Carrs Group Regulatory News (CARR)

15 April 2019

CARR'S GROUP PLC ("Carr's" or the "Group")

Interim Results

For the 26 weeks ended 2 March 2019

"Continued growth in challenging markets"

Carr's (CARR.L), the Agriculture and Engineering Group, announces its results for the 26 weeks ended 2 March 2019. 

Financial highlights

Net debt2 of £23.3m (£15.4m net debt at 1 September 2018)

Commercial highlights

Agriculture

· Robust performance in Agriculture despite challenging market conditions

· Warm weather in the UK and USA, in marked contrast to the same period in 2018, impacted volumes in Agriculture

· Reduced volumes in Agriculture mitigated through improved efficiencies, operating cost controls and effective procurement

· USA feed block volumes, including joint ventures, up 5.6% driven by strong performance from new low moisture feed block plant at Shelbyville, Tennessee

· Integration of Animax progressing well, with good progress in new product development

Engineering

· Strong performance in Engineering, significantly ahead of prior year

· Significant improvement in UK Manufacturing, driven by a strengthened management team and improved manufacturing efficiencies

· Good performance in USA Engineering and strong order book following significant MSIP® contracts won in 2018

· Significant funding awarded by the US Department of Energy in December 2018 to develop passive cooling technology

· Major USA $8.5m contract win in Remote Handling business strengthens confidence in medium term performance of the business

Outlook

· The Board's expectations for the full year remain unchanged

1 Adjusted results are after adding back amortisation of acquired intangible assets and non-recurring items including acquisition costs

2 Further details of net debt can be found in note 12

Tim Davies, Chief Executive Officer, commented:

"The Group delivered a good performance during the first half of the financial year and trading remains in line with the Board's expectations for the full year. During the period, our Agriculture division was impacted by challenging external market conditions, including unseasonably mild weather in marked contrast to the same period in 2018, and continued uncertainty in the UK around Brexit. However, we were able to mitigate the effect of these challenges through improved efficiencies, operating cost controls and better procurement.

I am pleased to report that our Engineering division had a strong start to the year as a result of good performances in our UK Manufacturing and USA Engineering businesses. We are now seeing strong order books across the division, driven by contract wins, and we have improved manufacturing processes and strengthened our management teams.

Trading in the second half of the year has started in line with expectations, and the Board's outlook for the full year remains unchanged. We also remain confident in the medium term prospects of the Group as we continue to invest across our divisions, expand our product offering and grow our international footprint."

Enquiries:

About Carr's Group plc:

Carr's is an international leader in manufacturing value added products and solutions, with market leading brands and robust market positions in Agriculture and Engineering, supplying customers in over 50 countries around the world.

Its Agriculture division manufactures and supplies feed blocks and supplementation products for livestock, distributes farm machinery and runs a UK network of rural stores, providing a one-stop shop for the farming community. Its Engineering division designs and manufactures bespoke equipment and provides technical engineering services into the nuclear, petrochemical, oil and gas, pharmaceutical, process and renewable energy industries, including robotic and remote handling equipment.

INTRODUCTION

Carr's has delivered a good performance during the period and ahead of the same period last year driven by improved profits in Engineering and a solid performance in Agriculture.

BUSINESS REVIEW

During the 26 weeks ended 2 March 2019 Group revenues were £206.2m, up on the prior year (H1 2018: £200.1m). Adjusted profit before tax increased by 4.5% to £11.4m (H1 2018: £10.9m). Adjusted operating profits are stated before amortisation of acquired intangibles and non-recurring items. The Board considers that this measure better reflects the Group's underlying performance. Reported profit before tax after amortisation and non-recurring items was £10.3m (H1 2018: £10.6m). Amortisation and non-recurring items of £1.1m (H1 2018: £0.3m) related mainly to the costs of GMP equalisation in the closed defined benefit pension scheme (£0.8m), together with business combination expenses and amortisation of acquired intangible assets.

