Carclo Regulatory News (CAR)

Carclo plc

Interim Report and Accounts

Half Year Ended 30 September 2020

Half Year Results for the six months ended 30 September 2020

Carclo plc, a global provider of value-adding engineered solutions for the medical, optical, electronics and aerospace industries announces its results for the first half of the financial year to 31 March 2021, being the six months to 30 September 2020 ("H1 2021").

The key financial performance measures for H1 2021 are summarised below:

· H1 2021 saw resilient performances from the two continuing businesses (Aerospace and Technical Plastics) in the context of COVID-19.

· Revenue from continuing operations decreased by 11% to £50.0m (H1 2020: £56.1m)

· Underlying operating profit from continuing operations decreased by 54% to £1.5m (H1 2020: £3.3m)

· Exceptional costs relating to continuing operations were £1.3m (H1 2020: £1.9m)

· Group statutory loss before tax was £0.9m (H1 2020: £5.6m)

· Progress was made in improving the financial position of the Group with net debt, excluding IFRS16 lease liabilities, reducing to £24.4m at 30 September 2020 (30 September 2019: £26.8m)

· Two significant tooling agreements were secured with a new medical customer for COVID-19 test components with supply of manufactured product due to commence in 2021

Notes:

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

Reconciliation of non-GAAP financial measures - H1 2021

Commenting on the results, Nick Sanders (Executive Chairman) said:

"The first half of the financial year has been one of transition against a backdrop of economic uncertainty resulting from the COVID-19.

Our priority has been to keep our employees and our communities safe whilst maximising our output during this challenging period.

As previously announced the Group reached agreement with the trustees of the Carclo Group Pension Scheme and its bank to agree a schedule of contributions to the pension fund and to extend its banking facilities to 2023. This has provided a stable platform for the Group to move forward and to develop its CTP and Aerospace divisions.

Trading in the first half of the year was adversely affected by the pandemic with the impact of lockdowns in several countries causing either disruption to our customers or our own operations.

The Group has responded swiftly to these challenges by taking advantage of government assistance where available, implementing local Health & Safety measures and adjusting shift patterns as necessary.

Demand for CTP products in the medical diagnostics sector is increasing as a result of the pandemic and we hope to secure further new contract awards over the coming months. Conversely demand in the aerospace sector is significantly down on pre-pandemic levels and we have responded to this by looking for alternative sources of business and cutting costs. Despite this trading in the aerospace division will remain challenging for some time".

Enquiries

Forward looking statements

Certain statements made in these report & 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 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 for the year ended 31 March 2020, 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

The Group's trading performance for the six month period to 30 September 2020 ("H1 2021") was slightly ahead of the Board's expectations although performances from both the Technical Plastics ("CTP") and Aerospace divisions (collectively and with the head office function the "continuing operations") were behind those of the prior period with Group revenue from continuing operations decreasing by 11% to £50.0m (H1 2020: £56.2m) .

CTP revenues decreased by 10% to £47.2m (H1 2020: £52.4m) and CTP underlying operating profit decreased by 31% to £3.2m (H1 2020: £4.6m) following the COVID-19 related disruption to non-medical diagnostics customer demand and business interruption caused by local lockdowns. Government grants of £0.4m were recognised within CTP operating expenses during the period.

Aerospace operating profit decreased by 33% to £0.5m (H1 2020: £0.7m) with the COVID-19 pandemic suppressing customer demand as new aircraft build rates reduced. Government grants of £0.2m were recognised within Aerospace operating expenses during the period. Management has taken steps to reduce operating expenses which has unfortunately resulted in some redundancies to the workforce. At the same time the business is pursuing alternative sources of business to diversify its sector exposure.

On a constant currency basis revenue from continuing operations decreased by 10%. This revenue decline drove a reduction in underlying operating profit from continuing operations of 54% to £1.5m (H1 2020: £3.3m). On a constant currency basis underlying operating profit from continuing operations decreased by 53%.

Central costs increased marginally to £2.2m (H1 2020: £2.0m). As previously reported, the LED Division was exited during 2020 and its results for the comparative period are presented separately from the residual Group as discontinued operations.

Exceptional costs during H1 2021 totalled £1.3m (H1 2020: £1.9m) and principally relate to the costs of external advisers to the Company, its lending bank and the Group pension scheme for the restructuring of the Group's financing and contribution arrangements with its lending bank and the Group pension scheme.

Finance costs of £1.1m (H1 2020: £1.4m) consisted of net interest payable on bank loans and leases of £0.7m (H1 2020: £0.8m) and net interest on the defined benefit pension liability of £0.4m (H1 2020: £0.6m). The decreases in costs were due to the reduction in bank loans and the reduction in the opening defined benefit pension liability relative to the preceding period end which decreases the imputed interest cost.

The Group statutory loss before tax was £0.9m (H1 2020: £5.6m).

The underlying effective tax rate for the period was 61%. The rate is impacted by a deferred tax asset that has not been recognised in respect of UK tax losses as there is no certainty that the losses will be utilised in the foreseeable future.

Underlying earnings per share from continuing operations for H1 2021 was 0.0 pence (H1 2020: 2.2 pence). The statutory loss per share for the period, for all operations, was 1.8 pence (H1 2020: 8.3 pence).

