Carclo Regulatory News (CAR)

Carclo plc

(“Carclo“ or the “Group“)

Interim Report and Accounts

Half-year results for the six months ended 30 September 2022

Carclo, the global provider of value-adding engineered solutions for the life sciences, precision components, and specialised optics and aerospace industries, announces its results for the first six months of its financial year ending 31 March 2023 ("H1 23").

Highlights

Market environment

á High growth in our chosen markets, led by Life Science innovations and a revival in Aerospace after the lifting of Covid related air travel bans.

á Higher energy prices, labour and material costs have continued to fuel our cost inflation. Where possible, the Group has implemented price increases to mitigate the impact of these cost increases.

H1 Results

á Revenue grew strongly to £72.2m, up 23% compared to H1 2022, driven by growth with new and existing life sciences customers, forex tailwinds and price increases.

á Margins in our manufacturing operations fell as a result of cost inflation and a delay in the launch of two new product lines.

á Underlying operating profit at £3.6m was slightly below H1 2022 as higher revenue and forex tailwinds largely offset the impact of lower margins. On a constant currency basis, the underlying operating profit was down by £0.3m.

á Net debt including IFRS16 lease liabilities increased to £36.8m (31 March 2022: £32.4m) driven by increased working capital, additional growth capital investment, and the impact of movement in exchange rates on the translation of non-sterling denominated debt.

Strategy Ð Carclo 2025

á Our focus is on improving the Group's cash generation through improved asset utilisation and driving operational excellence throughout our manufacturing operations.

á Through this improved asset utilisation and operational improvement, we aim to deliver a sustainable 15% ROCE through the cycle.

á We are building a "One Carclo" culture of entrepreneurialism and collaboration across the group to establish Carclo as a destination for talent and career development.

Financing

á As previously announced on 5th September, we have agreed to a revised and extended funding arrangement with the Group's lending bank and the Pension Scheme. This arrangement provides access to ongoing bank facilities and visibility of pension deficit repair contributions to June 2025.

á Largely due to rising global interest rates, the Group forecasts limited headroom on its interest cover covenant in the near term. The Board is taking a number of actions to mitigate this.

Outlook

á Demand for the Group's products remains robust, but ongoing cost inflation is expected to exert downward pressure on margins throughout the second half and into the following year. As a result, the Board is expecting a second half performance similar to that of the first half.

á Increasing global interest rates are already impacting the cost of financing the Group and we expect this trend to continue, partly mitigated by our focus on cash management.

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

Frank Doorenbosch, Chief Executive Officer, said:

“I am proud of Carclo's strong growth as the result of our position as the trusted partner of major blue-chip customers, operating in markets with robust demand. Our focus is now to capitalise on this growth, through operational excellence programmes and improved asset utilisation, to deliver an increased ROCE. The margin pressure, mainly caused by tightness in the labour market and inflation in both materials and energy costs is being offset by price increases where possible and enhanced investment in continuous improvement. Our near-term focus is on cash generation and improved asset utilisation as we seek to reduce our cost of finance in an environment of increasing global interest rates.

Looking ahead, we are targeting a sustainable 15% ROCE through the cycle, and we believe our chosen market sectors will provide the opportunity to deliver strong organic growth over the long term.“

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

Notes:

(1) underlying results are those calculated before discontinued operations, separately disclosed items and exceptional items. A reconciliation to statutory figures is set out below.

Enquiries

Carclo

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 several risks and uncertainties that could cause actual events to differ materially from any expected future events or results referred to in these forward-looking statements.

Alternative performance measures

The alternative performance measures are defined in the financial review of the Annual Report and Accounts (ARA) for the year ended 31 March 2022, 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 grew by 23.0% to £72.2m (H1 22: £58.7m), driven by a combination of strong demand, the impact of price increases and foreign exchange tailwinds. At constant exchange rates, revenue increased by 14.0%.

Technical Plastics ('CTP') revenues rose 22.2% to £69.1m (H1 22: £56.6m), with growth of 12.9% at constant currency driven by strong demand in its key markets. 

The CTP business principally operates in three key market sectors: Life Sciences, Precision Components and Optics. The Life Science segment exhibited strong demand during the first half as we saw a growing adoption of life science analytics in the healthcare market, particularly in North America which continues to dominate the life science analytics market due to its advanced and developing healthcare infrastructure. Revenue growth came from both new and existing customers.

The Precision Components market continued to be held back by the supply of microprocessors for our customers' products which constrained demand.

Demand in our traditional optics market of eyecare and aftermarket car-lighting remains stable, and the business is now seeking to capture growth by expanding its in-house range of highly efficient LED lighting solutions.