Adjusted group operating profit of £11.9m (H1 2018: £11.3m) was 5.2% ahead of the prior year driven by the improved performance in Engineering, and reported operating profit was 1.6% behind the prior year at £10.8m (H1 2018: £11.0m).

On an adjusted basis, earnings per share increased by 2.2% to 9.4p (H1 2018: 9.2p). Basic earnings per share decreased by 7.8% from 9.0p to 8.3p.

AGRICULTURE

Overall, Agriculture continues to perform in line with the Board's expectations for the full year.

The unfavourable weather conditions experienced within the first quarter of the year continued for the rest of the period, affecting volumes in both the UK and USA. This was in marked contrast to the same period in 2018. The continued uncertainty around Brexit also led to caution among the farming community impacting UK Agriculture. However, the resulting effect on profitability was offset through strong positions on raw materials and highly effective procurement across a broad range of product lines. Against this backdrop, the Agriculture division has reported adjusted operating profit of £10.0m (H1 2018: £10.0m), unchanged from the prior year and in line with the Board's expectations for the half year. Reported operating profit was £9.8m (H1 2018: £9.8m).

Feed blocks and supplements

Overall, global feed block volumes decreased 0.5% against the prior year.

Following a strong start to the year for our USA feed block business, volumes, including joint ventures, were 5.6% up on the prior year despite adverse weather conditions that made trading more difficult. Our new low moisture feed block plant at Shelbyville, Tennessee delivered a strong performance during its first full year of operation. This facility expands our geographic footprint, providing access to customers across the eastern and south eastern states of the USA. 

UK feed block sales volumes were down 14.1% compared to H1 2018 due to significantly warmer and drier weather conditions experienced during the period, in contrast to the much colder and wetter conditions in the same period last year.

Feed block sales in Europe through our joint venture business based in Germany, Crystalyx Products GmbH, were also affected by similar weather conditions to the UK, with volumes down 9.9% on H1 2018.

Despite some challenging market conditions, principally weather related, which resulted in lower volumes across a number of our feed block plants, we were able to mitigate the negative impact on profitability by adopting a series of measures, including increased efficiencies, strict control of operating costs and better procurement.

The integration of Animax Limited, our recently acquired manufacturer of market-leading trace element supplements for livestock, is progressing well. As part of the first integration phase we have commenced the implementation of production efficiencies and made good progress in the areas of new product development. The performance of the business during its first period of ownership was in line with the Board's expectations. Animax, which is highly complementary to the Group's global feed block offering, broadens our product range in the animal health and supplementation markets which deliver added value to farmers.

UK Agriculture

The current financial year started positively, however, volumes in our feed and fuel businesses were lower during the period as the unseasonably mild weather reduced demand. This resulted in total compound feed volumes decreasing by 4.1% during the period. Similarly, volumes in our fuel distribution business were down 6.0% on last year.

Our retail business was similarly affected by the mild, dry winter; revenues were down 0.4% and like for like sales were down 5.5%.

Machinery revenues were down 10.2% against a record performance last year, reflecting heightened concern of our farming customers in relation to the outcome of Brexit negotiations.

The implementation of efficiencies, good procurement and strong raw materials positions offset the impact on profitability of the unseasonably mild and dry weather.

ENGINEERING

Overall, our Engineering division is performing in line with the Board's expectations for the full year. Adjusted operating profit was up 45.1% at £2.0m (H1 2018: £1.4m) driven by improved performances in UK Manufacturing and USA Engineering; reported operating profit was £1.9m (H1 2018: £1.2m). 

UK Manufacturing

Our UK Manufacturing business performed well during the period. The new management team installed in our fabrication business approximately twelve months ago has successfully delivered a significant improvement in the business, which has resulted in a marked uplift in the forward order book, opportunity pipeline, and in the performance of the business.

Our precision engineering business has also significantly evolved during the period through a strengthened management team and improved manufacturing efficiencies. This has supported increased business development which, when combined with a recovery in the oil price, has resulted in a very strong order book.

