2008: £14.0 million) - 14% increase

Enhanced strategic focus of Group on regulatory and environmentally driven markets enables 11% increase in interim dividend to 0.40 pence per share (2008: 0.36 pence) 

Statutory results 

Loss before tax (after amortisation/impairment of intangible fixed assets) of £31.5 million (2008: profit of £9.4 million) 

*    EBITA comprises profit on ordinary activities before interest, tax, non operating exceptional items and amortisation/impairment of intangible fixed assets.

Operational highlights

May 2009	H20 extends United Utilities Contract for water meter installation
July 2009	Freedom awarded contract for the provision of overhead line services by Scottish Power
October 2009	Climate change agreement for plastics sector concluded
December 2009	H20 begins provision of data collection services to Scottish Power
December 2009	Freedom identified as preferred bidder for provision of network and overhead line engineering and maintenance services to United Utilities

Simon Rigby, Chief Executive Officer commented:

"I am pleased that the Group has been able to deliver an increase in adjusted earnings per share on our enlarged shareholder base and recorded strong conversion of profits into cash with 94% of EBITA converted into cash. The Supply Division and Utilities facing Distribution business have both performed strongly, with EBITA growing by 25%, and are well placed to capitalise on their strong market positions as illustrated by contract wins with Scottish Power and being selected as preferred bidder by United Utilities. This is likely to give rise to start up costs in the second half of the year. The regulatory and environmental drivers in place mean that these businesses have exciting futures and the renewed strategic focus of the Group on these drivers going forward gives the Board confidence to increase the interim dividend by 11%.

"Market conditions have been, and are likely to remain, challenging for the Group's Gas social housing business and the Board has taken decisive action including recording a non cash impairment charge in these results. 

"Spice enjoys strong positions within its regulated markets and, through a greater strategic focus on these core areas of expertise, the Board believes that the Group is well positioned to deliver sustainable long term growth."

Ends

Enquiries:

Spice plc                                                                                                                                                                                Tel: [phone]

Simon Rigby, Chief Executive Officer

Oliver Lightowlers, Group Finance Director

Financial Dynamics                                                                                                                                                             Tel: [phone]

Billy Clegg

Caroline Stewart  

Alex Beagley

KBC Peel Hunt (Broker)                                                                                                                                                      Tel: [phone]

Julian Blunt (Corporate finance)

Matthew Tyler (Corporate broking)  

Business and financial review

Strategy

The Board's strategy is to increase Spice's exposure to markets which have strong underlying regulatory and environmental drivers. Through greater focus on these core areas of operations, the Board believes that the Group is well positioned to deliver sustainable long term growth.

Introduction

Revenue for the period grew to £193.4 million (2008: £192.6 million) and profit before tax, non operating exceptional items and the amortisation/impairment of intangible fixed assets (PBTA) grew by 14% to £16.0 million (2008: £14.0 million). Diluted earnings per share, adjusted for non operating exceptional items and the amortisation/impairment of intangible fixed assets, increased by 4% to 3.32 pence per share (2008: 3.19 pence per share) and the Board has approved an interim dividend of 0.40 pence per share (2008: 0.36 pence), an increase of 11%.

It is pleasing to have converted 94% of EBITA (2008: 100%) into operating cash flow and the conversion of profits into cash continues to be a feature of our business. Net debt at 31 October 2009 was £116.5 million, compared to £95.8 million at 1 May 2009, giving the Group £53.5 million of headroom on its committed banking facilities which remain in place until 2012.

Following the move from AIM to the Official List in 2008, Spice reorganised its management and reporting structures into two Divisions being Supply and Distribution. Whilst the Group still operates and is managed on the basis of these two reportable segments under IFRS 8, the results of the Distribution Division have been additionally analysed to assist stakeholders in better understanding its performance and markets as follows:

• Utilities facing Distribution business - comprising our electricity and water businesses together with elements of our Gas and Telecoms businesses that serve utility companies; and 

• Public facing Distribution business - comprising our non-utility facing Gas, Facilities and Telecoms businesses. 

Revenues and EBITA for the period were as follows:

		Revenue		EBITA
	2009	2008	2009	2008
	£'m	£'m	£'m	£'m
Supply Division	20.5	14.7	9.1	6.6
Distribution - Utilities	124.9	116.3	12.7	10.9
Distribution - Public	48.0	61.6	0.2	5.8
Head office	-	-	(3.9)	(4.0)
	193.4	192.6	18.1	19.3

Spice's Supply Division and its Utilities facing Distribution business have made good progress in the first half of the year with combined revenue and EBITA growing by 11% and 25% respectively. EBITA for these businesses has also grown organically by 19%. This robust performance has been driven by new regulation and increasing trends towards outsourcing. Contract wins including Scottish Power and being selected as preferred bidder by United Utilities illustrate that Spice occupies strong positions within its regulated markets and that these markets offer significant opportunities for growth and for the creation of long term shareholder value. 

Our Public facing Distribution business has recorded an EBITA contribution of £0.2 million (2008: £5.8 million) and its results for the period have been adversely impacted by the performance of our Gas social housing business which has been loss making in the period, after taking account of reorganisation and other one off costs. A non cash impairment charge of £42.9 million has been recorded against associated goodwill and other intangible fixed assets. This non cash charge reflects the challenging trading conditions experienced by the Gas social housing business. The Board considers that such an approach is prudent, having undertaken a careful review of the future trading prospects of its Gas social housing business, since market conditions are likely to remain challenging. The Board is focusing on the ongoing development of its commercial and industrial gas operations and is undertaking a wider strategic review of its Gas social housing business.

Looking at each of our businesses in turn:

Supply Division

The Supply Division, which includes the Group's Billing and Energy businesses, has reported strong performance for the period with significant growth in revenue and profits. Revenue for the first six months of the year increased by 39% to £20.5 million (2008: £14.7 million) and EBITA increased by 38% to £9.1 million (2008: £6.6 million). 