CTP Design and Engineering (previously described as tooling) activity in the first half remained at a relatively high level, with revenue up 11.7% compared to the prior year of £10.2m (H1 22: £9.1m). The high level of Design and Engineering activity experienced over the last 18 months is now being converted into increased manufacturing activity and this is anticipated to continue with the launch of the two new major product lines expected in the second half. CTP manufacturing solutions first half revenue increased by 24.2% to £59.0m (H1 22: £47.5m).

The aerospace market continued to recover as aircraft manufacturers responded to increasing passenger numbers from the low levels during the height of the covid pandemic. As a result, Aerospace first half revenues grew by 44.5% to £3.0m (H1 22: £2.1m).

Group underlying operating profit fell slightly to £3.6m (H1 22: £3.7m) as increased revenues and the benefit of exchange rate tailwinds were offset by a drop in margins. At constant exchange rates underlying operating profit fell by 8.9%.

CTP's underlying operating profit margin reduced from 8.5% to 5.8% largely driven by significant inflation across its major cost categories including energy, materials, labour and transport. Prices have been increased where possible to mitigate the effect of these cost increases, but there is often a lag before the benefit of improved pricing feeds through to margins. CTP also incurred significant costs in the first half in developing the production lines for two new products, the launch of which has been delayed and is now expected in the second half. These reduced margins only partly offset increased revenues and the benefit of foreign exchange movement, resulting in CTP underlying operating profit being lower than the prior year at £4.0m (H1 22: £4.8m).

Aerospace operating margins strengthened further to 22.3% (H1 22: 10.9%) as the business continued to focus on its niche products. As a result the increased activity levels translated into strong growth in underlying operating profit, up 196.5% at £0.7m (H1 22: £0.2m).

Central costs decreased slightly by £0.2m to £1.1m mainly due to foreign exchange gains.

Finance costs increased by 14.8% to £1.6m (H1 22: £1.4m) as a result of increasing interest rates and higher net debt. Finance costs include net interest on the defined benefit pension liability of £0.3m (H1 22: £0.4m).

The Group incurred net exceptional operating costs of £0.3m in the period (H1 22: £nil), comprising £1.1m rationalisation costs relating mainly to the refinancing of the Group partly offset by a £0.8m gain on the sale and leaseback of the property in Tucson, Arizona, USA.

Group profit before tax was £1.7m (H1 22: £4.4m including £2.1m COVID-related US government grant income).

The income tax expense was £1.0m (H1 22: credit £0.4m benefitting from a £0.9m one-off re-recognition of UK deferred tax assets), and the underlying tax expense was £0.9m (H1 22: expense £0.5m). The effective tax rate was 59.5% (H1 22: credit 8.5%). The underlying effective tax rate was 43.8% (H1 22: expense 20.4%) due to a change in mix of the profits towards higher tax jurisdictions. 

Underlying earnings per share was 1.5 pence (H1 22: 2.5 pence). The statutory earnings per share for the period was 0.9 pence (H1 22: 7.5 pence).

Carclo 2025 Strategy

The strategic focus for the business is now to drive improved returns and cash flow. We are implementing 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:

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

á 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.

á Targeting growth in less capital intensive areas of the business.

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

Board changes

On 6 October 2022 the Board announced, with immediate effect, the appointment of Frank Doorenbosch as Chief Executive Officer of Carclo. Frank had previously been appointed as a consultant to the Group for a period of up to twelve months from 6 June 2022 and accordingly since that date has been an Executive Director of Carclo. On the same day Nick Sanders stood down as Executive Chair and became Non-Executive Chair until 5 November 2022 when he stepped down from the Board.

Joe Oatley was appointed as Non-Executive Chair with effect from 6 November 2022 and Eric Hutchinson, a Non-Executive Director and Chair of the Audit Committee, was appointed as Senior Independent Director and Chair of the Remuneration Committee with effect from 6 November 2022.

Phil White has given notice of his retirement and has stepped down from his role as Chief Financial Officer and as a Director of the Company with effect from 14 November 2022. Phil will remain with the Company until his retirement in June 2023 in order to ensure a smooth transition to the new CFO.

The Board has announced the promotion of David Bedford to Chief Financial Officer and appointment as a Director of the Company with effect from 14 November 2022. David joined Carclo in September 2022 as the Chief Financial Officer of the CTP Division.

Financial Position

Net debt excluding lease liabilities increased by £2.2m during the first half to £23.8m, and net debt increased by £4.4m to £36.8m which includes cash of £10.7m (31 March 2022: £12.3m).

Cash

The following table analyses the net cash outflow before and after the cash flows associated with debt and pension servicing.

Net cash outflow from operating activities during the first half was £1.3m (H1 22: net cash inflow £0.6m), comprising underlying EBITDA of £7.5m (H1 22: £6.9m), net working capital outflows of £4.7m (H1 22: outflow £3.3m), net pension contributions of £1.6m (H1 22: £1.5m), interest costs of £1.2m (H1 22: £1.0m), taxes of £0.7m (H1 22: £0.5m), exceptional rationalisation costs of £0.8m (H1 22: £nil) and £0.2m of other inflows (H1 22: £nil).