Remote Handling

As reported at the time of our AGM statement in January 2019, we have secured a major contract worth $8.5m in the USA, which represents a significant strategic milestone for the Group and fully supports our strategy for delivering sustainable growth. As anticipated, in the shorter term the business is currently experiencing a softer order book. However, this is not expected to impact on overall divisional performance owing to the performance of our UK Manufacturing and USA Engineering businesses. The medium term prospects for our Remote Handling business remain strong.

USA Engineering

Our USA Engineering business has had a particularly strong start to the year driven by the contracts won last year, including two significant MSIP® contracts won in summer 2018 which run through to FY21. In December 2018 we received confirmation of significant funding from the US Department of Energy to develop our passive cooling technology, which has the potential to be retrofitted on existing nuclear power plants. Work on this project is expected to commence during the second half of the current financial year.

BALANCE SHEET AND CASHFLOW

Net cash generated from operating activities in the first half was £3.8m (H1 2018: £5.5m). Net debt rose to £23.3m from £15.4m at the 2018 financial year end. This is primarily related to the acquisition of Animax and seasonal working capital increases. The Group's defined benefit pension scheme remains in surplus, although that surplus had decreased from £10.1m at 1 September 2018 to £6.8m at 2 March 2019. This was primarily due to market conditions and a charge of £0.8m for GMP equalisation following the High Court case against Lloyds Bank plc and others.

SHAREHOLDERS' EQUITY

Shareholders' equity at 2 March 2019 was £106.7m (1 September 2018: £105.3m), with the increase primarily due to profit retained by the Group for the period offset by the reduction in the Group's pension surplus and dividends paid.

DIVIDEND

A first interim dividend of 1.125 pence per ordinary share (2018: 1.075 pence per ordinary share) will be paid on 31 May 2019 to shareholders on the register on 26 April 2019. The ex-dividend date will be 25 April 2019.

PRINCIPAL RISKS AND UNCERTAINTIES

The Group has a process in place to identify and assess the impact of risks on its business, which is reviewed and updated quarterly. The principal risks and uncertainties for the remainder of the financial year are not expected to change materially from those included on pages 14 to 16 of the Annual Report and Accounts 2018, having been previously identified as follows:

· Brexit

· IT and Cyber Security

· Acquisitions

· Managing Costs

· Reliance on Key Customers

· People

· Strategic Partners

· Customer Demand

· Treasury

· Business Continuity

OUTLOOK

The Group continues to deliver on its strategic objectives of investing in its people and its asset base, focusing on product innovation and expanding its geographic footprint, to ultimately drive growth across both divisions in a safe and sustainable manner.

We remain confident in the medium term prospects of the Agriculture division. In the UK, while there is now greater visibility in relation to farming support post Brexit, uncertainty around the future trade agreements with the EU and the rest of the world has impacted farmer confidence in the immediate term, leading to increased caution among the farming community. The integration of our strategic acquisition of Animax is progressing well and has broadened our product range. In the USA our footprint across the eastern and south eastern states continues to expand.

In our Engineering division, the order books in our UK Manufacturing and USA Engineering businesses are strong, driven by improved manufacturing processes and a strengthened management team, which together have contributed to a significant increase in performance. As expected, in the short term, the order book in our Remote Handling business remains softer, however, the major new contract secured in the USA, which will mainly impact FY20, provides confidence in the medium term.

Despite a number of external factors impacting the Group's performance in the first half, trading in the second half of the year has started in line with expectations, and the Board's outlook for the full year remains unchanged. Recent investments, new product development, geographic expansion and strengthened management teams leave the Group well placed to deliver continued growth. Supporting this, we continue to seek further acquisition opportunities that complement our existing businesses and align with the Group's strategy.

