AFS.L Regulatory News (AFS)

11 September 2019

Amiad Water Systems Ltd.

("Amiad" or the "Company")

Interim Results

Amiad (AIM: AFS), a leading global producer of water treatment and filtration solutions, announces its interim results for the six months ended 30 June 2019.

Financial Summary*

·; Revenue of $58.4m (H1 2018: $56.2m)

·; Gross margin of 39.2% (H1 2018: 42.2%)**, primarily due to sales mix and exchange rate impact

·; Operating profit of $2.5m (H1 2018: $3.1m)

·; Profit before tax of $0.9m (H1 2018: $2.2m), primarily reflecting the impact of IFRS 16

·; Fully diluted earnings per share of $0.026 (H1 2018: $0.056)

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

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

* H1 2018 financials have not been restated for IFRS 16, in accordance with the available exemption.

** During the period, Amiad reclassified certain expenses from 'cost of sales' to 'selling and marketing' expenses. The Company has retrospectively applied this reclassification to the prior period and restated the gross margin.

Operational Summary

·; Positive sales momentum:

·; Growth in sales in all of the Company's geographic regions

·; Increase in revenue in both the Irrigation and Industry business units

·; Revenue generated under distribution agreement with Netafim increased by 8.5%

·; Received growing interest in new irrigation product range and TEQUATIC™ PLUS Filter, which is expected to translate to ramp up in sales in H2 2019

·; Improved operations:

·; Increase in total revenue achieved on consistent cost base

·; Implemented further internal efficiency measures, such as introducing automation to additional manufacturing processes

Dori Ivzori, Chief Executive Officer of Amiad, said: "With this set of results, we are beginning to see the operational benefits of our strategic plan as we achieved an increase in revenue without expanding the cost base. This was based on sales growth in all three of our geographic regions and in both the Irrigation and Industry business units. We were also pleased to see a return to growth in revenue generated under our agreement with Netafim. During the period, however, we experienced currency headwinds and the adoption of IFRS 16 had a negative impact on the financial reporting. Nonetheless, we are pleased with the operational progress that we achieved during the period.

"Looking ahead, we entered the second half of 2019 with a higher backlog than at the same point of the prior year as well as a larger sales pipeline, which we expect to convert to orders during the rest of this year. In particular, we expect a ramp up in sales of the new irrigation products to contribute to growth in the Irrigation business unit while the TEQUATIC™ PLUS Filter is expected to contribute to growth in the Industry business unit. We also anticipate an improvement in gross margin for the full year over the first half of 2019. We expect to experience currency fluctuations in H2, but the full extent is not known presently. Despite this, we anticipate good revenue growth for full year 2019, broadly in line with market expectations, and the Board looks to the future with confidence."

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

During the first half of 2019, Amiad recognised the initial benefits from the implementation of the Company's strategic plan established in 2017 as it delivered an increase in revenue without expanding the cost base. This was based on modest growth in most of the Company's geographies, and the Irrigation and Industry business units. In Irrigation, there was an increase in the Company's direct sales as well as in revenue generated under its distribution agreement with Netafim.

The Company's new products - the Sigma series for the Irrigation market and the TEQUATIC™ PLUS Filter in the Industry business unit - generated initial sales and continued to receive growing interest, with a ramp up in sales expected in the second half.

Amiad continued with the implementation of measures to increase internal efficiency. In particular, the Company introduced automation to additional manufacturing processes and expects to benefit from these measures during the current year.

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

Revenue in the Irrigation business unit increased to $33.4m in the first half of 2019 (H1 2018: $31.7m), accounting for 57.2% of the Company's revenue (H1 2018: 56.4%). This primarily reflects a return to growth in sales generated under the Company's distribution agreement with Netafim, which increased by 8.5%. There was also overall growth in Amiad's direct Irrigation sales due to an increase in the APAC region.

The new product series that Amiad launched last year, 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. During the period, the Company's distributors finalised testing and validating the new products, and the Company anticipates an increase in sales of the new products in the second half of the year.

Industry

The Industry business unit revenue increased slightly to $25.0m in the period (H1 2018: $24.5m), accounting for 42.8% of the Company's revenue (H1 2018: 43.6%). The increase was primarily due to growth in the Municipal segment within the Industry business unit, where sales grew by 15.7% to $7.0m (H1 2018: $6.1m) due to growth in the Americas and EMEA regions.

Sales in the PPOG segment within the Industry business unit grew by 27.2% to $4.1m (H1 2018: $3.2m). This reflects growth in PPOG sales in all of the Company's geographic regions.

For the Company's other projects within the Industry business unit, which are classified within the 'General' industry segment, sales were $13.9m (H1 2018: $15.2m) as growth in EMEA was offset by reductions elsewhere.

Performance by Region

Americas

The Americas region includes sales by Amiad's subsidiaries in the US, Mexico and Brazil as well as sales from the Company's headquarters in Israel into Latin America. In the Americas, revenue was $15.2m (H1 2018: $15.2m).

In the US, sales increased to $13.5m (H1 2018: $13.3m), reflecting growth in the Industry business unit to $6.5m (H1 2018: $6.2m) and a slight reduction in the Irrigation business unit to $7.0m (H1 2018: $7.1m). The main contributor to growth in the US was the Municipal segment, with sales increasing by 29.2% to $3.8m (H1 2018: $2.9m). There was also growth in PPOG segment with a 64.7% increase in sale to $1.4m (H1 2018: $0.8m).

The Company expects significant growth in revenue in the US in the second half of 2019 over the first half. In particular, the Company anticipates a strong increase in sales in the PPOG segment, primarily through sales of the TEQUATIC™ PLUS Filter.

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 was 4.6% higher at $16.9m (H1 2018: $16.1m) based on growth in the Industry business unit, particularly in Amiad Europe.

Sales in the Industry business unit in EMEA increased to $8.7m (H1 2018: $7.8m), reflecting growth in all of the industrial segments. In particular, Amiad Europe achieved strong growth in the Industry business unit. There was also increased sales in the Industry business unit in Turkey due to growth in the Municipal segment following a tentative return to public investment. In the Irrigation business unit, sales were slightly lower at $8.2m (H1 2018: $8.3m).

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 to $14.0m (H1 2018: $13.6m), reflecting growth in the Irrigation business unit to $4.9m (H1 2018: $3.6m) while sales in the Industry unit were slightly lower at $9.1m (H1 2018: $10.0m).

Australia continued to be the largest contributor to regional revenue, accounting for 54.8% of sales (H1 2018: 49.6%), with sales increasing to $7.7m (H1 2018: $6.7m). This was based on good growth in the Irrigation business unit, primarily due to two large projects.

The Company continued to execute on its reorganisation at its subsidiary in India. It is progressing as planned and the Company expects to start receiving the benefits from this next year.

Financial Review

Revenue for the six months ended 30 June 2019 was $58.4m compared with $56.2m for the first half of 2018.

Gross margin was 39.2% (H1 2018: 42.2%) with the reduction due to the negative impact of a number of factors:

·; Impact on sales of currency fluctuations: primarily the strengthening of the US Dollar against the Australian Dollar and the Euro. This was the largest single factor, although partly mitigated by the positive impact on costs of the strengthening of the US Dollar against the New Israeli Shekel.

·; Sales mix: margin dilution arose from (i) two significant projects in the PPOG segment that had a lower margin than average Amiad sales; (ii) increased contribution to sales in H1 2019, compared with H1 2018, from a lower-margin customer of Amiad Europe in the Industry business unit; and (iii) the increased volumes with Netafim.

·; Amiad benefited from a government grant in the first half of 2018, which wasn't repeated in H1 2019.

As a result of the lower gross margin, gross profit for the period was $22.9m (H1 2018: $23.7m). The Company expects an improvement in gross margin for full year 2019 as the large, lower-than-average margin projects were completed in the first half and there is expected to be an increase in sales of Amiad's new Irrigation products, which carry a higher gross margin as well as a higher total revenue without an expansion in the cost base.

Sales and marketing costs were $14.0m for the first half of 2019 (H1 2018: $14.2m). During the period, the Company reclassified approximately $0.7m in 'cost of goods' items as 'sales and marketing' costs to better reflect the nature of the expenses. The reclassification has been applied retrospectively to the previous year's figures, which was also in the amount of approximately $0.7m, and these have been restated where applicable.

R&D costs were $1.8m (H1 2018: $1.9m) and administrative and general expenses were $4.7m (H1 2018: $4.6m). As a result, total operating expenses were reduced to $20.4m (H1 2018: $20.7m).

Operating profit was $2.5m (H1 2018: $3.1m), with the reduction due to the lower gross margin, and profit before tax was $0.9m (H1 2018: $2.2m). The reduced profit before tax was due to the lower operating profit as well as financial expenses of $1.2m from the application of IFRS 16 as described below. Fully diluted earnings per share were $0.026 (H1 2018: $0.056).

EBITDA increased to $5.5m for the period (H1 2018: $4.2m) due to the adoption of IFRS 16 in the current year financials whereby the lease operating cost was replaced with a lower depreciation charge and an interest charge, which are not reflected in the EBITDA measure. Excluding the impact of IFRS 16, EBITDA was broadly flat year-on-year. Cash generated from operations increased to $3.9m (H1 2018: $1.0m), with approximately $2.0m of the increase due to less cash being absorbed into working capital compared with the earlier period. It was also positively impacted by the application of IFRS 16 due to the reallocation of lease charges from operating activities to finance activities. The impact of IFRS 16 on EBITDA and cash generation is described further below. 

As at 30 June 2019, cash and cash equivalents were $14.1m (31 December 2018: $13.5m). Net debt at 30 June 2019 was $14.4m (31 December 2018: $13.8m), with the increase primarily due to an expansion in working capital primarily as a result of a $4.3m increase in trade receivables. This increase in trade receivables was largely ($3.5m) due to increased volumes with Netafim. The Company expects the net debt position to be reduced at year-end.

IFRS 16

IFRS 16 is the new lease accounting standard that came into effect on 1 January 2019. The most significant impacts of this new accounting standard are the recognition of operating lease liabilities on the balance sheet as a liability (lease liability) and as an asset (right-of-use) and the operating lease charge being replaced by a charge to depreciation and interest.

The overall impact of the adoption of IFRS 16 was to increase EBITDA by $1.5m, operating profit by $0.25m and decrease net profit by $0.87m. As a result of the initial application of IFRS 16, in relation to the leases that were previously classified as operating leases, the Company recognised $17.6m of right-of-use assets and $17.6m lease liabilities as at 1 January 2019. As at 30 June 2019, the Company recognised $21.5m right-of-use assets and $22.5m lease liabilities on its balance sheet. The Company has elected not to restate the 2018 comparatives in line with the transitional exemptions available. As a result of IFRS 16, the Company has recognised depreciation and interest costs instead of operating lease expense. During the six months ended 30 June 2019, the Company recognised $1.3m of depreciation charges and $0.4m of interest costs instead of a $1.55m operating lease charge.

In addition, there was a $0.8m negative currency impact on finance costs resulting from the revaluation of the operating leases that are denominated in the New Israeli Shekel, which strengthened against the Company's reporting currency of the US Dollar. Financing expenses were therefore increased by $1.2m (being the lease interest cost and currency impact), with net finance costs being $1.5m (H1 2018: $0.9m), resulting in profit before tax being reduced to $0.9m (H1 2018: $2.2m). See note 2 to the consolidated financial statements for further detail.

Outlook

Amiad entered the second half of 2019 with a higher backlog than at the same point of the prior year as well as a larger sales pipeline, which the Company expects to convert to orders this year. In particular, following the successful completion of the evaluation of the Company's new Irrigation product range by its distributors, Amiad expects a ramp up in sales of the new products in the second half of the year. The Company continues to expect significant growth in the US for the full year, with sales of the TEQUATIC™ PLUS Filter anticipated to make an important contribution.

As noted, the Company expects improvement in gross margin for the full year, with an increase in revenue being achievable without expanding the cost base as well as a change in sales mix. The Company continues to focus on increasing efficiency, such as through introducing further automation and value engineering.

As a result, the Company continues to anticipate good revenue growth for full year 2019 over 2018 - with increased sales in both the Irrigation and Industry business units - broadly in line with market expectations and is targeting an improvement in gross margin for the full year over the first half of 2019. However, the Company remains cautious about the uncertainty regarding currency fluctuations, particularly regarding the application of IFRS 16.