Our Billing business is remunerated by its customers on a contingent basis. This acts as a strong stimulus for sales, particularly within this difficult economic environment, as supply businesses seek to improve revenues through the identification of under billings. The Billing business provides a risk free solution, which supplements and confirms the in-house activity of our clients, whilst being able to quickly respond to changing capacity and capability requirements of our clients as circumstances dictate. Revenues have benefited in the period from rapid mobilisation on a number of customer projects. We have also renewed contracts with a number of important customers including Shell and GDF Suez. The continued penetration of the electricity imbalance market by our Billing business was one of our key targets for the current financial year and it has been pleasing to see electricity revenues accounting for an increasing proportion of total revenues. This will remain an area of key focus during the second half of the year.

Market drivers within our Energy business remain positive with a number of legislative changes helping to maintain momentum. Negotiations were finally concluded during the period on behalf of the plastics sector with the related climate change agreement taking effect from 1 October 2009. As well as securing fees over a three year period to administer the scheme, over 150 companies have signed up for three year energy management programmes. The Carbon Reduction Commitment Energy Efficiency Scheme comes into effect in 2010 and we continue to develop our customer base with the addition of early adopters. We anticipate finishing the year, prior to the legislation taking effect, with an order book exceeding £1 million. The mandating of smart metering within the residential market together with the introduction of feed in tariffs will create good opportunities for the business in metering and the development of renewable generation projects. Economic uncertainty continues to drive interest in our services with industrial and commercial customers seeking to reduce costs. Whilst the recession has resulted in our customers using less energy, this has been compensated for by the addition of new customers.

The integration of Nifes has been completed and the operating and financial performance of the business has been in line with our expectations. Synergies anticipated between Nifes and the other businesses within the Supply Division are being realised. Previously unanticipated synergies, between Nifes and other activities within our Distribution Division (for example structural and civil design) have also been identified. Whilst there has been no evidence to date of any slow down in public sector spending, as a safeguard against any reduction in capital spending in the sector, Nifes has sought to enhance its presence within the industrial and commercial markets occupied by our other Energy businesses. We have seen signs that a lack of capital is limiting the ability of our clients to implement energy efficiency and carbon reduction measures; however, we are working on a number of solutions alongside energy supply companies and financial institutions that have an appetite for capital investment in this area.

Our intention to enter international markets remains, with particular interest in deregulated states in the USA being pursued through the existing presence of our Distribution Division in those markets. Both organic and acquisitive options are being investigated and we expect that a combination of both will be the likely outcome. 

With increasing emphasis on energy and the environment, together with economic uncertainty, we expect demand for the services of the Supply Division to remain high for the foreseeable future bringing further benefits in the second half of the year.

Utilities facing Distribution business 

Our Utilities facing Distribution business, which includes the Group's Electricity and Water businesses, contributed revenues of £124.9 million (2008: £116.3 million) and EBITA of £12.7 million (2008: £10.9 million) for the period, being growth of 7% and 15% respectively. EBITA operating margins improved to 10.2%.

Electricity has made good progress during the first half of the year, against uncertain market conditions as our customers awaited OFGEM's determination under Distribution Price Control Review Five. OFGEM have recently issued their final determinations with revenues for Distribution Network Operators increasing on average by 5.6% per annum, capital expenditure increasing by 25% to £6.6 billion and operating expenditure increasing by 15% to £7.4 billion. The permitted return on capital employed has been reduced slightly to 6.7%, but there are significant opportunities for Distribution Network Operators who deliver on the customer service aspects of the Review, with the possibility of returns as high as 13%. We expect that this will create opportunities for businesses such as Spice, which are able to innovate their service delivery.

Added to the usual network resilience and security issues, there are additional work programmes extending over the new five year period. The Innovation Funding Incentive adds £100 million for research and development and the Low Carbon Networks Fund adds £500 million for trialing new technology and to enable the connection of local generation and renewable energy sources. A further £213 million has been allocated to attract new engineers and apprentices into the electricity industry. The final investment in our Corby Training Centre was completed in the period, and this has given us a facility that is unrivalled anywhere in the UK. With OFGEM recognising the severe skills shortage faced by the UK power sector, we are now able to train both our own and our customers' apprentices and adult trainees across several craft work streams. 

We believe that our business is well positioned to be a long term beneficiary of the new regulatory period. The Scottish Power overhead line contract has incurred a significant level of start-up costs whilst we await a ramp up of work volumes in the second half of the year. Our tendering activity across the regulated asset base is high and we are optimistic that new contracts will be secured in the second half of the year. Indeed, we are delighted to have been selected as preferred bidder by United Utilities in relation to the provision of network and overhead line engineering and maintenance services. This is likely to give rise to start up costs in the second half of the year and the first half of the new financial year. In the private sector, clients are still subject to economic pressures although there are signs that confidence is improving and we have won several network infrastructure projects in education, transport and industry. During the period, we have reinforced our strengths in this market and expanded our operations geographically through the acquisition of NWP. Our presence in the off-shore market is also growing and has been enhanced by the acquisition of Agrilek, who have significant expertise in the maintenance of off-shore assets and long established relationships with wind farm operators. We now maintain network assets for several hundred wind turbines on land and at sea. Both NWP and Agrilek are located within the geographic footprint of United Utilities. UK consultancy continues to perform well with network asset ownership changes progressing, and we expect to see ownership changes in at least three of the fourteen electricity networks in 2010. This will bring many opportunities in both advisory roles (via BPI) and that of network operator (via Freedom). Our AT&T contract in the USA has been extended for a further two years, providing a platform for growth into other areas. We are also advising two authorities on the roll out of smart metering in the Middle East. 

