(SVCA) Servoca

Chairman / Chief Executive Officer Report

Introduction

For the year ended 30 September 2011, we are pleased to report a level of profitability marginally below the year ended 30 September 2010, despite continued difficult trading conditions.

Although we have experienced a substantial reduction in revenues from our historic public sector recruitment business during the year, we have seen the majority of this revenue replaced by growth in our outsourcing activities. This has enabled the Group to deliver a relatively resilient performance.

In our statement for the year ended 30 September 2010, we made clear our view that the development of the Group's outsourcing business was important for future growth. The experience of the last twelve months has confirmed this view. The trading environment in our public sector recruitment businesses remained tough and some of our recruitment businesses saw deterioration in conditions in the second half when compared to the first. Well documented cuts in public spending continue to impact on recruitment activities and the investment made in developing our outsourcing activities has proved pivotal to the Group's future prospects.

Revenues in our recruitment businesses were down by just under £9m with the majority of this reduction coming from our Doctors and Education activities. Conversely, revenues in our outsourcing businesses were up by over £6.5m. Our Domiciliary Care operations almost doubled its revenue and our Security business saw a 37% uplift in its revenues.

Inevitably we have had to manage the balance between investment in our outsourcing businesses and reducing overheads in the recruitment areas facing reduced demand for their services. Overall we have seen a reduction in Group overheads of £450k.

Financial Review

For the year ended 30 September 2011, Group revenue was £47.9 million compared with £50.2 million (2010), a reduction of 4.6%. Gross profit for the year was £13.4 million against £14.0 million (2010), a reduction of 4.3%.

Operating profit for the year was £1.9 million (before share based payment charges and amortisation of intangibles of £0.4 million) compared with an operating profit in the prior year of £2.1 million (before share based payment charges and amortisation of intangibles of £0.6 million) a reduction of 10%.

Profit before taxation (excluding share based payment charges and amortisation of intangibles) was £1.8 million compared to £2.0 million (2010).

Profit after taxation (excluding share based payment charges and amortisation of intangibles) was £1.7 million (2010: £2.5 million).

The basic earnings per share for the year were 1.05p compared with 1.69p (2010) based on profit after taxation, share based payment charges and amortisation of intangibles.

Net debt reduced from £3.0 million at September 2010 to £2.8 million at September 2011.

Cash generated from operations in the year was £0.8 million (2010: £2.4 million).

Operational highlights

Strategy and delivery

As noted in our Interim Statement for the six months ended 31 March 2011 the focus has remained the development of the Group's outsourcing activities. The Group has seen encouraging progress in both the Security and Domiciliary Care businesses and continues to see the latter area as key for further development.

Outsourcing

Our outsourcing activities are primarily based in two areas; Domiciliary Care and Security.

Our Domiciliary Care service involves the delivery of care to users in their own homes. The nature of the care provided ranges in complexity with much of our supply focused on those users requiring continuing care for on-going medical conditions.

We have had notable success in growing our presence in the Domiciliary Care market on the back of our successful acquisition of the trade and assets of Phoenix Employment Services Limited (Phoenix) towards the end of the previous financial year. The business model has been developed and the acquisition successfully integrated into existing operations. Outsourcing revenues are now almost double that of the year ended 30 September 2010, gross margin is up 107% and the net contribution towards Group central costs is up by 133%.

The business and management model we have developed holds what we believe to be some key areas of competitive advantage in our target markets. Although there remains pressure on spend in care funded by local authorities, we are still seeing strong demand for our services across the board and particularly in the provision of complex or continuing care for on-going medical conditions.

In our Interim Statement we referenced that in our Security business we had appointed a new management team for the start of the financial year ended 30 September 2011. This involved considerable investment in developing both our service offering and management capabilities. Start up losses in the first year of approximately £500k are not expected to recur and have been offset at Group level by the release of a number of legal provisions from the prior years of £765k.

Our service offering now incorporates traditional manned guarding, CCTV, event security, corporate investigations and the supply of specialist security products to the retail industry.

Revenues for the year were up by 37% on the year ended September 2010 and we have made progress in positioning the business for improved profitability. Our Interim Statement also made note of a number of exclusive contracts we had secured to supply unique and in some cases market leading security products, largely to the retail industry. We are pleased to report that the values of these contracts are proving to be substantial. The impact of these wins started to be felt in the second half, but we will see more of an impact in the first quarter of next year in line with the Christmas trading period.

Recruitment

Our recruitment businesses supply into the Healthcare, Education and Police markets.

In Healthcare we have continued to see pressure on demand and spend with our Nursing supply business faring much better in relative terms than our Doctors recruitment operation.

Although Nursing was not immune from the public sector spending pressures and it saw conditions become slightly more challenging in the second half, it has delivered a resilient performance. Revenues were down by less than 7% and a drive to operate more efficiently helped see the areas net contribution towards Group central costs actually increase by over 3% on the year ended 30 September 2010. The Nursing business has retained some key relationships through successful tenders and securing greater market share to offset reduced demand.

The reduction in revenues in our Doctors business was flagged in our Interim Statement and we have seen a further deterioration in the second half. We did see progress in developing our supply business that is positioned on the NHS framework but with a majority of the business historically supplied off framework; this has come under particular pressure. This business finished the full year behind management expectations and revenues were down 32% on the prior year.

Our Education recruitment is channeled through two brands and supplies temporary teaching staff for both short-term cover supply and longer term assignments. We also recruit for schools seeking to appoint candidates into permanent posts.

The reduced run rate at the start of the year ended 30 September 2011 has seen revenues reduced by 24% over the previous year. Reduced budgets and funding for schools and increased levels of candidate availability placed downward pressure on demand. Although we saw more resilience in our supply focused on short-term periods of absence, the market as a whole remained under pressure.

To combat the reduced demand, and in particular the reliance of one of our businesses on delivering long-term cover supply into the UK only, we have targeted other areas. We saw some positive progress in placing teachers into International posts and we are also focused on expanding the short-term supply operations.

The Police business also continued to face challenging trading conditions but a drive to manage overheads in light of this reduced opportunity has helped limit the impact on profitability. Although revenues were down by 19% on the prior year, the net contribution towards central costs was down by less than 10%.

Summary and prospects

Outlook

Our public sector recruitment businesses continue to be faced with a challenging trading environment as we head into 2012. We expect some areas of our business to be more resilient than others but anticipate further reductions in revenues from both our Education and Doctors operations. We are targeting the introduction of new revenue streams and territories in these areas to combat the on-going pressure on historic services and the UK market.

In our outsourcing operations the progress we have made during 2011 stands us in good stead for further development and improved profitability during 2012. We remain of the view that our outsourcing businesses hold good growth potential and we are actively expanding our operations in both Domiciliary Care and Security. The platform we have established as we enter 2012 gives us genuine grounds for optimism that the progress made so far can be enhanced.

We are currently expanding our Domiciliary Care operation and have embarked on a series of branch openings in areas of committed demand for our services. The retention of a key contract in this area in the early part of the financial year 2012 and the opportunity to expand our supply under the same arrangement to new funding authorities also bodes well.

The increase in revenues in our Security business during the year ended 30 September 2011 has positioned the business for improved profitability in 2012. This business has made a strong start to the new financial year.

26 January 2012