AFS.L Regulatory News (AFS)

26 March 2020

Amiad Water Systems Ltd.

("Amiad" or the "Company")

Final Results

Amiad (AIM: AFS), a leading global producer of water treatment and filtration solutions, announces its final results for the year ended 31 December 2019.

Financial Summary

· Revenue of $115.6m (2018: $113.9m)

· Gross margin of 38.9% (2018: 42.1%)

· Operating profit of $3.1m (2018: $6.1m)

· Profit before tax of $0.1m (2018: $4.8m)

· Cash generated from operations was $12.9m (2018: $1.1m)

· Net debt at 31 December 2019 reduced to $12.5m (30 June 2019: $14.4m; 31 December 2018: $13.8m)

· Cash and cash equivalents at 31 December 2019 increased to $15.0m (30 June 2019: $14.1m; 31 December 2018: $13.5m)

Operational Summary

· Growth in revenue reflecting increased sales in APAC and EMEA regions and Industry business unit:

· Sales in the APAC region - which was the largest contributor to revenue - increased by 8.6%, driven by return to normal business in Amiad India following successful reorganisation of that subsidiary

· Industry business unit sales, which accounted for 48.7% of Company revenue, increased by 4.8%, based on significant growth of 35.8% in the Municipal segment

· Sustained execution on strategy to improve operations and recognised initial benefits:

· Increased efficiency where manufacturing process automation has been introduced

· Maintained tight cost control and implemented internal efficiency measures

· Towards year-end, implemented cost cutting measures that are expected to deliver annualised savings of $4.6m, which will be almost fully realised in 2020 

· Post period, as announced on 27 February 2019, Amiad entered into a conditional agreement with FIMI for an investment of up to £17.6m through a subscription for new Ordinary Shares by FIMI and an open offer to the Company's shareholders

Dori Ivzori, Chief Executive Officer of Amiad, said: "Amiad achieved modest revenue growth in 2019. As explained in our trading update in December, whilst we began the year with a positive sales pipeline, certain projects did not convert into firm orders and hence the growth was not as high as we expected alongside certain margin pressures. Nevertheless, we continued to make good progress in improving internal operational efficiency and took further actions in the final quarter, which we expect to benefit from in the current financial year. In addition, we delivered strong cash generation from operations and reduced net debt.

"Looking ahead, we entered 2020 with a higher backlog than at the same point in the prior year and expect growth for both the Irrigation and Industrial business units. However, we're keeping under review the extent of potential disruption to trade caused by the COVID-19 outbreak as well as the impact of the currency markets. Meanwhile, Amiad stands to be well capitalised following the substantive investment from our shareholder, FIMI, and we are taking steps to ensure we are well-positioned for sustained profitable growth when normal business resumes. Consequently, the Board is confident in our business and looks to the future with optimism."

Enquiries

About Amiad

Amiad Water Systems (AIM: AFS) is a leading global producer of automatic, self-cleaning water treatment and filtration products and systems. Through its engineering skills and ability to innovate, Amiad provides cost-effective "green" solutions for the irrigation and industrial purposes. In these markets, its patented products are being integrated into the core of systems for filtration and water treatment, micro irrigation and membrane protection, wastewater and potable water treatment, cooling systems and sea water filtration.

Headquartered in Israel, Amiad provides these solutions through nine subsidiaries and a comprehensive network of distributors to customers in more than 80 countries.

For additional information or product details, please visit www.amiad.com.

Operational Review

Amiad delivered modest revenue growth during 2019 to $115.6m (2018: $113.9m), primarily reflecting a good performance in APAC and an increase in sales in the Industry business unit. As previously noted, currency fluctuations had a particularly negative impact on the Company's reported results and on a constant currency basis, Amiad's revenue for 2019 was approximately $118.1m.

The Company achieved good growth in sales of its new Sigma series for the Irrigation market. While the ramp up that the Company had expected to occur in the second half of the year was lower than anticipated, the Company was encouraged by the demand for these products and remains confident that they will deliver value. Similarly, the significant pipeline that the Company had established for the new TEQUATIC™ PLUS Filter in the Industry business unit did not translate into the expected orders during the second half.

Amiad continued to execute on its strategy to improve its operations and recognised initial benefits. The manufacturing process automation that the Company introduced in 2018 and in the first half of 2019 delivered efficiency gains in those products where it has been applied. The Company maintained tight cost control and, towards the end of the year, introduced a number of further cost saving measures, including the reorganisation of a number of positions and closing certain non-core subsidiaries such as Brazil. These actions have been completed and are expected to deliver savings of $4.6m on an annualised basis, which will be almost fully realised in 2020.

In response to COVID-19, the Company has acted to ensure the safety of its employees and has complied with the regulatory requirements in each of its territories, while preserving business continuity as far as possible. The Company's staff have moved to working remotely where possible. At present, production is still continuing in each territory and the Company has taken measures in order to ensure it can still deliver products to its customers, as far as circumstances allow. As a result, to date, the Company has not been materially impacted by the COVID-19 outbreak. The situation is evolving rapidly and the Company is monitoring and adapting to developments as they occur.

