Carclo Regulatory News (CAR)

Carclo plc

("Carclo" or the "Group")

Interim Report and Accounts

Half-year results for the six months ended 30 September 2023

Carclo plc, the leading global provider of high-precision components, offering comprehensive services from mould design, automation, and production to assembly and printing, serving the life sciences, aerospace, optics, and tech sectors, announces its results for the first six months of its financial year ending 31 March 2024 ("H1 2024").

Highlights:

· The Group faced challenging market conditions compared to the prior year, in particular from the life sciences sector, as demand for diagnostic equipment fell with key customers adjusting to post-COVID requirements. Demand from the aerospace sector remained robust. As a result, revenue from continuing operations decreased by 7.2% (4.8% at constant currency) to £66.9 million (H1 2023: £72.2 million).

· Our focus on operational excellence and efficiency delivered improved manufacturing contribution margins, in particular from our European operations, which partially mitigated the effect of the reduced volumes. As a result, segmental underlying return on sales increased to 7.0% from 6.5%.

· Underlying operating profit from continuing operations was £2.2 million (H1 2023: £3.6 million) with the £0.7 million foreign currency gain in H1 2023 not repeated in H1 2024 (£nil). On a constant currency basis, underlying operating profit was down by £1.1 million.

· Net exceptional costs in the period were £2.1 million (H1 2023: £0.3 million) being primarily £1.0 million rationalisation costs of which £0.4 million was cash.  There is also a £1.0 million past service pension cost which is non-cash.

· We made excellent progress on the key strategic goal of improving the Group's cash generation with cash generated from operations of £11.4 million (H1 2023: £0.5 million) largely driven by strict working capital management.

· Net debt, including IFRS16 lease liabilities, decreased to £29.5 million (31 March 2023: £34.4m) as a result of the focus on cash management to allow increased debt repayment.

· The tough market conditions are expected to continue in the near term, primarily in the US. A major restructuring plan for the US business is being actioned to reduce expense and to drive operational efficiency with the full year benefit expected to be realised in FY 2025.

Commenting on the results, Frank Doorenbosch, Chief Executive Officer said:

"The Carclo team has responded robustly to the fall in demand by our major customers by adapting our business to achieve enhanced contribution margins through increased efficiency. This has allowed the Group to maintain profitability from its manufacturing operations and to achieve a significant increase in cash generation in H1 2024 compared to H1 2023. This activity will continue through H2 2024 to place the Group on a sound footing for FY 2025, so that we are well placed to satisfy the future recovery in demand and retain our position as the trusted partner of major blue-chip customers, in markets with medium to long term demand. Our strategy continues to focus on operational excellence and improved asset utilisation, in order to deliver outstanding service to our customers, and superior returns to our shareholders."

The key financial performance measures for the period are as follows:

Continuing operations

Notes:

(1) Underlying results are those calculated before exceptional items. A reconciliation to statutory figures is set out below.

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Forward-looking statements

Certain statements made in these reports & accounts are forward-looking statements. Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause outcomes to differ materially from those expected.

Alternative performance measures

Alternative performance measures are defined in the financial review of the Annual Report and Accounts (ARA) for the year ended 31 March 2023, with a reconciliation to statutory figures included in this Half Year Report to aid the user of these accounts. The Directors believe that alternative performance measures provide a more useful comparison of business trends and performance. The term 'underlying' is not defined under IFRS and may not be comparable with similarly titled measures used by other companies.

Overview of Results

Group revenue fell by 7.2% to £66.9 million (H1 2023: £72.2 million), primarily as a result of the decrease in demand by major life sciences in vitro diagnostics companies restructuring their businesses as the demand for PCR-based diagnostic testing significantly reduced. At constant exchange rates, revenue decreased by 4.8%.

Group underlying operating profit fell to £2.2 million (H1 2023: £3.6 million) largely due to a fall in demand for medical components. Exchange gains of £0.7 million in H1 2023 did not repeat in H1 2024, accounting for a major part of the fall in reported profit. At constant exchange rates underlying operating profit fell by £1.1 million, this being the difference between current period underlying operating profit and prior year underlying operating profit translated at the current year's average exchange rate. This impact is primarily in the CTP segment.

Net finance costs increased by £1.0 million to £2.6 million (H1 2023: £1.6 million) as a result of increasing market interest rates. Finance costs include the imputed net interest on the defined benefit pension liability of £0.8 million (H1 2023: £0.3 million).

The Group incurred net exceptional operating costs of £2.1 million in the period (H1 2023: £0.3 million), comprising £1.0 million rationalisation costs primarily in respect of the central division and CTP segment, £1.0 million past service cost in respect of retirement benefits GMP equalisation, a further £0.4 million net costs in respect of the cancellation of the future supply agreement announced earlier this year and a credit for the release of £0.3 million provisions not required following settlement of legacy claims.

Group loss before tax was £2.5 million (H1 2023: £1.7 million profit).

The income tax credit was £0.3 million (H1 2023: £1.0 million expense) and the underlying tax credit was £0.1 million (H1 2023: expense £0.9 million). The effective tax rate was 13.2% credit (H1 2023: 59.5% expense). The underlying effective tax rate was 17.7% credit (H1 2023: 43.8% expense) primarily due to the fall in taxable profits in the US.

Underlying earnings per share was 0.5 pence loss (H1 2023: 1.5 pence earnings). The statutory earnings per share for the period was 3.0 pence loss (H1 2023: 0.9 pence earnings).

ROCE was 8.4% (H1 2023: 10.1%) reflecting the operating profit reduction in the period.

CTP division

CTP revenues fell 8.8% to £63.1 million (H1 2023: £69.1m), reflecting the decrease in demand by major customers due to the significant fall in PCR-based diagnostic testing.

The CTP business principally operates in three key market sectors: Life Sciences, Precision Components and Optics. The Life Science segment experienced a marked fall in healthcare demand during the first half, down 12.3% to £51.8 million (H1 2023: £59.0m), particularly in North America which is exposed to the larger life science analytics market. New product development activity remained high and is set to improve demand in the medium to long term.

Demand in our traditional optics market of eyecare and aftermarket car-lighting significantly reduced, reflecting the constraints that consumers have seen as the cost of living increases. However, the products maintain a high contribution margin on the lowered activity level. Cost reductions are being implemented which are expected to improve profitability in the second half and beyond.

CTP Design and Engineering activity in the first half remained at a high level, with revenue £11.3 million, up 11.5% compared to the prior year (H1 2023: £10.2 million). The high level of Design and Engineering activity experienced over the last 18 months is expected to be converted into improved manufacturing efficiency during the next financial year.

CTP return on sales ratio remained stable at 5.8% as the benefit of significantly improved efficiency in the UK operations offset the impact of reduced volumes in the US, China and India. The business continues to seek opportunities to increase prices where possible to mitigate the effect of input cost increases. The current focus is on improving the cost base and efficiency of the business' US operations which is expected to have a significant positive impact on the performance in the second half of this financial year.

The decreased revenues resulted in CTP underlying operating profit being marginally lower than the prior year at £3.7 million (H1 2023: £4.0 million) whilst maintaining a stable return on sales of 5.8%. Compared to the second half of last year CTP delivered an increase in underlying operating profit of £0.4 million.

Aerospace division

The aerospace market continued to recover as aircraft manufacturers restarted build programs responding to the continuing increase in passenger numbers from the low levels during the height of the COVID pandemic. As a result, Aerospace first half revenues grew by 27.5% to £3.8 million (H1 2023: £3.0 million).

Aerospace return on sales ratio strengthened further to 26.0% (H1 2023: 22.3%) as the business benefitted from the focus on its niche products. As a result, the increased activity levels translated into robust growth in underlying operating profit, up 48.9% at £1.0 million (H1 2023: £0.7 million).

Central costs

Central costs increased by £1.4 million to £2.5 million largely due to the non-repeat of significant foreign exchange gains in the prior year and investing in stronger leadership of the company.

Carclo 2025 Strategy

The strategic focus for the business continues to be to drive improved returns and cash flow through our Carclo 2025 plan, "Focus and Value", which resets our operational model and is targeted to restore our margins, with the medium-term goal of delivering a through-cycle ROCE of 15%. The key elements of the Carclo 2025 plan are:

· A focus on operational excellence throughout the business to increase efficiency and improve customer service.

· Increasing the utilisation of our asset base, in particular in the CTP business, with near-term investment focused on continuous improvement, delivering more predictable and higher returns.

· Targeting growth in less capital-intensive areas of the business.

· Building a "One Carclo" culture of entrepreneurialism and collaboration across the group to re-establish Carclo as a destination for talent and career development.

We have made excellent progress on improving the efficiency of our European operations and our focus is now on replicating this turnaround across our US business. Our focus on cash management has delivered a significant improvement in cash generation and allowed us to reduce the Group's debt burden over and above the required scheduled debt repayments.

Board changes

On 21 August 2023 the Board announced, with immediate effect, the resignation of David Bedford as Chief Financial Officer, Company Secretary, and as a Director of the Company. On the same day, Eric Hutchinson, formerly a Non-Executive Director was appointed as Chief Financial Officer and Company Secretary with immediate effect, thus becoming an Executive Director.

Also on 21 August 2023, Rachel Amey, a Non-Executive Director, was appointed as Chair of the Audit & Risk Committee, Interim Chair of the Remuneration Committee and Interim Senior Independent Director with immediate effect. Rachel joined the Board as a Non-Executive Director on 1 March 2023. This essential strengthening of the leadership team is necessary to ensure the successful turnround of the Group and achieving the Carclo 2025 Plan.

Financial Position

Net debt excluding lease liabilities decreased by £4.7 million during the first half to £17.8 million (31 March: 2023 £22.5 million). Total net debt decreased by £4.9 million to £29.5 million (31 March 2023: £34.4 million). Cash was £7.2 million (31 March 2023: £10.4 million).

Cash

Net cash inflow from operating activities during the first half was £8.5 million (H1 2023: net cash outflow £1.3 million), comprising underlying EBITDA of £6.2 million (H1 2023: £7.5 million), net working capital inflows of £7.0 million (H1 2023: outflow £4.7 million), net pension contributions of £1.4 million (H1 2023: £1.6 million), interest costs of £2.2 million (H1 2023: £1.2 million), taxes of £0.7 million (H1 2023: £0.7 million), exceptional rationalisation costs of £0.4 million (H1 2023: £0.7 million). Focus on cash management resulted in a working capital turnaround benefit of £11.7 million; with the current year working capital reducing by £7.0 million against a prior period increase of £4.7 million.

Net cash outflow from investing activities during the first half was £1.7 million (H1 2023: inflow £0.2 million) comprising mainly £2.1 million for capital investment in adapting production lines for new products expected to be manufactured in H2 2024.

Net cash outflow from financing activities during the first half was £10.0 million (H1 2023: £1.6 million), comprising £2.1 million repayment of lease liabilities (H1 2023: £1.8 million) and net repayment of other borrowings £7.9 million (H1 2023: £0.9 million).

A negligible foreign exchange gain on cash (H1 2023: £1.1 million), coupled with the £3.2 million net cash outflow (H1 2023: net cash outflow £2.7 million) resulted in an overall £3.2 million reduction in cash during the first half (H1 2023: £1.6 million).

Debt

Debt decreased by £8.0 million during the first half of the financial year to £36.7 million. It was reduced by £4.4 million repayments of term loans (of which £3.7 million were unscheduled), £3.5 million repayment of the revolving credit facility and £2.1 million repayments of lease liabilities. It was increased by £1.8 million from new lease debt and by £0.1 million from negative foreign exchange movements.

The debt facilities available to the Group at 30 September 2023 comprise term loans of £25.1 million, denominated in sterling 9.9 million, in US Dollar 13.3 million and in Euro 4.9 million. Of the sterling loan £0.7 million will be amortised by 31 March 2024, a further £2.2 million by 31 March 2025 and a final payment of £1.3 million in May 2025 before the balance becomes payable by 30 June 2025. The facility also includes a £3.5 million revolving credit facility, denominated in sterling, maturing 30 June 2025.