The UK Government announced in October 2009 its decision to commit to smart metering, which will see every home and business across the country make the switch by 2020. Some 26 million electricity meters and 22 million gas meters will need to be fitted by the end of 2020 at a cost of £7 billion. However, opportunities are currently limited and mainly consist of smart metering trials since there is still a large amount of ongoing uncertainty as to how this programme will be rolled out and funded. 

Our Water business has performed steadily in the first half of the year, during which we commenced a new five year term contract for Scottish Water for leakage detection services as well as extending contracts with Northumbrian Water and Essex and Suffolk Water. Morrel continues to make good progress by securing new imbalance contracts with Scottish Water, United Utilities and South East Water. We have seen good activity in our bid pipeline ahead of the newly announced regulatory review period for 2010 to 2015. Recently, we have signed a new agreement with United Utilities for the provision of field water connection services to supplement our existing term contract for water meter installation. In December 2009 we commenced a new three year contract with Siemens for the provision of data collection services for Scottish Power. This provides a useful platform for the business ahead of any nationwide programme of smart metering.

Public facing Distribution business 

The performance of our Public facing Distribution business has been adversely affected by the unsatisfactory performance of our Gas social housing business as explained above. Revenues for the period reduced by 22% to £48.0 million (2008: £61.6 million) and EBITA, including reorganisation and other one off costs, reduced to £0.2 million (2008: £5.8 million). 

Our Gas social housing business has been loss making, after reorganisation and other one off costs, for the first six months of the year, as a result of which a non cash impairment charge of £42.9 million has been recorded against associated goodwill and other intangible fixed assets. Increased competition in the social housing sector, along with reduced capital project and variations income, has given rise to this adverse performance. A number of management changes within the business have been made and the consolidation of our Gas businesses under the single Liberty Gas brand has been used as a platform to restructure and downsize the operations as we have sought to rigorously manage our cost base. However, the resulting performance improvement from actions taken has been slower than anticipated.

In contrast to the performance of our Gas social housing business, our commercial and industrial gas operations have grown in the period and continue to win new business with blue chip companies. Consequently, the Board has concluded that the Group should seek to focus on the ongoing development of its commercial and industrial gas operations and the Group is undertaking a strategic review of its Gas social housing business. 

The difficulties facing the high street are well documented and our Facilities business has been exposed to challenging trading conditions and reported a lower performance than for the comparative period. We have sought to significantly reduce our cost base to reflect activity levels and market conditions. A number of changes have been made to the senior management team and we now have in place a team which has significant and long established sector experience. The appointment of this new team, together with anticipated improvements in consumer confidence and spending, means that we expect to see improved performance in the second half of the year. 

Our Telecoms business has performed steadily over the first six months winning some larger deployment and systems projects in the UK and across the rest of the world including Anglian Water, New South Wales Police and Tellabs. Existing contracts with BAA and the MOD have been renewed. In July, we acquired Com Group which is now being fully integrated with the Team Simoco business to form a much stronger global player in the private mobile radio sector. In line with the economic backdrop, we have seen less project work awarded by British Airways (relative to the comparative period) and also less capital spend in the enterprise market. This spend is generally being deferred and the business is well positioned to benefit when customers recommence those projects.

Head office

During the period, we have continued our ongoing investment in IT infrastructure and resources to support the enlarged Group. Our Energy business is expected to go live on our common accounting platform in the second half of the year and the development of our work management system continues. Other significant projects initiated in the period include the development of a common Group wide application for the maintenance of training and competency records which is expected to be completed during early 2011. These investments will support the future growth of the Group. Head office costs comprise mainly salaries, including the Group's IT and HR functions, professional costs and the Group's share based payment (IFRS 2) charge. 

Acquisitions Four acquisitions have been made by our Distribution Division during the period, which are summarised in the table below
		Maximum
		additional
	Initial net cash	contingent cash
	consideration	consideration
	£'m	£'m
Com Group	6.9	1.9	Contingent cash consideration based on acquired working capital
Agrilek	4.8	1.3	Contingent cash consideration based on completion net assets and performance to June 2010
NWP	2.5	0.5	Contingent cash consideration based on acquired working capital
WSE	2.1	0.3	Contingent cash consideration based on acquired working capital and performance to October 2010
	16.3	4.0

The provision for contingent cash consideration is £9.8 million which includes an estimate of the contingent cash consideration arising on the acquisitions above.

Financial review

Revenue

Revenue for the period was £193.4 million (2008: £192.6 million), of which acquisitions made in the period contributed £7.1 million. Whilst Supply Division revenues have grown by 39% and revenues from our Utilities facing Distribution business have grown by 7%, this growth has been offset by the adverse performance of our Gas social housing and Facilities businesses, with the effect that Group revenues are showing only a marginal improvement on the prior period.

  Profit on ordinary activities before interest, tax, non operating exceptional items and amortisation/impairment of intangible fixed assets (EBITA)

EBITA for the Group reduced by 6% to £18.1 million (2008: £19.3 million). However, the Group's Supply Division and Utilities facing Distribution business have both performed strongly, recording like for like EBITA growth of 19%, which excludes the impact of acquisitions. This is illustrated in the table:

			2009	2008
EBITA	Growth		£'m	£'m
Like for like operations
Supply Division			8.7	6.6
Distribution - Utilities			12.2	10.9
	19%		20.9	17.5
Distribution - Public			0.1	5.8
Head office (including IFRS 2)			(3.9)	(4.0)
Foreign exchange loss on operating activities			(0.3)	-
Acquisitions
2009 acquisitions			0.6	-
Part year effect of 2008 acquisitions			0.7	-
	(6%)		18.1	19.3

Acquisitions made during 2009 contributed £0.6 million to EBITA. Spice made various acquisitions during 2008 which contributed to EBITA for part of that year but which have contributed to EBITA for the whole of the period ended 31 October 2009. For example, BPI was acquired on 18 July 2008. Its results for the period between 18 July 2009 and 31 October 2009 are shown within existing operations, as are the comparative numbers for the period from acquisition to 31 October 2008. The results of BPI for the period from 1 May 2009 to 18 July 2009 (for which there are no comparative numbers) are shown within the part year effect of 2008 acquisitions. Other 2008 acquisitions, part of whose performance contributes to this line, are Nifes, Mono, Morrel, Treewise and Stowland.