Performance by Segment

Amiad has two business units: Irrigation and Industry. Revenue generated under the Company's distribution agreement with Netafim, whereby Netafim sells Amiad's Irrigation products, contributes to the Irrigation business unit sales. The Industry business unit comprises sales into the Petrol, Petrochemical, Oil & Gas ("PPOG"), Municipal and General (other industry) segments.

Irrigation

The Irrigation business unit generated $59.3m in 2019 (2018: $60.3m), accounting for 51.3% of the Company's revenue (2018: 52.9%). This primarily reflects growth in APAC and the US being offset by reductions elsewhere, particularly in EMEA. Revenue generated under the Netafim agreement was broadly flat at $20.2m ($20.6m).

The new product series that Amiad launched in 2018 targeted at the Irrigation market, consisting of the Mini Sigma, Sigma Pro and ADI-P, performed well with good sales through the Company's direct channels. However, the ramp in sales that the Company expected through its distributor network in the second half of the year was lower than anticipated. The Company remains confident that sales in the new products will continue to increase in 2020.

Industry

The Industry business unit generated $56.2m in 2019 (2018: $53.7m), accounting for 48.7% of the Company's revenue (2018: 47.1%). The increase was predominantly due to growth in the Municipal segment within the Industry business unit, where sales grew by 35.8% driven primarily by projects in the US and Singapore. Other than a slight reduction in sales for the APAC region, there was growth in all other geographical regions. The Municipal segment accounted for 27.1% of the Industry business unit's sales (2018: 20.9%).

There was also growth in the PPOG segment of the Industry unit, with revenue increased to $9.1m (2018: $8.8m). The growth was due to increased sales in the APAC region. The PPOG segment accounted for 16.2% of the Industry business unit's sales (2018: 16.4%).

Specifically, the significant pipeline that had been established for the second half of the year for the new TEQUATIC™ PLUS Filter, which is designed for difficult-to-treat, highly loaded water, did not translate to orders. This was due to various factors peculiar to the individual projects. While this was disappointing, the Company continues to explore the market demand for its TEQUATIC™ PLUS Filter and expects some of this pipeline that had been expected to convert to orders in 2019 to result in orders in 2020. However, the Company remains cautious about the potential impact on this market of the COVID-19 outbreak and the depressed oil price.

For the Company's other projects within the Industry business unit, which are classified within the 'General' industry segment, sales were $31.9m (2018: $33.7m), with the reduction due to lower sales in the US. The General industry segment accounted for 56.7% of the Industry business unit's sales (2018: 62.7%)

Performance by Region

Americas

The Americas region includes sales by Amiad's subsidiaries in the US and Mexico as well as sales from the Company's headquarters in Israel into Latin America.

In the Americas, Amiad delivered sales of $29.8m (2018: $30.9m), which accounted for 25.8% of total Company revenue (2018: 27.2%). As previously noted, the macroeconomic factors impacting the Americas resulted in certain projects not proceeding in the second half of the year due to lack of capital investment.

In its key geography of the US, sales were $26.2m (2018: $26.8m), reflecting a slight decrease in the Industry business unit to $13.8m (2018: $14.4m). Within the Industry unit in the US, sales significantly increased in the Municipal segment to $7.6m (2018: $5.1m). This was offset by a reduction in sales for the General industry segment and slight reduction in the PPOG segment. Sales in the Irrigation unit in the US were flat year-on-year at $12.4m (2018:$12.4m).

In Latin America, sales were $3.6m for 2019 compared with $4.1m in 2018. This reflects flat year-on-year sales in the Industry unit at $1.7m (2018: $1.7m) and a slight decrease in the Irrigation unit to $1.9m (2018: $2.4m). As noted above, towards the end of the year, the Company took the decision to close its subsidiary in Brazil as part of its cost saving actions.

EMEA

The EMEA region includes sales by Amiad's subsidiaries in France (Amiad Europe), Turkey and the UK as well as the domestic sales of the Company's headquarters in Israel and also into Europe, the Middle East and Africa.

Revenue in EMEA grew slightly to $35.1m ($34.2m). This growth was due to higher sales in the Industry business unit, which generated $20.1m (2018: $18.2m), reflecting increased sales in the Municipal and General segments at $2.8m (2018: $1.2m) and $16.5m (2018: $16.1m) respectively. In the Irrigation business unit, sales were $15.0m (2018: $16.0m). Geographically, slight reductions in Amiad Europe, Amiad UK and from the Company headquarters into EMEA were offset by growth in Turkey and Israel, including increased sales in the domestic Israeli market across both business units and all segments.

APAC

The APAC region includes sales by Amiad's subsidiaries in Australia, China, India and Singapore as well as sales from the Company's headquarters in Israel into the Asia-Pacific geography.

Revenue in APAC increased by 8.6% to $30.6m (2018: $28.1m), reflecting growth in the Irrigation unit to $9.9m (2018: $8.8m) and in the Industry unit to $20.7m (2018: $19.3m). The main contributor to this growth was Amiad India, which increased sales by $1.2m to $2.8m (2018: $1.6m) as a result of the subsidiary resuming normal business activity following the reorganisation that commenced in 2018. Australia continued to be the overall largest contributor to regional revenue, accounting for 46.9% of total sales (2018: 49.1%), with sales increasing to $14.3m (2018: $13.8m).