The revolving credit facility was fully repaid in the period to 30 September 2023, leaving an amount drawn at that date of £nil (31 March 2023: £3.5 million).

Pensions

The most recent triennial actuarial valuation of the Group pension scheme was carried out as at 31 March 2021. This reported a significantly reduced actuarial technical deficit of £82.8 million (previously £90.4 million based upon the 31 March 2018 valuation).

The statutory accounting method of valuing the Group pension scheme deficit under IAS 19 resulted in net liability of £36.7 million at 30 September 2023 (31 March 2023: £34.5 million). Remeasurement gains during the first half of the financial year were £7.9m, due mainly to a change in the discount rate from 4.90% to 5.55%. These were offset by £9.6m adverse asset return experience over the period due to the Scheme's liability-driven investments being designed to hedge the larger actuarial liabilities and therefore being over-hedged relative to the IAS 19 liabilities and due to falls in the Scheme's growth assets, offset partially by an increase in corporate bond spreads. Further, a GMP equalisation past service cost of £1.0 million has been recognised as an exceptional item in the period to 30 September 2023.

Over the period, the Group's contributions to the scheme were £1.8 million (H1 2023: £2.4 million).

Dividend

Under the terms of its financing agreements the Company is not permitted to make a dividend payment to shareholders before June 2025.

Outlook

The tough market conditions are expected to continue in the near term. In the US demand for Manufacturing Solutions is anticipated to continue at the lower levels experienced during H1 2024, with Design and Engineering activity reducing as programmes are completed. A major restructuring plan for the US business is being actioned to reduce expense and to drive operational efficiency with the full year benefit expected to be realised in FY 2025.

Increased global interest rates are impacting the cost of financing the Group and we expect these to persist. We continue to seek opportunities to reduce the Group's debt burden wherever possible.

All of the above means that the severe downside risk scenarios considered by the Board when assessing the Group's future prospects create a material uncertainty that the interest cover covenant will not be met in March 2024.

The Board remains positive about the medium to long term prospects for the Group, driven by structural growth drivers in our end-markets, our strong customer relationships across our global footprint and the opportunity to drive improved financial performance through our focus on operational excellence.

Principal Risks and Uncertainties

In the Annual Report for the year ended 31 March 2023 Carclo provided a detailed review of the principal risks faced by the Group and how these risks were being managed. The Group continues to face and proactively manage the risks and uncertainties in our business and, whilst the Board considers that these principal risks and uncertainties have not materially changed since the publication of the 2023 Annual Report, it is worth noting that the following risks remain particularly relevant for the remainder of the financial year:

· Supply chain and political disruption is expected to continue with inflation creating further pressure on input costs.

· There has been a noticeable destocking of products by some of our customers over the last six to nine months, which has led to a reduction in orders, particularly in the USA and there is a risk that this may continue in H2 2024.

· Global interest rates remain high which continues to put pressure on interest cover covenants.

Mitigating actions being taken include:

· Strengthening procurement management to improve supply chain logistics and lower input costs;

· Pursuing operating efficiencies to lower the cost of production;

· Increasing asset utilisation to create additional capacity for customers who demand higher volumes of existing products; and

· Marketing to win new customers;

as we continue to focus on debt reduction to mitigate the interest burden that faces the Group.

Going Concern

These interim financial statements have been prepared on a going concern basis as detailed in Note 1. The Board's forecasts show that the Group can operate within its available facilities and meet its covenants as they fall due, however the interest cover covenant headroom is limited at 31 March 2024, principally due to the continuation of high interest rates.

The Board continues to take actions including operational restructuring, cost savings, working capital management, debt reduction and interest reduction initiatives and it considers that whilst the potential benefits from these give comfort that the downside risks can be mitigated, there remains a material uncertainty that the interest cover covenant may be breached under certain severe downside risk scenarios.

Responsibility Statement

We confirm to the best of our knowledge:

(a) the condensed consolidated set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting;

(b) the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

(c) the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and changes therein).

By order of the Board,

29 November 2023

Reconciliation of non-GAAP financial measures - H1 2024

Glossary of Terms