EBITA operating margins for the Group reduced to 9.3% (2008: 10.0%) due to the reduced performance of the Public facing Distribution business.

Non operating exceptional items

No costs have been separately identified as non operating exceptional items for the period. However, the Group has incurred costs of approximately £2 million during the period relating to redundancies, reorganisation and other one off costs. These costs, which have principally arisen within our Gas social housing and Facilities businesses, have been recorded as a charge against EBITA. Non operating exceptional items in 2008 principally relate to costs incurred in connection with the Group's move from AIM to the Official List which was completed in July 2008.

Foreign exchange gains and losses

Foreign exchange losses of £0.3 million (2008: £nil) arising on the re-translation of overseas revenues and costs have been recognised as a charge against operating profit. These movements principally arise within our Distribution Division and specifically in relation to the AT&T contract and to the acquired activities of Com Group.  

Finance expenses

Finance expenses for the period were £2.1 million (2008: £5.3 million). The Group has benefited from reductions in its cost of borrowing through the LIBOR interest rate swap put in place in March 2009. Finance expenses include a non cash interest charge on the Group's outstanding liability for contingent consideration. This non cash charge is excluded from the calculation for the purposes of determining compliance with the Group's banking covenants. The Group's main banking covenants are based around earnings before interest, tax, non operating exceptional items, depreciation, amortisation/impairment and share based payments (Adjusted EBITDA). Adjusted EBITDA interest cover for the period was 11.6 times (2008: 4.5 times) which compares against a covenant of three times. 

The Group is also covenanted in relation to its ratio of net debt to Adjusted EBITDA such that net debt should not exceed four times Adjusted EBITDA. At 31 October 2009, this ratio was 2.4 times (2008: 1.9 times).

Profit on ordinary activities before tax, non operating exceptional items and amortisation/impairment of intangible fixed assets (PBTA)

PBTA increased by 14% to £16.0 million (2008: £14.0 million). 

(Loss)/profit on ordinary activities before tax

A loss on ordinary activities before tax of £31.5 million (2008: profit of £9.4 million) was recognised after recording a non cash impairment charge against intangible fixed assets of £42.9 million. The Group's amortisation charge has increased from £4.0 million to £4.6 million which is attributable to the amortisation of separately identifiable intangible fixed assets arising on acquisitions made during the period.

Tax

The Group's effective rate of tax for the period was 27.0% (2008: 27.5%). 

Earnings per share

Diluted earnings per share were (9.27) pence (2008: 2.14 pence). Adjusted diluted earnings per share (before non operating exceptional items and amortisation/impairment of intangible fixed assets) at 3.32 pence (2008: 3.19 pence) increased by 4%. In prior years, the Group's ESOP has had adequate shares to satisfy all options vested and also options granted but not yet vested. As previously highlighted, this is no longer the case and new shares will either be issued or bought on the market to make up this difference. This has been taken account of in the calculation of diluted earnings per share.

Dividend

The Board is pleased to have recommended an interim dividend of 0.40 pence (2008: 0.36 pence) per share payable on 10 February 2010 to shareholders on the register at 15 January 2010. 

Cash flow

Net cash inflows from operations were £17.0 million (2008: £19.3 million). The Group converted 94% of EBITA into operating cash flow (2008: 100%). The ongoing strength of the Group's conversion of profits into cash reflects our rigorous management of cash. During the period, net working capital utilised increased by £4.5 million (2008: £3.3 million). This utilisation relates to investment in support of the continuing growth of the business and in particular growth in the Group's white collar operations within the Supply Division and our Utilities facing Distribution business, which are self delivered. This utilisation is net of a reduction in net working capital arising from reductions in volumes of activity within our Gas social housing and Facilities businesses.

Balance sheet

Net assets have reduced to £157.0 million (2008: £181.9 million), reflecting the non cash impairment charge explained above but offset by cash generated from the exercise of employee share options. 

Net debt is £116.5 million (1 May 2009: £95.8 million). The increase is mainly attributable to consideration paid in respect of acquisitions and also payments made to settle contingent cash consideration connected with acquisitions offset by cash generation. The Group continues to have in place a committed syndicated revolving credit facility totalling £170 million. At 31 October 2009, the Group had headroom under the revolving credit facility of £53.5 million. The facility is not due for renewal until March 2012. 

The Group has in place interest rate swaps, extending to March 2012, which fix the LIBOR rate payable on around £80 million of the Group's net debt. The fixed rate of LIBOR payable is approximately 2.03%.

Accounting policies

The Group's consolidated interim financial information has been prepared in accordance with International Financial Reporting Standards. The Group's significant accounting policies have been applied consistently throughout the period.

Principal risks and uncertainties

The Group's businesses maintain detailed risk registers which are regularly updated and include strategies to mitigate identified risks. These registers are compiled using a common model but with enough built in flexibility to take account of specific business risk. Broadly risks are categorised into six types being: strategic and planning; financial; operational and quality; people; reputation; and regulatory risks. For each risk identified, the processes and procedures in place to mitigate and manage that risk are also recorded. Significant risks facing the Group include:

• Regulatory (regulatory risks) - the Group operates within markets which are subject to extensive laws and regulations. These laws and regulations continue to change and evolve, as must Spice's processes, procedures and systems.

• Health and safety (operational and quality risks) - many of our markets are extensively regulated due to the dangerous nature of activities undertaken by the Group. The Group may suffer injuries and fatalities even if all processes, procedures and regulations are complied with.