CONDENSED CONSOLIDATED INCOME STATEMENT

For the 26 weeks ended 2 March 2019

3 Adjusted results are after adding back amortisation of acquired intangible assets and non-recurring items including acquisition costs

4 Restated for the inclusion of share of post-tax results of associates and joint ventures within operating profit 

 CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the 26 weeks ended 2 March 2019

CONDENSED CONSOLIDATED BALANCE SHEET

As at 2 March 2019

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the 26 weeks ended 2 March 2019

5 Restated for the adoption of IFRS 15 (note 19)

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the 26 weeks ended 2 March 2019

Statement of Directors' responsibilities

We confirm that to the best of our knowledge:

• the condensed consolidated financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU; and

• the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed consolidated financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

The Directors are listed in the Annual Report and Accounts 2018. A list of current Directors is maintained on the website: www.carrsgroup.com

On behalf of the Board

Tim Davies Neil Austin

Chief Executive Group Finance Director

15 April 2019 15 April 2019

Unaudited notes to condensed interim financial information

1. General information

The Group operates across two divisions of Agriculture and Engineering. The Company is a public limited company, which is listed on the London Stock Exchange and is incorporated and domiciled in the UK. The address of the registered office is Old Croft, Stanwix, Carlisle, Cumbria CA3 9BA.

These condensed interim financial statements were approved for issue on 15 April 2019.

These condensed interim financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the 52 weeks ended 1 September 2018 were approved by the Board of Directors on 19 November 2018 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

2. Basis of preparation

These condensed interim financial statements for the 26 weeks ended 2 March 2019 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34, 'Interim financial reporting' as adopted by the European Union. The condensed interim financial statements should be read in conjunction with the annual financial statements for the 52 weeks ended 1 September 2018, which have been prepared in accordance with IFRSs as adopted by the European Union.

The Directors have made suitable enquiries and based on financial performance to date and available banking facilities they have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its condensed interim financial statements.

3. Accounting policies

The accounting policies adopted are consistent with those of the previous financial year except for the adoption of new standards as detailed below.

Taxes on income in the interim periods are accrued based on management's estimate of the weighted average annual income tax rate expected for the full financial year.

IFRS 9 Financial Instruments

The Group adopted IFRS 9 retrospectively from 2 September 2018. There was no material impact on adoption of this new standard.

IFRS 15 Revenue from Contracts with Customers

The Group adopted IFRS 15 with effect from 2 September 2018 and has applied the standard retrospectively with the cumulative effect of initially applying the standard recognised at the date of initial application. The Group has restated its opening equity position as at 2 September 2018 by a charge of £0.1m. Comparative information has not been restated and is therefore still reported under IAS 11 and IAS 18. To assist comparability, note 19 shows the balance sheet as at 2 March 2019 had the Group continued to adopt IAS 11 and IAS 18.

Accounting standards not yet adopted by the Group

IFRS 16, "Leases", is effective for periods beginning on or after 1 January 2019, and will therefore first apply to Carr's in the year ending August 2020. The Group continues to assess the impact of the accounting changes that will be required. A further update will be provided in the full year Report and Accounts for year ending 2019.

4. Estimates

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these condensed interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the 52 weeks ended 1 September 2018, with the exception of changes in estimates that are required in determining the provision for income taxes.

5. Financial risk management

The Group's activities expose it to a variety of financial risks: market risk (including currency risk and price risk), credit risk and liquidity risk.

The condensed interim financial statements do not include all financial risk management information and disclosures required in the annual financial statements; they should be read in conjunction with the Group's annual financial statements as at 1 September 2018. There have been no changes in risk management practices since the year end.

6. Operating segment information

The Group's chief operating decision-maker ("CODM") has been identified as the Executive Directors. Management has determined the operating segments based on the information reviewed by the CODM for the purposes of allocating resources and assessing performance.

The CODM considers the business from a product/services perspective. Operating segments have been identified as Agriculture and Engineering. Performance is assessed using operating profit. For internal purposes the CODM assesses operating profit before amortisation of acquired intangible assets and non-recurring items consistent with the presentation of adjusted operating profit in the financial statements. The CODM believes this measure provides a better reflection of the Group's underlying performance. Sales between segments are carried out at arm's length. 