Board and management changes

During the period the following changes to the Board took place:

Joe Oatley became Chairman on 27 April 2020; Nick Sanders was appointed as a Non-Executive Director and Chairman-elect on 18 August 2020 and became Non-Executive Chairman on 30 September 2020; Antony Collins stood down as Group CEO on 5 October 2020 and Nick Sanders became Executive Chairman on the same day. The Board would like to thank Antony for his contribution to the business.

The Company also announces that Matt Durkin-Jones has informed the Board of his intention to step down from his role as Interim Chief Financial Officer and as a Director of the Board with effect from 17 December 2020. Matt had joined the Board for an initial six-month term on 21 January 2020. The Board would like to thank Matt for his service over the previous months and extend him every good wish for the future. The search for his successor is underway.

Outlook

The Board expects the Group to report a marginally stronger underlying operating profit performance in the second half of the financial year subject to any further COVID-19 disruption beyond its current expectation. This reflects higher anticipated CTP product sales from its existing customer base alongside revenues from two new tooling agreements for COVID-19 test components which were entered into during the period with a new medical customer. This is expected to offset a weaker performance in the Aerospace division during the second half due to lower customer demand.

The medium term outlook for the Aerospace business remains uncertain with ongoing weakness in the sector. However, prospects for CTP are positive with the division retaining a strong position in the growing medical diagnostics market.

Financial Position

Cash generated from operations during the first half was £0.6m (H1 2020: £14.6m) despite the exceptional cash costs of £1.3m associated with external advisor fees related to the restructuring, cash payments to the pension scheme of £1.1m and net working capital outflows of £2.3m. The comparative period H1 2020 also suffered £2.0m of exceptional advisor costs but benefitted from one-off asset realisations related to the discontinued LED division.

Gross capital expenditure for the period was £2.8m (H1 2020: £6.2m including discontinued operations of £4.7m), with the majority related to investment in production machinery, facility improvements and property lease extensions in the CTP division. Gross capital expenditure on a cash basis was £0.8m with the Group making use of various financing arrangements.

These factors, combined with £0.7m of interest payments and £0.3m of tax payments, resulted in net debt (excluding IFRS 16 lease liabilities) increasing since the last financial year end to £24.4m (31 March 2020: £22.1m). Including IFRS 16 lease liabilities net debt was £29.4m at the end of the period (31 March 2020: £27.4m).

At 30 September 2020, the Group's total UK bank facilities were £38.0m of which £34.5m related to a term loan and £3.5m to a revolving credit facility.

Government COVID-19 support loans of £2.6m were received during the period and are presented within interest bearing loans and borrowings at 30 September 2020.

The Group's IAS 19 pension deficit increased to £58.1m as at 30 September 2020 (31 March 2020: £37.6m) despite strong asset returns during the period. This was mainly due to the adverse impact of a change in the assumption for the discount rate on liabilities to 1.50% per annum (31 March 2020: 2.30%) as the AA corporate bond rate fell.

The 31 March 2018 triennial actuarial valuation and recovery plan was finalised on 14 August 2020 and in accordance with that recovery plan total contributions paid by the Company (for deficit recovery contributions and scheme administration costs) for the six-month period were £1.4m (H1 2020: £1.1m). Total contributions for the six-month period to 31 March 2021 are expected to be £1.5m.

DividendUnder the terms of its financing agreements the Company is not permitted to make a dividend payment to shareholders up to the period ending in July 2023.

Post Balance Sheet EventsOn 19 November 2020 £0.5m of proceeds from the Administrators of former subsidiary Wipac Ltd was received by the Group's lending bank and used to reduce the drawn balance on the Group's debt facility reducing net debt accordingly. At 30 September 2020 no asset is recognised in respect of these proceeds and so this will be recognised by the Group as an exceptional profit on disposal of discontinued operations during the second half of the financial year. A total of £1.0m potential future proceeds, including this £0.5m, is disclosed as a contingent asset at 30 September 2020.

Principal Risks and Uncertainties

In the Annual Report for the year ended 31 March 2020 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 2020 Annual Report, it is worth noting that:

· COVID-19 related uncertainty continues with the impact on the Group's markets and geographies evolving over time. It is possible that the Group's operations, its supply chains and customer demand could be further impacted;

· the impact of Brexit remains unclear as negotiations between the EU and the UK continue and could impact on customers' investment decisions;

· during the current period two significant tooling agreements were entered into with a new medical customer which helps to diversify the Group's customer portfolio and reduces its reliance on other major customers. These agreements and pending subsequent agreements for the supply of manufactured product are subject to operational execution risk; and

· as a result of historical trading issues, the PPF levy payable by the Group pension scheme has increased during the half year and may continue at a higher rate than has been incurred historically. This would impact on the Group's reported earnings.

Going Concern

These interim financial statements have been prepared on a going concern basis as detailed in Note 1 to these interim accounts. There is limited headroom in a number of the banking covenants for the 12 month periods to 30 June 2021 and 30 September 2021. Any material manifestation of the above risks, individually or in combination, could therefore lead to a breach of the Group's banking covenants. Management has considered the impact of potential mitigations including cost saving and working capital management initiatives, as well as compensation from customers in respect of delays and it considers that the potential benefits from these give sufficient comfort that the downside risks can be mitigated. If it were not possible to mitigate a potential breach the bank would be approached to request that it considers issuing a waiver for any covenant that may be breached.

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 parties' transactions and changes therein).

By order of the Board,

Nick Sanders Matt Durkin-Jones Executive Chairman Chief Financial Officer

26 November 2020

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