• People (people risks) - Spice provides support services to its customers. These services are principally delivered by employees but also using subcontractors. In some of Spice's markets, severe skill shortages exist. In order to continue to grow and prosper, the Group needs to be able to retain existing employees whilst also continuing to access new pools of talented and skilled resources.

• Competitive (operational and quality risks) - Spice seeks to maintain long term relationships with its customers and typically operates via contracts whose duration is for between two and five year periods. At any point in time, some of the Group's contracts will be in the process of retender and renewal. The Group has a good track record of renewing key customer contracts, however, the markets within which Spice operates are competitive. 

• Innovation (operational and quality risks) - on a number of contracts, Spice has been incumbent for very many years. Over this time, the Group has been able to successfully innovate in order to improve the effectiveness and efficiency of its service delivery. Our customers continue to demand innovative solutions and therefore we must continue to innovate to maintain our position.

• Financial, operational and management information systems (financial risks and operational risks) - the efficient operation and management of the Group depends on the proper operation and performance of financial, operational and management information systems. Any failure in such systems may result in a loss of control and adversely impact Spice's ability to operate effectively and to fulfil its contractual obligations.

• Economic and financial (financial risks) - ongoing turmoil in the financial, debt and commodities markets has had a significant adverse impact on certain sections of the economy. The wider effect of such events is unknown but may include difficulty of access to, or higher costs of, debt or equity financing, general economic weakness, restricted fiscal expenditure or higher taxes. This may adversely impact the Group's revenues, margins and profits.

• Key personnel (people risks) - Spice has in place an experienced and motivated senior management team and considers that its management team has strength in depth. However, the loss of one or more key personnel could have an adverse impact on the Group's operations, reputation, customer relationships and future prospects.

• Acquisitions (financial risks) - Spice has made a number of acquisitions over the course of its history and expects to continue to make acquisitions. Acquisitions always carry an element of risk, may perform otherwise than expected, and the process of integrating acquisitions may be prolonged due to unforeseen difficulties. Any of these events may harm the Group's business, financial condition or operating results.

Cautionary statement
The Business and financial review has been prepared for the shareholders of the Group, as a body, and no other persons. Its purpose is to assist shareholders of the Company to assess the strategies adopted by the Group and the potential for those strategies to succeed and for no other purpose. This Business and financial review contains forward-looking statements that are subject to risk factors associated with, amongst other things, the economic and business circumstances occurring from time to time in the sectors and markets in which the Group operates. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a wide range of variables which could cause actual results to differ materially from those currently anticipated. No assurances can be given that the forward-looking statements in this Business and financial review will be realised. The forward-looking statements reflect the knowledge and information available at the date of preparation.

Outlook

The Supply Division and Utilities facing Distribution business have both performed strongly and are well placed to capitalise on their strong market positions as illustrated by contract wins with Scottish Power and being selected as preferred bidder by United Utilities. This is likely to give rise to start up costs in the second half of the year. The regulatory and environmental drivers in place mean that these businesses have exciting futures.

Market conditions have been, and are likely to remain, challenging for the Group's Gas social housing business and the Board has taken decisive action including recording a non cash impairment charge in these results. 

Spice enjoys strong positions within its regulated markets and, through a greater strategic focus on these core areas of expertise, the Board believes that the Group is well positioned to deliver sustainable long term growth.

14 December 2009

Consolidated income statement  for the six months ended 31 October 2009
		Unaudited	Unaudited	Audited
		6 months to	6 months to	year ended
		31 October	31 October	1 May
		2009	2008	2009
	Note	£'m	£'m	£'m
Revenue	6	193.4	192.6	386.0
Operating expenses		(222.8)	(177.9)	(355.2)
EBITA	6	18.1	19.3	39.8
Non operating exceptional items		-	(0.6)	(0.7)
Amortisation of intangible fixed assets		(4.6)	(4.0)	(8.3)
Impairment of intangible fixed assets		(42.9)	-	-
Operating (loss)/profit		(29.4)	14.7	30.8
Finance expenses		(2.1)	(5.3)	(7.5)
PBTA		16.0	14.0	32.3
Non operating exceptional items		-	(0.6)	(0.7)
Amortisation of intangible fixed assets		(4.6)	(4.0)	(8.3)
Impairment of intangible fixed assets	10	(42.9)	-	-
(Loss)/profit on ordinary activities before tax	6	(31.5)	9.4	23.3
Tax on (loss)/profit on ordinary activities	3	(1.2)	(2.6)	(6.1)
(Loss)/profit for the period attributable to equity shareholders		(32.7)	6.8	17.2
Earnings per share (pence per share)
Basic	5	(9.46)	2.33	5.48
Diluted	5	(9.27)	2.14	5.17
Adjusted earnings per share (pence per share)
Basic	5	3.39	3.47	7.54
Diluted	5	3.32	3.19	7.11

EBITA comprises profit on ordinary activities before interest, tax, non operating exceptional items and amortisation/impairment of intangible fixed assets.

PBTA comprises profit on ordinary activities before tax, non operating exceptional items and amortisation/impairment of intangible fixed assets. 

   Statement of changes in shareholders' equity

	Unaudited	Unaudited	Audited
	6 months to	6 months to	year ended
	31 October	31 October	1 May
	2009	2008	2009
	£'m	£'m	£'m
Total recognised (loss)/income attributable to equity shareholders	(32.7)	6.8	17.2
Dividends paid in the period	(4.0)	(2.6)	(3.8)
IFRS 2 Share based payments charge	0.6	1.1	2.1
Decrease in deferred tax asset relating to share options	(1.0)	(1.2)	(4.9)
S23 tax relief on the exercise of share options	3.2	0.5	1.3
Proceeds from exercise of share options	4.8	0.5	1.8
Payments to acquire own shares (ESOP)	-	-	(1.1)
Utilisation of ESOP shares	(2.5)	-	(0.7)
Interest rate hedge	(0.5)	-	0.2
Currency translation differences	0.7	-	-
Issue of shares	0.9	50.0	50.0
Costs of share issue	-	(1.0)	(1.0)
Net (reduction)/addition to equity shareholders' equity	(30.5)	54.1	61.1
Opening equity shareholders' equity	187.5	127.8	126.4
Closing equity shareholders' equity	157.0	181.9	187.5

Currency translation differences arise on the retranslation of the balance sheet of Com Group.