Within the Industry business unit, there was an increase in revenue in the PPOG and General segments with sales of $4.9m (2018: $3.7m) and $11.5m (2018: $11.3m). Sales in the Municipal segment were $4.2m (2018: $4.4m).

Financial Review

Revenue for the year ended 31 December 2019 increased to $115.6m compared with $113.9m for 2018. On a constant currency basis, revenue for 2019 was approximately $118.5m with the difference being primarily due to the strength of the US Dollar against the Australian Dollar and Euro.

Gross margin was 38.9% (2018: 42.1%) with the reduction due to the negative impact of several factors:

· Impact of currency exchange rate: primarily the strengthening of New Israeli Shekel against the US Dollar, resulting in increased cost of sales based in Israel, and the sales erosion due to the strength of the US Dollar against the Australian Dollar and Euro as mentioned above

· Shift in sales mix, with variation by product and territory: such as the reduction in sales of certain high-margin products in the US, which were replaced with sales of other lower margin products; as well as a certain number of specific low-margin projects completed in the first half of the year

· The receipt of government grants in 2018, which wasn't repeated in 2019

The gross margin for the full year was slightly lower than that for the half-year period primarily due to the greater currency impact in the second half. In addition, the margin didn't recover in the second half as expected due to the ramp in sales of the new products, which carry a higher margin, being less than initially anticipated as described above. The lower sales in the second half also meant that the Company wasn't able to offset the large, lower-margin projects completed in the first half of the year.

Because of the lower gross margin, gross profit for the year was $45.0m (2018: $48.0m).

Total operating costs were maintained at $41.8m (2018: $41.8m). Sales and marketing costs were slightly lower at $28.5m for 2019 (2018: $28.8m). R&D costs were level at $3.6m (2018: $3.6m) and administrative and general expenses were slightly higher at $9.8m (2018: $9.5m).

Operating profit was $3.1m (2018: $6.1m), with the reduction due to the lower gross margin. Profit before tax was $0.1m (2018: $4.8m) due to the lower operating profit as well as financial expenses of $2.3m from the implementation of IFRS 16. Excluding IFRS 16, profit before tax would have been $1.7m. Fully diluted loss per share was $0.08 (2018: $0.10 earnings per share).

Cash generated from operations increased significantly to $12.9m (2018: $1.1m), with approximately $10m of the increase due to less cash being absorbed into working capital compared with the prior year. It was also positively impacted by the application of IFRS 16 in 2019 due to the reallocation of lease charges from operating activities to finance activities.

Due to the low level of profit before tax generated, especially in Israel where there is a lower tax rate than in the subsidiary countries, the Company had tax expenses of $1.0m on profit before tax of $0.01m in 2019 compared with tax expenses of $1.1m on profit before tax of $4.8m in 2018.

Additionally, the adoption of IFRS 16 had a negative impact on the Company's reported net profit, including a negative currency impact on finance costs resulting from the revaluation of the operating leases that are denominated in the New Israeli Shekel. As a result, the Company reported a net loss for 2019 of $0.9m (2018: $3.8m net profit). Excluding the impact of IFRS 16, net profit was $0.6m.

As at 31 December 2019, cash and cash equivalents were $15.0m (30 June 2019: $14.1m; 31 December 2018: $13.5m). Net debt at 31 December 2019 was $12.5m (30 June 2019: $14.4m; 31 December 2018: $13.8m). This reduction was due to the strong increase in the generation of cash from operations with a $1.1m increase trade receivables.

Outlook

Amiad entered 2020 with a higher backlog than at the same point of the prior year and year-to-date sales in 2020 have been greater than the same period in 2019. However, the Company is keeping under review the extent of potential disruption to trade caused by the COVID-19 outbreak as well as the impact of the currency markets. Consequently, it is too early to assess the impact these factors will have on revenue growth and the Company will keep the market updated throughout the year.

Meanwhile, the Company continues to execute on its strategy to improve efficiency and maintain strict cost control. As mentioned, this includes expected costs savings of $4.6m from measures already implemented towards the end of 2019, which will therefore be almost fully realised in 2020. As a result, macroeconomic conditions notwithstanding, Amiad expects an improvement in gross margin for 2020.

Additionally, Amiad expects to benefit from the potential investment from FIMI. As a result of this, as well as the strong cash generation during 2019, the Company will be well-capitalised. The funding will be used to help develop the business in a number of ways including, to further investment in research and development of new products and solutions in both the irrigation and industrial segments; scale up production through the automation of certain processes for improved efficiency; and potentially support the Company's aspiration of extending its water filtration solutions portfolio and its access to new markets through the acquisition of new technologies and channels to market. Consequently, the Board looks to the future with optimism.

AMIAD WATER SYSTEMS LTD.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AMIAD WATER SYSTEMS LTD.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AMIAD WATER SYSTEMS LTD.

AMIAD WATER SYSTEMS LTD.

CASH FLOWS FROM OPERATING ACTIVITIES:

Changes in working capital: