Abrdn Property Regulatory News (API)

2 Jun 2009 07:00



2nd June 2009

API Group plc

Preliminary results for the year ended 31 March 2009

API Group plc (LSE: API), the specialist foils and packaging materials group, today releases preliminary results for the year ended 31 March 2009.

Commenting, API's Non-Executive Chairman, Richard Wright said:

"The Group has made good progress on a number of fronts despite increasingly difficult market conditions caused by the global recession.

Overall, conditions are very challenging and the Group has continued to experience a year-on-year decline in volumes during the early part of the new financial year. Any recovery depends on an improvement in general economic activity and confidence and an end to destocking within the consumer goods supply chain.

However, as a result of the progress made in the last year, the Group is financially stronger and more able to withstand current economic conditions. A significantly lower cost base, more efficient and streamlined operations and anticipated lower energy and raw material costs will ensure that financial results benefit from any upturn in demand." 

Enquiries:

  Chairman's Statement

The Group has made good progress on a number of fronts despite increasingly difficult market conditions caused by the global recession. The businesses in Europe delivered an encouraging performance, especially in the first half, while the US was particularly hard hit by the economic downturn and losses continued at the Group's majority owned joint venture in China.

Reported sales, unchanged at £93.5m, were 6% lower than the comparable period last year on a constant exchange rate basis. Second half revenues were down 16% at constant rates.

Operating profits from continuing operations and before exceptional items of £0.1m were slightly lower than the results reported last year (£0.4m profit for 18 months to 31 March 2008). At constant exchange rates operating profit before exceptional items was £0.5m, an increase of £0.1m on the previous 12 month period.

Despite decisive action on costs, including a 20% reduction in the global workforce during the year, management was unable to fully mitigate the impact of higher average raw material and energy prices and deteriorating economic conditions, leading to reduced volumes in the second half. In China, operational difficulties during the relocation of manufacturing operations to a new site were compounded by a squeeze on export margins as a result of changes to the Chinese tax regime and a stronger currency.

While overall profitability levels were disappointing, positive cash flow reduced net debt by £2.4m to £14.7m, compared to £17.1m at March 2008. At constant exchange rates, net debt was down £6.1m.

Throughout the year, the Group operated within the covenants on its main bank facilities in the UK and negotiated an extension of those facilities to July 2010.

The year has been a good one for concluding a number of legacy matters which had provided an unwelcome distraction for management. Most notably, a protracted legal dispute relating to a past business disposal was settled in March 2009, eliminating a significant contingent liability for the Group. After relevant consultations, the UK defined benefit pension scheme was closed to future accrual as of 31 December 2008, thereby reducing a key element of the risk associated with growing scheme liabilities. Finally, notwithstanding the adverse impact on trading results in China, the relocation of manufacturing operations to a new purpose-built facility was completed on budget and the sale of the old site in Shanghai concluded for a consideration of RMB 99m (£8.4m).

Dividend

In light of the Group's trading performance and the priority given to debt reduction, the Board is not recommending the payment of a dividend.

Board

In September 2008, the Board was pleased to announce the appointments of Chris Smith and Jane Hyndman as Group Finance Director and Company Secretary respectively. As previously announced, the size of the Board was reduced in April 2008 to coincide with the Group's move to AIM. As a result, Martin O'Connell and Brian Birkenhead stepped down as Non Executive Directors.

Employees, Customers & Suppliers

The Board wishes to express it gratitude to the Group's employees, customers and other business partners for their continued loyalty and support during the past year. The Board is especially appreciative of the flexibility and understanding demonstrated by our workforce in response to the deepening economic recession and the unprecedented measures which have had to be taken to mitigate its impact.

Outlook

While there are signs that the weakness in demand in the US has bottomed, the outlook for European and Asian markets remains uncertain. Overall, conditions are extremely challenging and the Group has continued to experience a year-on-year decline in volumes during the early part of the new financial year. Any recovery depends on an improvement in general economic activity and confidence and an end to destocking of the consumer goods supply chain.

However, as a result of the progress made in the last year, the Group is financially stronger and more able to withstand current economic conditions. A significantly lower cost base, more efficient and streamlined operations and anticipated lower energy and raw material costs, will ensure that financial results benefit from any upturn in demand.

Management will continue to focus on costs, cash flow and protecting and developing the market position of the Group's businesses.

Richard Wright

Non-Executive Chairman

  Proforma Financial results 

The audited comparative results in the attached financial statements are for the 18 months to 31 March 2008, following the change of accounting year end in 2007. In order to make a more meaningful comparison, the following proforma financial information for the year to 31 March 2008 is provided for comparison with the 12 months to 31 March 2009.

Segmental Analysis

Group Cash Flow Statement

  Business Review

Group Operating Results

For the 12 months to March 2009, reported revenues from continuing operations were unchanged compared with the prior year, at £93.5m. At constant exchange rates, revenues were down by 6%. Sales growth in the first six months (4% at constant rates) was more than reversed by the impact of weakening demand in the second half of the year.

Operating profit from continuing operations and before exceptional items was £0.1m, down from £0.4m (unaudited) in the previous 12 months.

At comparable exchange rates, operating profit would have been marginally improved at £0.5m. Underlying profitability was affected by a decline in volumes and higher average energy and raw material costs (£1.0m) offset by reduced labour costs and general expenses (£2.9m).

Full year profits in Europe more than doubled, compared with the prior year, to £4.5m, and central costs were 13% lower. However, these gains were offset by a deterioration in results for Asia Pacific and North America. 

Cost Reduction

Measures to streamline operations and lower operating costs were accelerated in response to the global recession and falling demand in the majority of the Group's markets. Restructuring programmes were implemented at all major locations resulting in a reduction of the global workforce by 179 or 20% over the twelve month period. Salary and wage rates were frozen in response to the unprecedented economic conditions and, at some sites, reduced shift patterns and short time working were introduced. By the end of the year, core labour costs, excluding overtime, bonus payments and temporary measures, were £3.8m lower on an annualised basis.

In addition, purchasing and other measures yielded annualised savings of £1.0 m, excluding any impact from commodity prices.

Europe

External sales originating in Europe were £63.8m, up 1.9% on prior year and 0.4% higher at constant exchange rates. After 11% growth in the first half (at constant exchange rates), sales rates fell back due to declining activity levels across the customer base and reduced promotional spend. Nevertheless, Laminates sales were ahead 10% for the year as a whole and in Foils, growth in Italy and Germany partially compensated for shortfalls in the UK, France and security holographics. 

European operating profits before exceptional items of £4.5m were £2.5m ahead of the previous year as a result of lower operating costs and improved margins. UK manufacturing competitiveness was favourably impacted by the depreciation of Sterling against the Euro, which compensated for the effect of commodity price inflation on second half raw material and energy costs .

North America

Reported US sales were broadly unchanged compared to the previous 12 months at £21.0m. However revenues were 16% lower on a local currency basis. The second half saw a steep fall in demand across all market sectors, as the US economy contracted and supply chains destocked. In addition, the business suffered from a sharp spike in raw material and energy prices in the third quarter. Increased selling prices and determined action on costs, including an 18% reduction in headcount and the introduction of short time working, were insufficient to compensate for the speed and depth of the fall in volumes. As a result, the US business recorded an operating loss for the full year of £0.3m compared to a profit of £1.0m in the 12 months to March 2008. 

Asia Pacific

Full year sales in Asia Pacific of £8.7m were down 7% compared to the previous 12 months while operating losses before exceptional items widened by £1.9m to £2.6m. The appreciation of the Chinese Renminbi (RMB) increased reported sales and losses by £1.3m and £0.5m respectively on translation to sterling. Trading in China experienced significant disruption during the relocation of manufacturing operations in Shanghai to a new site. Production problems continued for a time after the move and results were further undermined by the currency impact on export margins and year end write downs for old inventory, quality claims and bad debts. A new management team is now focused on restoring the business to profitability.

Elsewhere in the region, sales declines in Hong Kong and New Zealand were partially offset by increased market share in Australia.

Central Costs

Central costs before exceptional items reduced by £0.3m year on year, to £1.5m, with business units benefiting from a further £0.6m of savings in centrally-controlled costs through reduced recharges from shared service departments.

Exceptional Items

Exceptional items for the 12 months to 31 March 2009 amounted to a net gain of £4.7m. A gain of £7.8m was recorded following receipt of funds for the sale of surplus land in Shanghai, China offset by £1.3m relocation and redundancies costs connected with the move of operations to a new facility on the outskirts of the city. Redundancy and restructuring costs of £0.5m were incurred in respect of cost reduction programmes in the UK and US facilities.

Impairment

After a Group-wide impairment review, the value of goodwill held in the consolidated accounts in respect of the Group's investment in its majority owned joint venture in China has been written down from £1.3m to zero. The Board considers that no other impairments to goodwill or asset carrying values are necessary. 

Discontinued Operations

The Group made a loss from discontinued operations of £1.3m in the 12 months ended 31 March 2009, comprised entirely of legal fees incurred in defending a claim for breach of warranties connected to the disposal of the Group's Converted Products division in January 2005. The claim was settled in March 2009.

Finance Costs

Net finance costs for the 12 months ended 31 March 2009 were £2.6m, including £0.7m in respect of defined benefit pension schemes. Compared to the 12 months to 31 March 2008, finance costs decreased by £0.3m, with interest payable on bank loans decreasing £0.6m and pension fund finance costs increasing by £1.0m. The prior year benefited from a release of over accrued costs associated with the Pension Protection Fund levy.

A credit of £0.3m relating to prior year derivative contracts reversed a charge of £0.4m taken in the previous period. Since 1 April 2008, the group's treasury procedures have complied with the requirements of hedge accounting under IFRS. Gains or losses related to interest rate hedge instruments or re-translation of foreign currency denominated loans designated as hedge instruments are accounted for in the Statement of Recognised Income and Expense. In the 18 months to 31 March 2008, these exchange and interest rate losses were reported within interest costs. 

Taxation

For the year to 31 March 2009, tax of £4.3m has been charged to the profit and loss account (credit of £0.4m for the 18 months to 31 March 2008), comprising an overseas tax charge of £3.3m (2008: £0.5m) and a deferred tax charge of £1.0m (2008: credit of £0.9m). £3.1m of the overseas tax charge relates to China and management's estimate of the potential tax liability arising from the sale of surplus land. Deferred tax assets have been adjusted downwards in the light of recent trading performance and the impact on potential short term recoverability of tax losses compared to the assessment at 31 March 2008.

The tax charge for the year of £4.3m compares to the Group's reported profit before tax and discontinued operations of £2.2m. The reasons for the disproportionately high tax charge are primarily the high effective tax rate on the China land sale and the reduction in the US deferred tax asset, as well current year losses not being recognised. A full reconciliation of the total tax charge is shown in Note 7(b) to the financial statements. 

Earnings Per Share 

Basic and diluted loss per share from continuing operations was 3.7p for the 12 months to 31 March 2009 compared to a loss per share of 16.7p for the 18 months ended 31 March 2008.

Cash Flow and Net Debt

Net cash inflow from operating activities was £6.4m for the 12 month period to March 2009 compared to £1.0m for the 18 months to 31 March 2008. For the 12 months to 31 March 2008, net cash inflow from operating activities was £2.8m.

A reduction in working capital generated £5.7m compared to an outflow of £1.5m for the 18 months to March 2008. 