Statement of comprehensive income

	Unaudited	Unaudited	Audited
	6 months to	6 months to	year ended
	31 October	31 October	1 May
	2009	2008	2009
	£'m	£'m	£'m
Other comprehensive income
Cash flow hedges, net of tax	(0.4)	-	0.1
Currency translation differences	0.7	-	-
Other comprehensive income, net of tax	0.3	-	0.1
Total recognised (loss)/income attributable to equity shareholders	(32.7)	6.8	17.2
Total comprehensive (loss)/income for the period	(32.4)	6.8	17.3

Consolidated balance sheet  as at 31 October 2009
		Unaudited	Unaudited	Audited
		31 October	31 October	1 May
		2009	2008	2009
		£'m	£'m	£'m
Assets
Non-current assets
Purchased goodwill		202.0	222.7	228.6
Intangible fixed assets		43.5	45.1	45.9
Property, plant and equipment		27.7	19.5	23.9
Investment in associates		-	0.2	0.2
Trade and other receivables		0.3	0.3	0.3
		273.5	287.8	298.9
Current assets
Inventories		15.8	16.9	12.6
Trade and other receivables		78.0	75.1	70.0
Derivative financial instruments		-	-	0.2
Cash - client monies		0.7	0.8	0.2
		94.5	92.8	83.0
Liabilities
Current liabilities
Trade and other payables		(66.2)	(71.0)	(60.4)
Current tax payable		(7.0)	(8.1)	(9.0)
Derivative financial instruments		(1.1)	-	(0.8)
Financial liabilities		(5.4)	(3.8)	(4.6)
		(79.7)	(82.9)	(74.8)
Non-current liabilities
Financial liabilities		(111.1)	(81.2)	(91.2)
Deferred tax liabilities		(10.4)	(8.6)	(10.6)
Provisions for other liabilities and charges		(9.8)	(26.0)	(17.8)
		(131.3)	(115.8)	(119.6)
Net assets		157.0	181.9	187.5
Shareholders' equity
Called up share capital		7.0	7.0	7.0
Share premium account		95.4	94.6	94.5
Capital redemption reserve		0.1	0.1	0.1
Merger reserve		37.9	37.9	37.9
Retained earnings		16.6	42.3	48.0
Equity shareholders' funds		157.0	181.9	187.5

Consolidated cash flow statement  for the six months ended 31 October 2009
		Unaudited	Unaudited	Audited
		6 months to	6 months to	year ended
		31 October	31 October	1 May
		2009	2008	2009
	Note	£'m	£'m	£'m
Operating activities
Net cash generated from operations	7a)	17.0	19.3	38.4
Interest paid		(2.2)	(5.0)	(6.9)
Tax paid		(4.5)	(3.3)	(7.5)
Net cash generated from operating activities		10.3	11.0	24.0
Investing activities
Purchase of property, plant and equipment		(3.5)	(2.2)	(8.4)
Proceeds from sale of property, plant and equipment		0.1	0.1	0.2
Purchase of intangible fixed assets		(1.4)	-	(2.0)
Acquisition of subsidiary undertakings		(25.2)	(17.0)	(33.1)
(Debt)/cash acquired with subsidiary undertakings		(0.1)	2.2	3.4
Net cash used in investing activities		(30.1)	(16.9)	(39.9)
Financing activities
Dividends paid		(4.0)	(2.6)	(3.8)
Repayment of obligations under finance leases		(0.1)	(0.1)	(0.2)
Proceeds from exercise of share options		2.3	0.5	1.8
Payment to acquire own shares (ESOP)		-	-	(1.1)
Net proceeds from issue of ordinary shares		0.9	49.0	49.0
Net proceeds/(repayment) of borrowings		20.0	(36.0)	(26.0)
Net cash generated from financing activities		19.1	10.8	19.7
Net (decrease)/increase in cash, cash equivalents and overdrafts	7c)	(0.7)	4.9	3.8
Cash, cash equivalents and overdrafts at 1 May 2009		(4.4)	(8.6)	(8.6)
Exchange gains on cash, cash equivalents and overdrafts		-	-	0.4
Cash, cash equivalents and overdrafts at 31 October 2009		(5.1)	(3.7)	(4.4)

Notes to the Interim Report 

for the six months ended 31 October 2009

1 Basis of accounting

The interim financial information has been prepared under the historical cost convention, as modified by financial assets and liabilities at fair value through the income statement and share based payments at fair value, and in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union, IFRIC interpretations and the Companies Act 2006. 

The accounting policies used in the interim financial information are consistent with those that have been used in the annual financial statements for the year ended 1 May 2009. The impact of new accounting standards has been disclosed in the 2009 financial statements. Further IFRS standards or interpretations may be issued that could apply to the Group's financial statements for the year ending April 2010. If any such amendments, new standards or interpretations are issued then these may require the financial information provided in this report to be changed. The Group will continue to review its accounting policies in the light of emerging industry consensus on the practical application of IFRS.

The interim financial statements for the six months ended 31 October 2009 and for the six months ended 31 October 2008 contained within the Interim Report do not constitute statutory financial statements within the meaning of Section 434 of the Companies Act 2006 and are unaudited. The comparative figures for the year ended 1 May 2009 have been extracted from the financial statements for 2009. The financial statements for the year ended 1 May 2009 received an unqualified auditors' report and have been delivered to the Registrar of Companies and did not contain any statement under Section 498 of the Companies Act 2006.

