Interim Management Statement
RM is today issuing its Interim Management Statement for the second half of its financial year, covering the period from 1 April 2010 to 25 July 2010.
Trading update - underlying trading expectations for the full year remain unchanged, exceptional costs in second half related to BSF restructuring
Although our UK customers face uncertainties as a result of recent changes in education policy, trading in the first three quarters of RM's FY-2010 has been consistent with market expectations for the year as a whole. However, RM's business is seasonal, with the large majority of the full-year profit arising in the fourth quarter, which means that trading in the first three quarters is not a reliable indicator of outcome for the year as a whole.
RM's results for FY-2010 will reflect exceptional costs of c.£1.5m related to actions taken in response to the Department for Education's (DfE) recently announced review of the BSF (Building Schools for the Future) programme. This review has effectively stopped all future BSF procurement and, as a consequence, we are restructuring our strategic projects bidding activity.
In line with our normal programme of communications with shareholders, RM anticipates issuing a pre-close update to the market prior to 30 September 2010, the Group's financial year end.
Operational delivery in each of our three divisions is progressing on track and we anticipate revenue growth in each of them for the year as a whole.
In the second half of the year, we will install and commission ICT systems in 44 BSF schools and, in addition, 15 Academies. We will also see further increases in the number of examination scripts marked online through our Assessment and Data Services division and increased volumes in our Education Resources division.
The installation and commissioning of BSF schools over summer, and the phasing of our business with individual schools and local authorities, results in a seasonal peak in working capital requirements. The Group has working capital facilities totalling £38m, which are sufficient to cover this peak requirement.
The Group has in place a five-year, £25m committed bank facility with HSBC, which has three years left to run. Borrowings under this facility at 30 June 2010 were £9.8m, all of which is associated with previously made acquisitions.
Total net debt, including borrowing on the committed facility, loan notes payable and deferred consideration on previous acquisitions, was £22.1m at 30 June 2010 (30 June 2009: £14.6m).
Terry Sweeney, Chief Executive, said:
"In his recent Emergency Budget, the Chancellor indicated that education remains a relative priority for public spending and that the Government intends to maintain 'frontline' education budgets. However, total education funding was not explicitly protected and it is likely that our UK customers' budgets will come under pressure. Whilst this will present challenges for RM, the strategy of diversification we have been adopting over recent years positions us well."
On 5 July 2010, the DfE announced a review of the BSF programme. The key elements of this announcement were:
- Existing BSF projects which have reached financial close will continue.
- BSF projects which are close to financial close (i.e. where preferred bidders have been appointed) will be individually reviewed. The DfE has indicated that only 'sample' schools (typically two or three in each case) will be reviewed.
- Other BSF projects will be stopped.
The DfE has stated that capital spending will continue and has established an external review team to consider how future spending programmes should be structured. This review is not expected to report until the end of the calendar year and we do not expect clarity on the form of future capital spending until after it is complete. Our existing Learning Technologies sales channel remains well placed to pursue opportunities with individual local authority schools, Academies and free schools.
At the time of the DfE announcement, RM had reached financial close on 14 BSF projects. Subsequently, RM has also reached financial close for a BSF contract worth £29m with Stoke-on-Trent City Council. In total, these 15 projects represent revenue of £272m, of which approximately £60m had been recognised by the end of H1-2010. Management believes that the remaining business expected under these contracts is still available to the Group. This represents all of the BSF school deliveries previously expected in FY-2010; more than 80% of those expected in FY-2011; but fewer than 40% of those expected in FY-2012 and beyond.
RM had also been selected as preferred bidder for a further six BSF projects, which represent revenue of £167m. The majority of the business from these projects was expected in FY-2012 and beyond. These six projects comprised, in total, 76 schools, of which 13 are 'sample' schools and may still go ahead. Bid costs incurred after RM was appointed preferred bidder had previously been capitalised; depending on the final contractual outcome of these projects, some or all of these costs will be written off in H2-2010.
RM expensed BSF bid costs, net of contributions from construction partners, of £3.9m in FY-2009; net BSF bid costs in FY-2010 have been running at a broadly similar level. RM has acted immediately to reduce costs associated with bidding for BSF projects by reducing contract staff and external spend. In addition, we are currently restructuring our strategic projects bid team, refocusing their activities on non-BSF project business across the Group both in the UK and internationally. We have initiated a consultation process with the people affected and restructuring costs in FY-2010 will be dependent on the outcome of this process. Following the restructuring, we anticipate strategic project bid costs in FY-2011 of c.£1.5m.
We have established a provision of £1.5m against exceptional costs relating to changes to the BSF programme to be taken in H2-2010. This includes restructuring costs and all previously capitalised bid costs relating to contracts at preferred bidder stage.
A revised table of BSF projects is available from the 'Analyst Presentations' page of the Group's investor relations Web site at www.rm.com/investors
The RM Group is a leading provider of educational solutions to schools, colleges and universities, local government and central government education departments and agencies. RM works closely with educationalists to create new products, processes and technology which improve teaching and learning. RM is listed on the main market of the London Stock Exchange under the symbol RM.L, ISIN GB0002870417.
RM's business reflects buying patterns in the schools marketplace. Many schools choose to purchase and install the Group's ICT products and services during the summer vacation, in order to make them available at the beginning of the academic year. As a consequence, the majority of the Group's annual revenue arises in the second half of the year and a large majority of full year profit arises in the fourth quarter of the year.
Significant developments during the period:
On 21 July, RM announced that it had reached financial close for a £29m contract to provide managed ICT services to Stoke-on-Trent City Council's BSF programme. RM previously announced on 5 May 2010 that it had been appointed preferred bidder for this contract and estimated its value at £33m.
On 5 July, the DfE announced a review of the BSF programme. As a consequence BSF projects that had reached preferred bidder but not progressed to financial close are subject to review.
On 22 June 2010, RM announced that it had been appointed preferred bidder for a contract to provide managed ICT services to the London Borough of Barking and Dagenham's BSF programme. This programme is now subject to review by the DfE.
On 22 June 2010, RM confirmed that it had reached financial close for an eight-year contract with the South West grid for Learning Trust (SWGfL).
On 21 June 2010, RM announced that it had been appointed preferred bidder for a contract to provide managed ICT services to Derby City Council's BSF programme. This programme is now subject to review by the DfE.
On 17 May 2010, RM announced that it had signed a letter of intent with LEGO Education which sets out the two companies' intention to create a joint venture company.
On 12 May 2010, RM announced that it had been appointed preferred bidder for a contract to provide managed ICT services to the London Borough of Camden's BSF programme. This programme is now subject to review by the DfE.
On 4 May 2010, RM confirmed that it had reached financial close for a contract to provide managed ICT services to Essex County Council's BSF programme. The DfE has indicated that the schools initially included in this contract are unaffected by its BSF review.
On 19 April 2010, RM announced that it had been appointed preferred bidder for a contract to provide managed ICT services to the London Borough of Ealing's BSF programme. This programme is now subject to review by the DfE.
On 7 April 2010, RM announced that it had been appointed preferred bidder for a contract to provide managed ICT services to Bradford City Council's BSF programme. This programme is now subject to review by the DfE.