Capital investment in the year amounted to £4.1m compared to depreciation of £3.9m and included £3.7m expenditure on the new facility in China. The magnitude of the China project in recent years has limited the capital expenditure available to the Group's other operating businesses. As this project is now concluded, it is anticipated that investment in other regions will increase although management expect total expenditure will be below depreciation.

Cash interest expense was £2.5m for the 12 months to March 2009 compared to £2.2m for the comparative period to March 2008. The current year expense includes £0.3m re-financing costs associated with an extension of terms on the Group's main UK bank facilities.

The depreciation of Sterling during the year had an adverse impact on the Sterling value of the Group's foreign currency denominated borrowings. The total loss of £3.7m for the year included £3.4m relating to US$ borrowings. There has been a corresponding increase in the consolidated value of the Group's US assets. 

Net debt (financial liabilities excluding the fair value of derivatives, less cash) reduced from £17.1m at March 2008 to £14.7m at 31 March 2009. Gearing reduced to 56% at March 2009 compared to 62% one year previously and 116% at September 2007.

Borrowings and Liquidity

The Group's policy is to ensure that bank and other funding facilities are sufficient to meet foreseeable peak borrowing requirements. Facilities are in place to independently finance the main geographic regions - The UK, North America and China.

In the UK, the Group extended its bank facilities during March 2009. UK facilities at 31 March 2009 totalled £18.5m comprising a term loan of £1.5m repayable in instalments to December 2009, a term loan of £4m repayable with an instalment of £0.75m on 1 April 2010 and the balance on 1 July 2010, a credit facility of £7.5m to 1 July 2010 and a multi-option facility up to £5.5m repayable on 24 March 2010. UK borrowings are secured against the Group's UK assets. 

In North America, the Group's banking facilities comprise a term loan of $0.7m repayable over a 5 year period from April 2006 and a variable asset-based working capital facility up to $5.0m. At 31 March 2009 the amount available was $3.0m. Lending is secured over US assets.

In China, the business had bank loans of RMB 35m (£2.5m) at 31 March 2008 which were repaid in 2008 from the proceeds of the land sale. A new one year revolving working capital facility of RMB 48m (£4.9m) was agreed during March 2009, secured against the new manufacturing site, and repayable on 24 March 2010. At 31 March 2009, RMB 20m (£2.0m) had been drawn down.

Bank Covenants

The Group's main facilities are with Barclays Bank plc in the UK. The total debt under committed and revolving facilities are subject to four quarterly financial covenant targets based on the financial performance of the Group after excluding the US and China. Covenants are for Debt Cover, Total Service Payments cover, Senior Interest cover and Tangible Net Worth. Throughout the year to 31 March 2009 the Group met all its covenant targets. At 31 March 2009, Debt Cover, the ratio of net debt to 12 month trailing EBITDA was 2.74 (2008: 5.60).

The US facilities are subject to covenant obligations relating to profitability and net worth. At 31 December 2008 and 31 March 2009, following the second half slowdown in trading, the US business did not meet its covenant obligations and the lender, HSBC, exercised its right to increase the interest rate margin and reduce the uncommitted funds availability from $7m to $5m. The committed funds of $0.7m are unaffected. China facilities are subject to a limited number of general financial covenants.

Pensions

The Group operates a number of pension schemes for the benefit of its employees. At 31 March 2009 the Group's IAS19 gross pension liability was assessed at £7.1m (2008 £3.5m) with a net liability of £5.1m (2008 £2.5m) after accounting for a deferred tax asset of £2.0m (2008 £1.0m). The IAS19 liability has been calculated using discount rates of 6.85% - 7.0% (2008: 6.0% - 6.5%).

The API Group plc Pension and Life Assurance Fund is a defined benefit scheme operated by the Group in the UK. The IAS19 liability at 31 March 2009 relating to this scheme was £6.3m (2008 £3.3m). No new members have joined the Fund since October 2006 and the scheme was closed to future service accrual on 31 December 2008. UK employees affected were eligible to join a newly introduced defined contribution pension plan. A small number of staff in the US are members of a closed defined benefit pension plan.

The UK scheme's last triennial valuation was at 30 September 2007. The valuation calculated a funding deficit of £8.7m on a continuing basis. During the year to 31 March 2009, to reduce the deficit, the Group made additional contributions into the scheme at a rate of 4% of pensionable earnings plus additional contributions of £0.3m per year. The Group made regular contributions of 8% of pensionable earnings in respect of the accrual of future service benefits up to December 2008. Following the 2007 valuation, the company and Scheme Trustees agreed a funding plan and schedule of contributions aimed at reducing the deficit to zero over a 10 year period. The company also pays all pension related administration fees on behalf of the Fund.

  Group Income Statement

for the year ended 31 March 2009

Group Statement of Recognised Income and Expense

for the year ended 31 March 2009

Group Balance Sheet

at 31 March 2009

  Group Cash Flow Statement

for the year ended 31 March 2009

1. Preparation of financial statements

Publication of abridged accounts

The group's financial statements for the year ended 31 March 2009 were authorised for issue by the Board of Directors on 1 June 2009 and the balance sheet was signed on the Board's behalf by A Turner.

The preliminary announcement figures for the year ended 31 March 2009 and the comparative figures for the 18 months ended 31 March 2008 are an abridged version of the Group's statutory accounts which carry an unmodified audit report and do not contain a statement under S237 (2) or (3) of the Companies Act 1985. The Group's audited statutory accounts for the year ended 31 March 2009 will be filed in due course with the Registrar of Companies. The Group's audited accounts for the 18 months ended 31 March 2008 have been filed with the Registrar of Companies.

The Annual Report and Accounts for the year ended 31 March 2009 will be posted to shareholders by 19 June 2009 prior to the Annual General Meeting on 21 July 2009. Copies of the Annual Report and Accounts will be available to members of the public from 22 June 2009 at the Group's registered office at Second Avenue, Poynton Industrial Estate, Poynton, Cheshire SK12 1ND.

API Group plc is a public company incorporated and domiciled in England & Wales. The company's ordinary shares are traded on the Alternative Investment Market of the London Stock Exchange.

Basis of preparation 

The Group's financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) as adopted by the European Union as they apply to the financial statements of the Group for the year ended 31 March 2009 and applied in accordance with the Companies Act 2005. The Group has applied optional exemptions available to it under IFRS 1.

The principal accounting policies which apply in preparing the financial statements for the year ended 31 March 2009 are consistent with those disclosed in the Group's audited accounts for the 18 months ended 31 March 2008.

The consolidated financial statements are presented in sterling and all values are rounded to the nearest thousand (£'000) except when otherwise indicated.

The Group meets its day to day working capital requirements through overdraft and loan facilities which expire at various times up to July 2010. The principal facilities relate to the UK, which have recently been extended to July 2010. The current economic conditions create uncertainty over the general level of demand for the group's products and fluctuations in exchange rates have impacts over the sterling value of the Group's products and the cost of its raw materials.

The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current facility. The Group will open renewal negotiations with potential lenders in due course and has at this stage not sought any written commitment that the facility will be renewed. However, the Group has held discussions with its current lenders about its future borrowing needs, in particular when extending its UK facilities in March 2009, and no matters have been drawn to its attention to suggest that renewal may not be forthcoming on acceptable terms.

The principal accounting policies which apply in preparing the financial statements for the year ended 31 March 2009 are consistent with those disclosed in the Group's audited accounts for the 18 months ended 31 March 2008.

  2. Segmental analysis

Primary reporting format - by geographic segment: At 31 March 2009, the Group is organised into three distinct independently managed geographic segments in accordance with the location of assets, Europe, North America and Asia Pacific.

Exceptional items are material items which derive from events or transactions that fall within the ordinary activities of the Group and which need to be separately disclosed by virtue of their size or incidence.

Relocation of China factory

This relates to the net revenue impact during the year of the project to relocate to a new factory location in Shanghai. The net gain is the result of a gain of £7,827,000 (2008: £541,000) on the land sale net of relocation and restructuring costs of £1,290,000 (2008: £303,000) associated with the move. These funds have been used to invest in the new site construction, infrastructure, machinery and installation.

Impairment of goodwill

This relates to goodwill arising in the China business which has been impaired during the year.

Restructuring of operating businesses

This relates largely to redundancy and other costs associated with business improvement measures primarily within the UK businesses.

Charlotte factory closure costs

The credit in the previous period relates to the sale of the Charlotte factory which had previously been closed.

Rationalisation of group costs

These costs related to the severance and other related costs in respect of a number of senior executives who were made redundant during the period to 31 March 2008.

Impairment of property, plant and equipment

In the period to 31 March 2008, as part of the review of Group costs, a provision was made in respect of the costs of a suspended IT project.

5. Taxation

The current year charge for foreign tax rates relates primarily to China, where a tax provision has been made against the profit on sale of surplus property in Shanghai after the relocation of operations to a new site.

6. Discontinued operations

The loss on disposal of discontinued operations is comprised entirely of legal fees incurred in defending a claim for breach of warranties in connection with a business disposal made by the Group in January 2005. The claim  was received in 2007 and was settled in March 2009.

A write-off of £750,000 deferred consideration in the previous period, together with £380,000 of legal and other costs were related to the same transaction.

  7. Earnings per ordinary share

Basic earnings per share is calculated by dividing the net profit/(loss) for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share is calculated by dividing the net profit/(loss) attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all dilutive potential ordinary shares into ordinary shares. As a dilution would reduce the loss per share, the diluted weighted average number of shares is equivalent to the basic weighted average number of shares.

The following reflects the income and share data used in the basic and diluted earnings per share computations:

There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of these financial statements.

The weighted average number of shares excludes the shares owned by the API Group plc No.2 Employee Benefit Trust (58,221; 2008: 58,221). 

The weighted average number of shares in 2008 has been adjusted to reflect the discount on the market price immediately prior to admission of new shares under the open offer to shareholders in January 2008.

Earnings/(loss) per ordinary share

  8. Financial liabilities

In the UK, the Group has taken out an amortising interest rate swap contract on borrowings of £6m as at 31 March 2009. This swaps floating rate borrowings at 1 month LIBOR with a fixed rate of 6.08% until 1 August 2010.

Bank loans

Bank loans comprise the following:

The Group's banking facilities comprise:

UK Facilities

A term loan of £5.5m (2008: £8.5m) repayable between July 2009 and July 2010 and a revolving credit facility of £7.5m (2008: £7.5m) repayable July 2010. The revolving credit facility was wholly denominated in US Dollars at 31 March 2009. In addition there is a multi option overdraft facility of £5.5m (2008 : £5.0m). Interest cost for the period averaged 2.35% above LIBOR for term loans and 2.35% above Base rate for overdrafts.

China Facilities

Term loans of RMB 35m at March 2008 were repaid in the period. A new term loan of RMB 20m was arranged in March 2009. This loan is repayable in March 2010. The rate of interest is fixed at 4.8%.

US facilities

A term loan of $0.7m (2008: $1.05m) is repayable in instalments to May 2010. In addition there is an overdraft facility of $5.0m (2008: $7.0m) depending on the level of working capital. Interest cost for the period averaged 0.75% above prime for the term loan and 0.5% above prime for the overdraft.

As a result of a shortfall in results in the second half of the year, US facility covenants were breached and the term loan is consequently shown as a current financial liability in the financial statements. Subsequently, the event of default has been waived by the lender, new covenants have been agreed, the interest margin has been increased by 3% and the overdraft capacity has been reduced by $2m, as indicated above. The payment schedule on the term loan has remained unchanged. 

9. Reconciliation of movements in equity