The following tables present revenue, profit and asset information regarding the Group's operating segments for the 26 weeks ended 2 March 2019 and the comparative periods.

6 Adjusted results are after adding back amortisation of acquired intangible assets and non-recurring items including acquisition costs

7 Earnings before interest, tax, depreciation, amortisation, profit/(loss) on the disposal of property, plant and equipment and share of post-tax results of associate and joint ventures

8 Adjusted results are after adding back amortisation of acquired intangible assets and non-recurring items including acquisition costs

9 Earnings before interest, tax, depreciation, amortisation, profit/(loss) on the disposal of property, plant and equipment and share of

post-tax results of associates and joint ventures

7. Disaggregation of revenue

In accordance with IFRS 15 'Revenue from Contracts with Customers' the following table presents the Group's reported revenue for the 26 weeks ended 2 March 2019 disaggregated based on the timing of revenue recognition. The Group implemented the new standard on 2 September 2018.

8. Amortisation of acquired intangible assets and non-recurring items

For further details of the past service cost of £795,000 see note 14.

Business combination expenses relate to acquisition costs incurred in the period, and in respect of prior periods contingent consideration in relation to the acquisitions of Phoenix Feeds Limited and the business and certain assets of Mortimer Feeds Limited which is explained further below.

Phoenix Feeds Limited was acquired on 1 June 2016. The consideration paid included £490,000 of contingent consideration linked to the continued employment of key personnel and therefore in accordance with IFRS 3 this was not recognised as consideration in the acquisition accounting in the 53 weeks ended 3 September 2016. It is instead being recognised in the income statement over a two year period with £nil (H1 2018: £92,000) recognised in the 26 weeks ended 2 March 2019. Given the nature of the payment it has been recognised as a non-recurring item.

Mortimer Feeds was acquired on 5 June 2017. The consideration paid included £30,000 of contingent consideration linked to the continued employment of key personnel and therefore in accordance with IFRS 3 this was not recognised as consideration in the acquisition accounting in the 52 weeks ended 2 September 2017. It is instead being recognised in the income statement over a one year period with £nil (H1 2018: £20,000) recognised in the 26 weeks ended 2 March 2019. Given the nature of this payment it has been recognised as a non-recurring item.

The goodwill impairment recognised in the year ended 1 September 2018 was against the carrying value of goodwill in respect of the Bendalls engineering business.

9. Earnings per share

Amortisation of acquired intangible assets and non-recurring items that are charged or credited to profit do not relate to the underlying profitability of the Group. The Board believes adjusted profit before these items provides a useful measure of business performance. Therefore, an adjusted earnings per share is presented as follows:

10. Dividends

An interim dividend of £982,583 that related to the period to 1 September 2018 was paid on 5 October 2018, and a final dividend of £2,156,098 was paid on 11 January 2019. 

In addition, an interim dividend of 1.125p per share (2018: 1.075p per share) has been approved by the Directors. It is payable to shareholders on the register on 26 April 2019. This interim dividend, amounting to £1,034,223 (2018: £982,578), has not been recognised as a liability in this interim financial information. It will be recognised in shareholders' equity in the 52 weeks to 31 August 2019.

11. Intangible assets, property, plant and equipment and investment property

Capital commitments contracted, but not provided for, by the Group at the period end amounts to £132,000 (2018: £772,000).

12. Borrowings and loans

13. Financial instruments

IFRS 13 requires financial instruments that are measured at fair value to be classified according to the valuation technique used:

Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2 - inputs, other than Level 1 inputs, that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices)

Level 3 - unobservable inputs

All derivative financial instruments are measured at fair value using Level 2 inputs. The Group's bankers provide the valuations for the derivative financial instruments at each reporting period end based on mark to market valuation techniques. 