Net cash inflow from investing activities during the first half was £0.2m (H1 22: net cash outflow £2.8m) comprising mainly £1.1m proceeds from the disposal of part of the Tucson manufacturing site in a sale and leaseback transaction (H1 22: LED Technologies disposal proceeds £0.7m), less £1.0m of capital expenditure (H1 22: £3.5m).

Net cash outflow from financing activities during the first half was £1.5m (H1 22: £3.1m), comprising £1.8m repayment of lease liabilities (H1 22: £0.9m), net repayment of other borrowings £0.9m (H1 22: £2.2m) and £1.2m proceeds related to the financing element of the sale and leaseback of Tucson (H1 22: £nil).

A £1.1m foreign exchange gain on cash (H1 22: £0.2m), coupled with the £2.7m net cash outflow (H1 22: net cash outflow £5.3m) resulted in an overall £1.6m reduction in cash during the first half.

Debt

Debt increased by £2.8m during the first half of the financial year to £47.6m. It was reduced by £1.1m repayments of term loans, £1.8m repayments of lease liabilities and £0.4m net capitalisation of debt transaction costs. It was increased by £1.2m of new lease liabilities arising from the sale and leaseback of the Tucson manufacturing site, by £1.9m from other new leases and by £2.8m from adverse foreign exchange movements.

On 2 September 2022 the Group successfully refinanced with the Company's bank. The debt facilities available to the Group at 30 September 2022 comprise a fully drawn £3.5m revolving credit facility and term loans of £31.2m, denominated in sterling 14.9 million, in US Dollar 13.3 million and in Euro 4.9 million. Of the sterling loan £0.7m will be amortised by 31 March 2023, a further £1.4 million by 31 March 2024, a further £2.2 million by 31 Mar 2025 and the balance becomes payable by 30 June 2025.

Pensions

On 2 September 2022, the Group agreed to the 31 March 2021 triennial pension scheme valuation with an actuarial deficit of £82.8m and a revised schedule of contributions under which the deficit repair contributions payable are £3.9m in FY22, £3.8m in FY23 and £3.5m annually thereafter, plus additional contributions of 25% of any surplus of FY24 underlying EBITDA over £18m payable from 30 June 2024 to 31 May 2025, extending to 26% of any FY25 surplus payable from 30 June 2025 to 31 May 2026.

At 30 September 2022 the Group's IAS 19 pension deficit reduced to £24.9m (31 March 2022: £26.0m) driven by Company contributions in excess of the interest cost. Remeasurement gains during the first half of the financial year were £49.6m, due mainly to a significant change in the discount rate from 2.70% to 5.30%. These were offset by £49.8m 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 SchemeÕs growth assets, offset partially by an increase in corporate bond spreads. The estimated actuarial deficit at 30 September 2022 was £73.1m.

Dividend

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

Outlook

Demand for the Group's products remains robust but ongoing cost inflation is expected to persist throughout the second half and into the following year. As a result, the Board is expecting a second half performance similar to that of the first half.

Increasing global interest rates are already impacting the cost of financing the Group and we expect this trend to continue, mitigated by our focus on cash management.

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

Principal Risks and Uncertainties

In the Annual Report for the year ended 31 March 2022 a detailed review of the principal risks faced by the Group and how these risks were being managed was provided. We continue 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 2022 Annual Report, it is worth noting that:

á Supply chain and political disruption continues with inflation creating pressures on input costs, particularly energy and materials;

á Global interest rates have increased which has increased the Group's cost of financing putting pressure on interest cover covenants; and

á Increased exchange rate volatility, particularly relative to sterling, can impact the Group's reported profits earned in other currencies and the reported value of debt.

Going Concern

These interim financial statements have been prepared on a going concern basis as detailed in Note 1. Whilst the Board's base case forecasts show that the Group is able to operate within its available facilities and to meet its covenants as they fall due, the interest cover covenant headroom is limited, principally due to increases in interest rates, and manifestation of the above risks, individually or in combination, could lead to a breach of the Group's banking covenants.

The Board is taking 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 some comfort that the downside risks can be mitigated there remains a material uncertainty that the interest cover covenant will be breached under reasonable downside risk scenarios.

The Group is engaging with the bank with a view to a temporary easement of the interest cover covenant. Whilst the Board is hopeful that such an easement will be granted, there is no guarantee and as such there is a material uncertainty over going concern due to the lack of forecast headroom on the interest cover covenant.

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 partiesÕ transactions and changes therein).

By order of the Board,

29 November 2022

Reconciliation of non-GAAP financial measures - H1 23

Glossary of Terms