2 Directors' responsibility statement

The Directors confirm, to the best of their knowledge, that the condensed consolidated interim financial statements have been prepared in accordance with IAS 34 as adopted by the European Union and that the interim business review includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

• an indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

• material related-party transactions in the first six months and any material changes in the related-party transactions described in the last Annual Report.

3 Taxation

The taxation charge on the profit on ordinary activities has been based upon the estimated effective tax rate of 27.0% (2008: 27.5%) for the current year.

4 Dividends

	Unaudited	Unaudited	Audited
	6 months to	6 months to	year ended
	31 October	31 October	1 May
	2009	2008	2009
	£'m	£'m	£'m
Amounts recognised as a distribution from shareholders' funds during the period
Final dividend paid of 1.14 pence per share for the year ended 1 May 2009 (2008: 0.9 pence)	4.0	2.6	2.6
Interim dividend paid of 0.36 pence per share for the year ended 1 May 2009 (2008: 0.3 pence)	-	-	1.2
	4.0	2.6	3.8
Proposed interim dividend of 0.40 pence for the period ended 31 October 2009 (2008: 0.36 pence)	1.4	1.2	1.2

The interim dividend for the period ended 31 October 2009 will be accounted for, following payment of that dividend, in the second half of the financial year. It is proposed that the interim dividend amounting to £1.4 million (2008: £1.2 million) will be paid on 10 February 2010 to those shareholders on the register at 15 January 2010.

  5 Earnings per share

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of shares in issue during each period. The weighted average number of shares, after adjusting for shares held by the ESOP, in issue during the period used in the calculation of basic earnings per share was as follows:

	Unaudited	Unaudited	Audited
	6 months to	6 months to	year ended
	31 October	31 October	1 May
	2009	2008	2009
	'm	'm	'm
Weighted average number of shares for basic earnings per share	345.8	292.8	314.3

Diluted earnings per share is the basic earnings per share adjusted for the effect of the conversion into fully paid shares of the weighted average number of share options outstanding during the period. The weighted average number of shares in issue during the period used in the calculation of diluted earnings per share was as follows:

	Unaudited	Unaudited	Audited
	6 months to	6 months to	year ended
	31 October	31 October	1 May
	2009	2008	2009
	'm	'm	'm
Weighted average number of shares for diluted earnings per share	352.8	318.8	333.4

Adjusted earnings per share has been calculated so as to exclude the effect of the amortisation/impairment of all intangible fixed assets and non operating exceptional items including related tax charges and credits. Adjusted earnings used in the calculation of basic and diluted earnings per share reconciles to basic earnings as follows: 

	Unaudited	Unaudited	Audited
	6 months to	6 months to	year ended
	31 October	31 October	1 May
	2009	2008	2009
	£'m	£'m	£'m
Basic earnings	(32.7)	6.8	17.2
Adjustments for taxation	(3.2)	(1.3)	(2.5)
Non operating exceptional items	-	0.6	0.7
Amortisation of intangible fixed assets	4.6	4.0	8.3
Impairment of intangible fixed assets	42.9	-	-
Adjusted earnings	11.6	10.1	23.7
Earnings per share (pence per share)
Basic	(9.46)	2.33	5.48
Diluted	(9.27)	2.14	5.17
Adjusted earnings per share (pence per share)
Basic	3.39	3.47	7.54
Diluted	3.32	3.19	7.11

  6 Segmental analysis

Revenue for the period was derived from the Group's principal activities and is attributable to the following markets:

	Unaudited	Unaudited	Audited
	6 months to	6 months to	year ended
	31 October	31 October	1 May
	2009	2008	2009
	£'m	£'m	£'m
By destination
UK	177.1	182.0	362.9
USA	4.4	7.1	15.7
Continental Europe	3.7	2.1	4.7
Rest of the World	8.2	1.4	2.7
	193.4	192.6	386.0

Revenue for the period is derived from the Group's principal activities as follows:

	Unaudited	Unaudited	Audited
	6 months to	6 months to	year ended
	31 October	31 October	1 May
	2009	2008	2009
	£'m	£'m	£'m
Supply	20.5	14.7	35.1
Distribution	172.9	177.9	350.9
	193.4	192.6	386.0

(Loss)/profit before tax is derived from the Group's principal activities as follows:

	Unaudited	Unaudited	Audited
	6 months to	6 months to	year ended
	31 October	31 October	1 May
	2009	2008	2009
	£'m	£'m	£'m
Supply	9.1	6.6	17.0
Distribution	12.9	16.7	30.9
Head office (including IFRS 2)	(3.9)	(4.0)	(8.1)
EBITA	18.1	19.3	39.8
Non operating exceptional items	-	(0.6)	(0.7)
Amortisation of intangible fixed assets	(4.6)	(4.0)	(8.3)
Impairment of intangible fixed assets	(42.9)	-	-
Finance expenses	(2.1)	(5.3)	(7.5)
(Loss)/profit before tax	(31.5)	9.4	23.3

7 Notes to the cash flow statement

7a) Cash generated from operations

	Unaudited	Unaudited	Audited
	6 months to	6 months to	year ended
	31 October	31 October	1 May
	2009	2008	2009
	£'m	£'m	£'m
Operating (loss)/profit	(29.4)	14.7	30.8
Depreciation of tangible fixed assets	2.4	2.1	4.3
Amortisation of intangible fixed assets	4.6	4.0	8.3
Impairment of intangible fixed assets	42.9	-	-
Non operating exceptional items	-	0.6	0.7
Foreign exchange losses/(gains) on operating activities	0.3	-	(0.7)
IFRS 2 Share based payments charge	0.6	1.1	2.1
Loss on sale of fixed assets	0.1	0.1	0.2
Net increase in working capital	(4.5)	(3.3)	(7.3)
Net cash generated from operations	17.0	19.3	38.4

7b) Analysis of net debt

	At 1 May	Cash	Non cash		At 31 October
	2009	flows	movements	Acquisition	2009
	£'m	£'m	£'m	£'m	£'m
Bank overdraft	(4.4)	(0.7)	-	-	(5.1)
Bank loans due after one year	(91.0)	(20.0)	-	-	(111.0)
Finance leases due within one year	(0.2)	0.1	(0.1)	(0.1)	(0.3)
Finance leases due after one year	(0.2)	-	0.1	-	(0.1)
Net debt	(95.8)	(20.6)	-	(0.1)	(116.5)

7c) Reconciliation of net cash inflow to movement in net debt

	Unaudited	Unaudited	Audited
	6 months to	6 months to	year ended
	31 October	31 October	1 May
	2009	2008	2009
	£'m	£'m	£'m
(Decrease)/increase in cash in the period	(0.7)	4.9	3.8
Dividends paid	(4.0)	(2.6)	(3.8)
Net proceeds received from share issue	0.9	49.0	49.0
Proceeds from exercise of share options	2.3	0.5	1.8
Payments to acquire own shares (ESOP)	-	-	(1.1)
Cash inflow from financing	(19.1)	(10.8)	(19.7)
Change in net debt resulting from cash flows	(20.6)	41.0	30.0
Exchange gains	-	-	0.4
New and acquired finance leases	(0.1)	(0.1)	(0.3)
Net debt at 1 May 2009	(95.8)	(125.9)	(125.9)
Net debt at 31 October 2009	(116.5)	(85.0)	(95.8)

Net debt excludes any monies which are held on behalf of the Group's customers. Such monies are disclosed separately on the face of the balance sheet.

  8 Related party transactions

Transactions between Spice plc and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

Remuneration of key management personnel

The remuneration of the Directors and members of the operational board, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures:

	Unaudited	Unaudited	Audited
	6 months to	6 months to	year ended
	31 October	31 October	1 May
	2009	2008	2009
	£'m	£'m	£'m
		(restated)
Short term employee benefits (excluding bonuses)	0.7	0.7	1.7
Post-employment benefits	-	-	-
IFRS 2 Share based payments charge	0.2	0.4	0.4
	0.9	1.1	2.1

Comparative numbers for the period to 31 October 2008 have been restated to reflect the composition of the operational board at 31 October 2009.

9 Business combinations

a) Acquisition of Com Group Australia Pty Limited

On 13 July 2009, Spice acquired the entire issued share capital of Com Group for initial cash consideration of £6.9 million. The provisional fair values attributed by the Directors to the net assets acquired are as follows:

	IFRS book		Provisional
	value	Adjustments	fair value
	£'m	£'m	£'m
Property, plant and equipment	1.3	-	1.3
Inventories	2.6	(0.5)	2.1
Trade and other receivables	3.5	-	3.5
Cash and cash equivalents	1.3	-	1.3
Trade and other payables	(3.3)	-	(3.3)
Current tax payable	(0.2)	(0.3)	(0.5)
	5.2	(0.8)	4.4
Net assets recognised on acquisition
Intangible assets			3.9
Deferred taxation on intangible assets			(1.1)
Purchased goodwill			0.5
Fair value of assets acquired			7.7
Cash consideration paid			7.5
Costs of acquisition			0.2
Total cost of acquisition			7.7

The book values of assets and liabilities were extracted from the underlying accounting records of Com Group at the date of acquisition. The provisional fair value adjustment made to inventories was to restate the carrying value of assets acquired to estimated realisable value. Provisional fair value adjustments to current tax payable principally relate to the recognition of liabilities, not recorded in the underlying records at the date of acquisition. Fair values are provisional, based upon management's initial assessment of the acquired entity, and are subject to reassessment during the initial twelve months following acquisition.

  b) Other acquisitions

During the period, the Group also acquired the entire issued share capital of Agrilek Limited, NWP Power Systems Limited and Wayleave Servicing Engineering Limited. None of these acquisitions is considered material to the interim financial statements. Had each of the Group's acquisitions occurred on 1 May 2009, Group revenue would have been £200.3 million and EBITA would have been £18.5 million.

In the six months ended 31 October 2009, goodwill has been increased by £9.3 million as a result of acquisitions made during the period, to reflect adjustments made to the initial assessment of the fair value of net assets acquired in prior years and also to reflect revisions to the amount of contingent consideration paid or payable in relation to the acquisitions of Treewise, Stow Land, Melton Power, Utility Management Services, Gas Call, Saturn and Morrel.

10 Impairment of intangible fixed assets

During the period an impairment charge of £42.9 million was recorded in relation to intangible fixed assets (£6.5 million) and goodwill (£36.4 million) associated with our Gas social housing business which was loss making during the period. The pre-tax discount rate used in the impairment review was 11.5% and a growth rate of 2.5% was assumed. This resulted in an impairment charge of £42.9 million.

11 Seasonality

Whilst certain of the Group's businesses experience a moderate amount of seasonal variation in their trading, when taken as a whole, it is considered that the Group experiences no material variations in performance arising due to seasonality.

12 Share capital

In September 2009, the Company issued 3,125,000 Ordinary shares of 2 pence each to satisfy the exercise of share options. The net cash consideration received by the Company was £0.9 million. 

During the period 3.9 million share options were issued (2008: 0.6 million) under the Group's performance share plan. Included within the total number of options issued were 1.3 million options issued to Directors as announced in August 2009.

13 Availability of Interim Report

The Interim Report will be sent to all shareholders on 5 January 2010. Copies may be obtained from the Company Secretary at Wellfield House, Victoria Road, Morley, Leeds LS27 7PA or on Spice's website at www.spiceplc.com.

 

END

 

 

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