VT Group plc, the support services and shipbuilding company, has announces its interim results for the half year ended 30 September 2006. These results are prepared under International Financial Reporting Standards.

Financial Highlights

Strong growth in underlying profits and adjusted earnings per share, reflecting the impact of recent acquisitions; Acquisitions traded in line with expectations, contributing GBP89.5m in turnover and GBP7.6m in underlying operating profit in the period; Strong results from VT Communications and VT Support Services with difficult trading conditions in VT Education and Skills; Group order book of GBP3.5bn providing good visibility of earnings Business Highlights

Overall the business is in good health with acquisitions successfully integrated
UK Defence business now re-branded as VT Support Services to reflect non-defence business
Significant prospects for the Group, with the decisions on three major defence PFI programmes expected in the next six months

Michael Jeffries, Chairman, commented:  "The Group has a strong order book of GBP3.5bn. Within the next six months we expect the outcome of our bids for three large military PFI support programmes. The extent to which we are successful in these will have a major effect on the future growth of the Group.

Acquisitions made during the period have been fully integrated and are performing well. Of strategic importance, the acquisition of the former Lex businesses has brought into the VT portfolio a broader customer base for critical services within the civil sector.

The MoD's discussions with the UK shipbuilding industry about planned consolidation continue and VT is working to find a mutually beneficial outcome.

We are, therefore, confident that the results for the full year will be in line with our expectations. The Group is in sound financial condition with a growing order book, high visibility of earnings and some exciting prospects ahead."

Financial Results Operating review

VT Shipbuilding

VT Shipbuilding has shown good profit performance in the first half of the year, despite a disappointing performance from our Marine Products businesses. This reflects continuing progress in the programme to supply blocks for the Royal Navy's Type 45 Anti-Air Warfare Destroyer and the achievement of the requisite milestones in our programme to build Fast Attack Craft (FAC) for the Hellenic Navy, in partnership with Elefsis Shipbuilding. Three FACs have now been accepted by the customer and prospects remain good for the ordering of a further two ships. The second Type 45 ship block was delivered to BAE Systems during the period and the programme for all six ships remains on schedule.

The Royal Navy Offshore Patrol Vessel, HMS Clyde, has now started trials and is expected to be officially accepted later this month. She is scheduled to be deployed to the Falkland Islands next Spring.

Following the announcement that we have been named preferred bidder to build three Ocean Patrol Vessels for the Government of Oman, we expect the contract to be signed by the end of the year. It is anticipated that this contract will be worth approximately GBP400m.

VT, along with its partners in the Aircraft Carrier Alliance (ACA), submitted prices for its workshare in the CVF project in September. These have been considered by the ACA and a price was submitted to the MoD last month for consideration.

Prospects

The Group order book stood at GBP3.5 billion at 30 September 2006 (GBP2.4 billion at 31 March 2006). We expect announcements on three military PFI support programmes in the next six months, and the extent to which we are successful in these will have a major effect on the future growth of the Group. After a long period of negotiations, we expect financial closure of the Future Strategic Tanker Aircraft (FSTA) project to be completed in the first half of 2007. Decisions are also expected shortly on preferred bidder status in the UK Military Flying Training System (MFTS) and Defence Training Rationalisation (DTR) competitions. Both are potentially multi-billion pound programmes, although the DTR decision, where there would be a large-scale regional impact on sites in England and Wales, could be affected by political considerations.

In September, the Secretary of State for Defence, Des Browne, announced a review of the future of the UK's Naval Bases which could result in closure of one of the facilities. Depending on the outcome of the review, there could be a considerable effect on the nature of FSL's future business. We do not anticipate any effect on our shipbuilding business in Portsmouth although the stated desire of the UK MoD to see consolidation in the UK shipbuilding industry will affect that business and also our related Marine Products businesses.

VT Shipbuilding is pursuing an opportunity to build Offshore Patrol Vessels for Trinidad and Tobago and we expect an announcement on Preferred Bidder by the end of the year.

In line with our intention to identify new areas to develop our support services business, we have made initial progress in the waste management market. VT's capabilities are ideally suited to this market which is set to expand considerably in the next few years. We have been shortlisted for a requirement to build, operate and maintain a facility for Wakefield District Council and are considering a number of other opportunities.

VT Communications

VT Communications achieved strong revenue and profit growth in the first half compared with the corresponding period in 2005.

Good progress continues to be made in delivering the capability enhancement for the Defence High Frequency Communications Service following the opening of the new Network Operations Centre in Forest Moor, Yorkshire, a key element of the programme.

VT Communications has also started the European roll-out of receivers for a major BBC World Service project to implement a new global programme distribution system. The system will ultimately be rolled out worldwide and VT Communications will manage its ongoing operation on behalf of the BBC.

VT Communications has won an initial 5 year contract with a potential value of GBP20m, commencing in January 2007, to broadcast analogue and digital shortwave programmes for Deutsche Welle, the German public broadcaster. This is our first significant contract with a major international broadcaster outside the UK and we believe it will position VT Communications well for future growth.

In the defence and security sector, VT Communications will start transmitting the national time and frequency standard for the National Physical Laboratory (NPL) next year. In addition, it has been confirmed as the preferred bidder for the ICT (Information Communications Technology) solution for the Airtanker consortium on the Future Strategic Tanker Aircraft programme. This ICT provision has a potential value of GBP65m over the life of the programme.

As the UK advances towards digital broadcasting, VT Communications is positioning itself in the future development of this communications technology by investing GBP7m in digitally capable transmission and distribution infrastructure.

VT Education and Skills

With the successful integration of HCTC and Touchstone, which were acquired in the second half of last year, VT Education and Skills is now the largest private sector provider to the Learning and Skills Council (LSC).

During the period under review, the profitability of VT Education and Skills was impacted by changes that the LSC has made to its funding of vocational training. In addition, we have incurred a further GBP1m of costs as a result of higher bid costs for Building Schools for the Future (BSF) projects and higher than expected acquisition integration costs (HCTC and Touchstone). The division, therefore, reported lower profits than it achieved in the first half of last year, despite increased turnover.

We have re-worked our processes to accommodate some of the impact of changes to the LSC funding regime. The integration and rationalisation of the two acquisitions with our existing training operations is now complete and we have been able to substantially reduce the number of offices and administrative staff.

BSF is the biggest single government investment in improving school buildings in England for over 50 years. We have secured preferred bidder status as the partner for Greenwich Council in this programme and contract closure is expected shortly. This will be the first BSF programme contracted in London and will give us considerable credibility in competing for further BSF work. We are also a partner in one of three consortia short listed in Lewisham, where we are bidding with the Costain Group under the umbrella of Learning 21, and are considering bidding for a number of other BSF opportunities.

We have secured contracts from the LSC for the Government's new Train to Gain initiative in seven of the nine English regions. This work will involve delivering Level 2 NVQ (National Vocational Qualification) training to learners over 25 years of age across a wide range of professions, as part of a programme which aims to provide flexible training and advice to employers in order to combat skills shortages in the UK workforce.

Our education business is becoming increasingly established as a provider of national training and assessment contracts for the Department for Education and Skills. We are delivering programmes for teaching assistants, excellent teachers and advanced skills teachers, and most recently have secured preferred bidder status on a contract linked to the nationwide delivery of personal health/social education in schools.

VT Services Inc.

We have made progress towards achieving our target margin of 3% for our US base operations activities. Although the last 12 months have seen further constraints on the domestic Department of Defense (DoD) budget, market opportunities are now more positive with bid activity in the region of US $1bn currently under consideration. In addition, VT Services was successful in the award of 3 contract extensions totalling approximately US $55m.

VT Services has further expanded its regional coverage by securing a ten year contract, worth up to US $68m, to support US Coast Guard operations based in Kodiak Island, Alaska. Services will include materials purchasing, plant operations, logistics and transport support.

In addition to growing the business organically we continue to look for acquisition opportunities in the US, particularly those which would enable us to increase the value added content of our offering and hence the margins.

VT Support Services

Following the acquisition of the Lex businesses earlier in the period, VT Defence has now re-branded and re-structured to reflect the significant non-defence customer base within this division and is now called VT Support Services. The 'Defence' element of this division comprises the Aerospace, Land and Naval Support businesses and the 'Critical Services' element comprises our work with customers in the civil sector, namely the Metropolitan Police, British Airways and a number of local fire authorities.

The addition of the former Lex businesses has resulted in a significant increase in turnover and operating profits for the division, building on the solid performance of the existing business. They have now been successfully integrated into the expanded division and this has been achieved alongside the successful implementation of three new major contracts - fleet management for the Metropolitan Police, C vehicles (provision and management of British Army construction vehicles) and Allenby Connaught (transport services for British Army garrisons in Southern England).

The acquisition has enabled VT Support Services to extend its existing availability contracting model, which already covers ships and aircraft, to land vehicles and also to expand our customer base. There is considerable potential for extending these models to other airlines and elsewhere in the emergency services sector.

The continuing business has also performed well in the period under review with contracts for Army training at Bordon and Arborfield garrisons renewed; the commencement of discussions to extend the contractor logistic support agreements on the Royal Navy's offshore patrol vessels and inclusion of the support contract within VT Shipbuilding's expected order for Ocean Patrol Vessels for Oman. Good growth has also been achieved by our joint venture VT Fitzroy, which operates the Royal New Zealand Navy's principal base near Auckland.

In the aviation sector, our relationship with Lockheed Martin, which has developed considerably through the Ascent joint venture bidding for the UK Military Flying Training System, is set to position VT in the international arena for further flying training opportunities.

The Group's joint venture, Flagship Training, has recently reached agreement in principle with the Royal Navy to extend its current contract for a further 9 months to 31 March 2012 with a further 12 month extension at the customer's option. In addition, as part of this agreement Flagship will undertake a GBP49m contract to design, plan, deliver and assess a range of training courses for Royal Navy personnel. This will involve transferring up to 350 roles to Flagship and further recruitment to replace Royal Navy personnel redeployed to front line duties as a result of this move.

VT's other joint venture, Fleet Support Limited (FSL), has successfully delivered the Royal Navy Type 23 frigate HMS Richmond after a major refit. FSL remains fully committed to, and involved in, the review currently underway between naval base contractors and the MoD relating to the Surface Ship Support Alliance Memorandum of Understanding. This seeks to allocate Royal Navy ship refit and maintenance work to the three Naval Bases (Portsmouth, Plymouth and Rosyth), based on the class management of ships, and is expected to bring both greater stability to the sector and cost savings for the customer. The MoD is also undertaking a review of the Naval Bases and further information is included in 'Prospects'.

Outlook

The Board is confident that the results for the full year will be in line with our expectations. The Group is in sound financial condition with a growing order book, high visibility of earnings and some exciting prospects ahead.

Last Updated ( Thursday, 16 November 2006 )