As previously announced, the Company is currently in discussions with FIMI Opportunity Funds, a significant shareholder in the Company, regarding a potential investment in Amiad through the placing of new ordinary shares. While there is no guarantee that the discussions will lead to an investment in the Company, the Board is encouraged by the support demonstrated by its significant shareholder and, were the investment to be completed, believes that the proceeds would enable the Company to accelerate the achievement of its growth objectives.

Consequently, with good growth expected for full year 2019, as well as potential opportunities for accelerated growth, the Board continues to look to the future with confidence.

AMIAD WATER SYSTEMS LTD.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

JUNE 30, 2019

AMIAD WATER SYSTEMS LTD.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

JUNE 30, 2019

AMIAD WATER SYSTEMS LTD.

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2019

*Restated for reclassification of certain expenses from 'cost of sales' to 'selling and marketing'. No restatement has been made for IFRS 16 in the 2018 comparative periods.

(Continued) - 1

AMIAD WATER SYSTEMS LTD.

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2019

(Continued) - 2

AMIAD WATER SYSTEMS LTD.

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2019

 (Concluded) - 3

AMIAD WATER SYSTEMS LTD.

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2019

AMIAD WATER SYSTEMS LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2019

AMIAD WATER SYSTEMS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1) CASH FLOWS FROM OPERATIONS:

2) INITIAL IMPLEMENTATION OF NEW STANDARDS

IFRS 16 replaced the guidance in IAS 17, Leases ("IAS 17") upon initial application. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases, and have material impact mainly on the accounting treatment applied by the lessee in a lease transaction.

IFRS 16 changes the existing guidance in IAS 17 and requires lessees to recognize a lease liability that reflects the discounted value of future lease payments and a "right of use asset" in all lease contracts (except for the following exemption), with no distinction between financing and capital leases. However, IFRS 16 permits the lessee to elect not to apply these provisions for short-term leases, according to groups of underlying assets, and for leases where the underlying assets has a low value.

IFRS 16 also changes the definition of "a lease" and the manner of assessing whether a contract contains a lease.

IFRS 16 requires a lessee to account for each lease component in a contract separately from non-lease components. However, as a practical expedient, IFRS 16 permits the lessee to choose, according to groups of an underlying asset, not to separate non-lease components from lease components, and instead to account for all the lease components and associated non-lease components as one lease.

For lessors, the guidance in IFRS 16 is similar to that in IAS 17, such that the lessors will continue to classify leases as operating leases or financing leases, similar to the guidance in IAS 17.

The Company applied IFRS 16 as from January 1, 2019.

For agreements in which the Group is the lessee, the Company elected to apply the standard for the first time by recognizing lease liabilities, for leases previously classified as operating leases, based on the present value of the remaining lease payments, discounted at the incremental interest rate of the lessee as at the date of initial application. Concurrently, the Company recognized a right-of-use asset at the same amount of the liability, adjusted for any prepaid or accrued lease payments. Therefore, application of the standard did not have an effect on the balance of retained earnings as of January 1, 2019.

It should be noted that as part of the initial application of the standard, the Company chose to apply the following practical expedients:

- To apply this Standard to contracts that were previously identified as leases applying IAS 17 Leases and IFRIC 4 Determining whether an Arrangement contains a Lease and not to apply this Standard to contracts that were not previously identified as containing a lease applying IAS 17 and IFRIC 4

- To apply a single discount rate to a portfolio of leases with reasonably similar characteristics.

- To rely on a previous assessment of whether a contract is onerous in accordance with IAS 37 at the transition date, as an alternative to assessing impairment of right-of-use assets.

- Not applying IFRS 16 with respect to leases that end within 12 months from the date of initial application and leases where the underlying asset has a low value.

- Using hindsight when determining the lease term if the contract includes an extension or termination option.

- Excluding initial direct costs from measurement of the right-of-use asset at the date of initial application.

The impact of initial implementation the IFRS 16 on the Company's statement of financial position as of January 1, 2019:

The book value of right of use assets as of the reporting date by groups of the underlying asset:

The table below represents the accumulated effect of the initial implementation of IFRS 16 on the income statement for the six-month period ended 30, June 2019.

The table below represents the accumulated effect of the initial implementation of IFRS 16 on the cash flows for the six-month period ended 30, June 2019.