Contingent consideration is measured at fair value using Level 3 inputs such as entity projections of future profitability.

Transfers between levels are deemed to have occurred at the end of the reporting period. There were no transfers between levels in the above hierarchy in the period.

Financial instruments recognised at fair value are as follows:

The movement on the fair value of current and non-current contingent consideration since 1 September 2018 is mainly due to the acquisition of Animax Limited.

14. Retirement benefit asset

The expense/(income) is recognised within the Income Statement as shown below:

In October 2018 the High Court ruled on the case of Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank plc and others. This ruling required all UK defined benefit pension schemes to equalise Guaranteed Minimum Pensions (GMPs) between males and females. The Scheme's actuary has estimated the effect on the Carr's Group Pension Scheme to be a £795,000 increase in liabilities and this has been recognised as a past service cost through the Income Statement and disclosed as a non-recurring item (note 8).

It is expected that there will be further court hearings from which clarity over the practical application of the ruling will arise. There is also the possibility of the case being taken to appeal. 

Net interest on the defined benefit retirement asset is recognised within interest income.

The amounts recognised in the Balance Sheet were as follows:

Actuarial losses of £2,640,000 (2018: gains of £698,000) have been reported in the Statement of Comprehensive Income. The surplus has decreased over the period since 1 September 2018 due to the recognition of additional scheme liabilities arising from GMP equalisation as discussed above together with changes in market conditions contributing to an overall reduction in the scheme surplus.

The Group's associate's defined benefit pension scheme is closed to future service accrual and the valuation for this scheme has not been updated for the half year as any actuarial movements are not considered to be material.

15. Share capital

Options exercised under the share save scheme during the period to 2 March 2019 resulted in 7,540 shares being issued (2018: 7,100 shares), with exercise proceeds of £8,000 (2018: £10,792). The related weighted average price of the shares exercised was £1.061 (2018: £1.52) per share.

In addition, 520,313 shares were issued in the period and held initially as Treasury shares. These shares were subsequently used to satisfy the share awards under the LTIP scheme which were exercised in November 2018. 

16. Acquisition

On 21 September 2018 the Group acquired the entire issued share capital of Animax Limited, a producer of market-leading animal health products, for a total cash consideration of up to £8.5m. As part of the acquisition, the Group also acquired the entire issued share capital of Animax Limited's related party, Clinimax Limited. Clinimax Limited is a manufacturer of specialist disinfectant products for use in the medical industry.

Both businesses were acquired for an initial cash consideration of £6.0m, with an additional cash consideration of up to a maximum of £2.5m payable over the period to November 2020, based on the achievement of agreed financial targets.

The acquisition of Animax Limited aligns with the Group's stated strategy of investing in growing agriculture markets in the UK and internationally.

Goodwill represented the excess of the consideration paid over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired.

The acquired companies have generated revenue of £3,182,000 and profit before taxation of £398,000 since the date of acquisition.

Total acquisition related costs amounted to £268,000 which have been recognised within non-recurring items in the consolidated income statement. £147,000 has been charged to the income statement in the 26 weeks ended 2 March 2019 and £121,000 has been recognised in prior years as incurred.

Given this is a recent acquisition the fair value accounting exercise has not been fully completed. The fair value disclosures in the table below represent provisional fair values. Finalised disclosures will be presented in the full year Report and Accounts for the year ending 31 August 2019.

The aggregate assets and liabilities provisionally recognised in the acquisition accounting are set out below:

Intangible assets represent the fair value of customer relationships.

Had the acquisition of Animax Limited and Clinimax Limited occurred at the beginning of the accounting period the Group's revenue and profit before taxation for the period would not be materially different to the amounts actually recognised in the consolidated income statement.

17. Cash generated from continuing operations

18. Related party transactions

The Group's significant related parties are its associate and joint ventures, as disclosed in the Annual Report and Accounts 2018.

Transactions and balances with the associate and joint ventures were all undertaken on an arm's length basis in the normal course of business and are as follows: