Eurocell Regulatory News (ECEL)

1 August 2019

EUROCELL PLC (Symbol: ECEL)

HALF YEAR REPORT FOR THE SIX MONTHS ENDED 30 JUNE 2019

Robust financial results - full year expectations unchanged

Eurocell plc is a market leading, vertically integrated UK manufacturer, distributor and recycler of innovative window, door and roofline PVC products

Financial and Operational Highlights

·; Strong sales growth of 15% (10% on a like-for-like(4) basis)

·; Gross margin up 110bps, reflecting selling price increases and higher usage of recycled material

·; Overheads up 14% on a like-for-like basis(4), reflecting direct labour from higher production volumes

·; EBITDA up 4% (pre-IFRS 16)

·; Good progress with planned actions to improve operational efficiency

- On track with investment in extrusion capacity - all new lines to be operational by the end of Q3

- Investment in recycling capacity at Ecoplas now well advanced

- Mark Hemming appointed Chief Operating Officer - joins the business in August

·; Stock build programme implemented to protect against Brexit-related raw material supply interruption, with c.£3 million added to finished goods in H1 2019

·; Pre-IFRS 16 net debt £36.7m (December 2018: £23.5m) includes substantially increased capital expenditure, stock build and the impact of growth 

Mark Kelly, Chief Executive of Eurocell plc said:

"We have reported robust financial results for the first half and delivered another period of strong sales growth, albeit against weaker comparatives after bad weather in the early part of 2018. Higher EBITDA includes the benefit of selling price increases and continued growth in our use of recycled material.

"We have made good progress with our plans to improve operations. These include strengthening operational teams and implementing a substantial capital investment programme to increase production capacity. Our focus for 2019 remains on delivering further improvements in operating efficiency as these plans progress through the second half.

"As a result, whilst we are mindful of macroeconomic and political uncertainty, our expectations for the full year are unchanged."

NOTES FOR ANALYSTS AND EDITORS

·; Revenue growth of 15% (11% excluding acquisitions) includes:

- Like-for-like(4) sales growth of 10%

o Profiles division like-for-like(4) sales growth of 9%, including good contributions from both existing and new accounts, arising consistently from across our base of fabricators

o Building Plastics division like-for-like(4) sales growth of 11%, reflecting the positive impact from better stock availability and new management team driving improvements in operating standards

- Sales from branches opened in 2018/19 of £1.1 million

o 3 new sites in H1 2019, excluding 2 branches from the acquisition of Trimseal in March (full year 2018: 8 new sites, excluding 4 branches from the acquisition of Kent Building Plastics in December)

- Incremental sales from 2018/19 acquisitions of £4.6 million

·; Gross margin up 110 bps to 51.1% (H1 2018: 50.0%)

- Selling price increases implemented progressively across H1 2019 to recover cost inflation

- Increased use of recycled material to 6.4k tonnes or 22% of material consumption (H1 2018: 4.3k tonnes, or 17%)

·; Tax rate of 16.4% (H1 2018: 16.1%) includes the benefit of Patent Box(5) relief

·; Capex of £8.8 million (H1 2018: £3.1 million) includes:

- £2.5m to expand production capacity with additional co-extrusion and foam lines

- £3.5m to increase recycling capability at Ilkeston and Ecoplas (with associated tooling)

- £2.8m of other planned and maintenance capex

·; Interim dividend of 3.2 pence per share (H1 2018: 3.1 pence per share) up 3%

·; IFRS 16 (leases) impact on profit before tax and earnings per share not significant in H1 2019

- Net debt increased by c.£33 million to reflect present value of future lease payments

Notes:

(1) Pre-IFRS 16 results exclude the impact of the new accounting standard for leases.

(2) EBITDA represents earnings before interest, tax, depreciation and amortisation.

(3) Net debt is cash and cash equivalents less bank overdrafts, bank borrowings and lease liabilities.

(4) Like-for-like sales and operating costs exclude acquisitions and branches opened in 2018 and 2019.

(5) An HMRC approved scheme, allowing a 10% tax rate on profits derived from products that incorporate patents.

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Analyst presentation

There will be an analyst presentation at 9am today at Canaccord Genuity, 88 Wood Street London, EC2V 7QR. The presentation will also be accessible via a live conference call for registered participants.

To register for the call please contact Teneo by email on eurocell@teneo.com.

CHIEF EXECUTIVE'S REVIEW

INTRODUCTION

The Construction Products Association Spring 2019 update reported on a subdued Repairs, Maintenance and Improvements ('RMI') market, with Brexit-related uncertainty intensifying. Against this backdrop, we delivered another period of strong sales growth, with reported revenues up 15% in H1 2019 (or 10% on a like-for-like basis), albeit against weaker comparatives after bad weather in the early part of 2018.

We are pleased to report that our gross margin improved by 110 bps to 51.1%. This reflects a benefit from selling price increases implemented progressively across the business in H1 2019 to recover cost inflation, and higher usage of recycled material. Overheads up 14% (on a like-for-like basis) includes the impact on direct labour from higher production volumes. As a result, EBITDA for H1 of £14.8 million (pre-IFRS 16) is up 4% on last year.

We have also made good progress with plans announced at the beginning of the year to improve operating efficiency. These include a substantial capex programme to increase manufacturing capacity, and strengthening our operational teams, particularly through the appointment of Mark Hemming, who joins the business as Chief Operating Officer in August. Our focus for 2019 remains on delivering further improvements in operating efficiency as these plans progress in H2.

Further information on financial performance is provided in the Divisional and Group Financial Reviews.

STRATEGIC PRIORITIES

Our overall objective remains to deliver sustainable growth in shareholder value by increasing sales and profits at above our market level growth rates. We have five clear strategic priorities to help us achieve our overall objective:

·; Increase the use of recycled materials

·; Target growth in market share

·; Expand the branch network

·; Develop innovative new products

·; Explore potential bolt-on acquisition opportunities

We made good progress with our strategic priorities in H1, with the key aspects described below.

OPERATIONAL PERFORMANCE

Health and safety

The safety and well-being of our employees and contractors is our first operational priority and we continue to maintain a good safety performance. Our Lost Time Injury Frequency Rate ('LTIR') was 0.9 in H1 2019, compared to 0.9 for the whole of 2018. There were no major injuries and 8 minor injuries reported under the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 2013 (RIDDOR) in the period (H1 2018: 4 minor injuries).

Production

In the first half of 2019 we manufactured approximately 26.6k tonnes of rigid and foam PVC profiles, up from 23.3k tonnes in H1 2018, an increase of 14%.

This reflects the sales growth reported for the period, as well as a drive to increase stock holding at our branches, in order to improve availability. In addition, given the possibility for raw material supply interruption due to Brexit, we have invested in a stock build programme. In total, we added approximately £3 million to finished goods for key product lines in H1 2019, which provides a good level of protection.

Overall equipment effectiveness in extrusion ('OEE', a measure which takes into account machine availability, performance and yield), improved to 73%, compared to an average of 71% for the whole of 2018. Extrusion scrap levels were 8%, compared to 9% for the whole of 2018.

Recycling

We used 6.4k tonnes of recycled PVC compound alongside virgin resin in the manufacture of co-extruded rigid profiles, representing 22% of overall material consumption, up from 4.3k tonnes (or 17%) in H1 2018.

This increase has been delivered largely through the expansion of our recycling facility in Ilkeston and by investment in new tooling, which allows a greater proportion of recyclate to be used in our products. Looking forward, we expect a good contribution from Ecoplas in H2 (see investment in recycling capacity). 

Operating efficiency

In 2018, the combination of strong sales growth and larger than expected mix changes towards co-extruded and foiled products resulted in volumes above the immediately available manufacturing capacity. This impacted negatively on the efficiency of our manufacturing and distribution operations, leading to increased costs.

In response, we have been implementing mitigating actions to improve the efficiency of our operations. We have made good progress with these plans, which include a substantial capital investment programme to expand the capacity of our extrusion and recycling plants and the strengthening of our operational teams.

Investment to expand extrusion capacity

In H2 2018 we increased co-extrusion capacity by c.25%, including investment in 4 new lines. Our plans for 2019 include investment in a further 30% co-extrusion capacity (5 lines) and 15% more foam capacity (3 lines).

We are on track with these investments, with 4 of the new lines now in service and the remainder on schedule to be commissioned by the end of Q3, in line with our original plans. Together they are expected to cost in the region of £5 million, with capex of £2.5 million incurred in H1. We believe they will secure production of 2019/20 volumes at improved levels of plant utilisation and better factory efficiency. This will also enable increased preventative maintenance on plant and tooling, and thereby help to optimise OEE and scrap levels.

Investment in recycling capacity

Significant raw material cost inflation over the past several years has resulted in a widening gap between the cost of virgin PVC compound and our recycled compound, making the case for further investment more compelling.

Between 2016 and 2018 we expanded our Ilkeston site to more than double usage in primary extrusion from 4.1k tonnes of material consumption in 2015 to 9.5k tonnes in 2018, driving a substantial saving compared to the cost of using virgin material. We continue to invest in this site, with a further c.£2 million planned for 2019 to increase output and improve reliability (including new co-extrusion and other tooling to support the increased usage of recyclate on key product lines). We are on schedule, with capex of £1.4 million in H1 (including £0.7 million for tooling).

The acquisition of Ecoplas in August 2018 represented a significant step change in our recycling capability and placed recycling demonstrably at the heart of our business. It also reduces our dependence on the Ilkeston plant. Output at acquisition was c.7k tonnes of recycled compound per annum, sold into a broad mix of trade extruders.

As expected, investment is required to improve the operating environment and reliability of the Ecoplas plant, to eliminate bottlenecks from production processes and to expand capacity. We invested £0.3 million in H2 2018, with a further c.£2.5 million to follow in 2019. After some initial delays, caused by protracted negotiations over the site lease renewal, the investment in Ecoplas is now well advanced, with capex of £2.1 million in H1.

Following these investments at Ilkeston and Ecoplas, we expect total usage of recycled compound in our primary extrusion processes to increase by at least 3k tonnes in 2019.

Strengthening operational teams

In 2019 we have strengthened operational teams in key areas, including production planning and logistics. We were also delighted to announce the appointment of Mark Hemming to the position of Chief Operating Officer. Mark joins us from Amazon UK, where he is currently Regional Director for Customer Fulfilment. Prior to that, Mark has experience from leading manufacturing plants in the automotive sector. He joins the business in August and is an excellent addition to our operational leadership team.

PROFILES DIVISION REVIEW

(1) Acquired August 2018

(2) Excludes the impact of IFRS 16

Profiles revenue

Profiles third-party revenue was up 14% to £57.6 million (H1 2018: £50.5m), with growth comprising an increase in like-for-like sales of 9%, as well as the Ecoplas acquisition. This growth includes the impact of selling price increases implemented progressively across H1 to recover cost inflation.

Like-for-like sales growth reflects strong contributions from both existing and new accounts, arising consistently from across our fabricator base. It also includes a strong contribution from Vista Panels, where sales were up 25%, driven by higher sales of composite doors to new build. Across the Profiles division, new build continues to represent approximately one-third of sales.

We have been pleased with recent market share gains and believe that we are now consolidating our position as the largest supplier of rigid profile to the UK market. Our dedicated specifications teams continue to be successful in generating demand, well supported by our ability to supply a comprehensive product range through the fabricator network (as well as windows, this includes composite doors, PVC and aluminium bi-fold doors, a cavity closure system and products which support off-site construction).

Following the introduction of c.40 new accounts in 2017/18, we have added selectively a further 20 relatively small accounts in 2019 and our prospect pipeline remains good.

In terms of Ecoplas, as described above, we suffered some initial delays with our project to expand capacity, which led to a shortfall in external sales. However, the programme is now well advanced, and we expect performance to improve in the second half.

Profiles EBITDA

EBITDA in H1 2019 was £11.6 million (H1 2018: £11.5 million), an increase of 1%.

Gross margin percentage in Profiles is ahead of H1 2018. As noted above, we implemented selling price increases progressively across H1 to recover cost inflation and increased the use of recycled material in our primary extrusion processes.

Higher overheads in Profiles includes the impact on direct labour from higher production volumes and the acquisition of Ecoplas as well as wage and other inflation. As a result, return on sales percentage for H1 2019 is below last year. However, as described above, we are implementing plans to improve operating efficiency and our focus for 2019 remains on delivering further improvements as these plans progress in H2.

BUILDING PLASTICS DIVISION REVIEW

(1) Acquired December 2018

(2) Acquired March 2019

(3) Excludes the impact of IFRS 16

Building Plastics revenue

Building Plastics third-party revenue was up 15% to £78.7 million (H1 2018: £68.3m), with growth comprising an increase in like-for-like sales of 11%, as well as the impact of branch openings and the acquisitions of Kent Building Plastics and Trimseal. This growth includes the impact of selling price increases implemented progressively across H1 to recover cost inflation.

Like-for-like sales includes growth from branches opened in 2017 and prior, as the more recent sites from that vintage begin to mature. This growth also reflects the positive impact from better stock availability, particularly for manufactured products, and the new management team driving improvements in operating standards.

In terms of new branches, we have opened 3 new sites so far this year, in addition to the 2 sites added through the acquisition of Trimseal. We now have a total of 207 branches providing national coverage across the UK, which offers a significant competitive advantage. Sites opened in 2018/19 added £1.1 million to sales in H1 2019.

Building Plastics EBITDA 

EBITDA for H1 2019 was £3.2 million (H1 2018: £2.7 million), an increase of 19%.

Gross margin percentage and EBITDA in Building Plastics have improved compared to H1 2018. As noted above, we implemented selling price increases in 2019 to recover cost inflation. Other initiatives implemented to improve profitability include the introduction of a more rigid pricing architecture, revised sales and account management structures and better stock availability.

Higher overheads in Building Plastics in H1 2019 includes the impact of branches opened in 2018/19 and acquisitions, as well as a higher bad debt charge (albeit against a relatively low comparator).

BREXIT

There remains significant uncertainty over the impact of Brexit, be it related to general macroeconomic factors or specific company risks. We have taken a number of steps to protect the business from potential negative effects. In this context, almost all of our sales are to UK-based customers and we expect the vast majority of our workforce will have the right to remain and work in the UK post Brexit.

However, some 50% of our material purchases originate from Europe, so any disruption in supplies could impact our manufacturing operations. We continue to work closely with our key suppliers to support continuity of supply for our most critical raw materials. Whilst we have only limited capacity to hold excess raw material stocks at our own sites, some of our suppliers have agreed to hold additional inventory on our behalf. We also undertook a finished goods stock build in the first half of the year, and have locked-in electricity prices for the next 12 months at current market rates.

More generally, we refinanced our bank facilities in December, securing additional funding at competitive rates, and hold selective credit insurance for large customer accounts.

Therefore, whilst we are not able to predict the impact of Brexit on our business, we have taken sensible steps to help mitigate known risks.

OUTLOOK

We have made good progress with our plans to improve operations. Our focus for 2019 remains on delivering further improvements in operating efficiency as these plans progress through the second half.

As a result, whilst we are mindful of macroeconomic and political uncertainty, our expectations for the full year remain unchanged.

Mark Kelly

Chief Executive Officer

GROUP FINANCIAL REVIEW

IFRS 16 LEASES

We have adopted IFRS 16 Leases, with effect from 1 January 2019, which requires all qualifying operating leases to be brought on to the balance sheet. The impact on the H1 2019 Consolidated Income Statement was for overheads to reduce by £5.1 million (being the removal of lease rental charges), for depreciation to increase by £4.9 million (being the amortisation of right-of-use assets over the remaining lease term) and for interest to increase by £0.4 million (being the unwind of the discounting of lease liabilities).

To provide better comparability, we have presented both the reported and pre-IFRS 16 financial information, and in explaining variances have disclosed both the impact of the new standard and the underlying variance to H1 2018.

REVENUE 

Revenue for H1 2019 was £136.3 million (H1 2018: £118.8 million), which represents growth of 15%, (11% excluding acquisitions). Like-for-like sales growth (i.e. excluding the impact of acquisitions and branches opened in 2018/19) was 10%.

Sales were driven by good like-for-like growth in Profiles (£4.6 million, or 9% for the division including the benefit of new fabricator account wins), strong like-for like growth in the branch network (£7.2 million, or 11% for the division) and the positive impact from branches opened in 2018/19 (£1.1 million, or 2% for the division). Acquisitions added an incremental £4.6 million to sales in H1 2019. 

GROSS MARGIN 

Overall, our gross margin increased by 110 bps from 50.0% in H1 2018 to 51.1% in H1 2019.

The production capacity constraints we experienced in 2018 delayed our ability to realise selling price increases and recover cost inflation. However, with customer service levels improved, we implemented price increases progressively across the business in H1 2019. We estimate the net impact of these price increases and raw material cost inflation was to improve gross profit by c.£2.5 million (or 70 bps) in H1, thereby also recovering the labour and other cost inflation included within overheads (see below).

The gross margin improvement also includes a benefit of £0.9m (or 60 bps) from increased usage of recycled material in our manufactured goods to 6.4k tonnes (H1 2018: 4.3k tonnes).

OVERHEADS

Excluding the impact of IFRS 16, overheads for the first half were £54.9 million compared to £45.2 million in H1 2018, an increase of £9.7 million.

The increase includes £3.5 million as a result of acquisitions and new branches opened in 2018/19, and wage and other inflation of £1.6 million. Of the remaining increase, we estimate £3.6 million is driven by volume, representing a cost increase of 8%, driven by the impact on direct labour of higher production (compared to production up 14%). The balance of £1.0 million includes higher bad debt charges.

DEPRECIATION AND AMORTISATION

Depreciation and amortisation for H1 2019 is £8.6 million. Excluding the impact of IFRS 16 (lease-related depreciation), depreciation and amortisation is £3.7 million (H1 2018: £3.4 million).

FINANCE COSTS

Finance costs for H1 2019 are £0.9m. Excluding the impact of IFRS 16 (lease-related interest), finance costs are £0.5 million (H1 2018: £0.3 million).

TAX

The effective tax rate on profit before tax for H1 2019 of 16.4% (H1 2018: 16.1%) was lower than the standard corporation tax rate for both half year periods due to the benefit of Patent Box relief. The full year tax rate for 2018 of 11.2% was lower than the standard rate of 19.25%, due to the benefit of two Patent Box claims being recognised in the year.

PROFIT BEFORE TAX

Profit before tax for the period was £10.4 million. Excluding the impact of IFRS 16, profit before tax was £10.6 million (H1 2018: £10.5 million).

EARNINGS PER SHARE

Basic earnings per share for the period were 8.7 pence. Excluding the impact of IFRS 16, basic earnings per share for the period were 8.8 pence (H1 2018: 8.8 pence). The dilutive effect of share options on earnings per share was not significant.

ACQUISITIONS 

As previously noted, we acquired Trimseal, a distributer of building plastic materials, on 6 March 2019 for a total cash consideration of £0.5 million.

DIVIDENDS 

On 31 July 2019, the Board approved an interim dividend for the six months ended 30 June 2019 of 3.2 pence per share (£3.2 million), representing an increase of 3% on the corresponding period.

The interim dividend will be paid on 4 October 2019 to shareholders on the register at the close of business at 6 September 2019 and shares will be marked ex-dividend on 5 September 2019.

CAPITAL EXPENDITURE 

Capital expenditure for H1 2019 was £8.8 million (H1 2018: £3.1 million).

Capital expenditure for 2019 reflects our programme to improve manufacturing efficiency through the expansion of production capacity. We are investing in additional co-extrusion and foam lines, increasing capacity by 30% and 15% respectively, and with related capex of £2.5 million in H1. We are also increasing our recycling capability by at least c.3k tonnes per annum across the Ilkeston and Ecoplas sites, with associated capex of £3.5 million in H1 (including co-extrusion tooling).

Other capital expenditure in the period of £2.8 million includes new / refurbished branches, IT and maintenance capex.

CASH FLOW 

Net cash generated from operating activities was £8.4 million for the period, compared to £7.6 million in H1 2018.

This includes a net outflow from working capital for H1 2019 of £10.4 million, comprised of an increase in stocks (£4.1 million), an increase in trade and other receivables (£8.0 million) and an increase in trade and other payables (£1.7 million). This compares to a net outflow from working capital of £4.7 million in H1 2018. It also includes net tax paid of £1.0 million (H1 2018: £2.1 million), comprising gross payments of £2.0m and £1.0m cash received in relation to patent box claims filed in 2018.

Higher stocks reflects the impact of our Brexit-related finished goods stock build. We have also improved stock availability in our branches, which has been an important driver of strong like-for-like sales growth in the period.

The increases in trade receivables reflects normal business seasonality, alongside increased activity and growth in 2019. The cash inflow from trade payables is relatively low due to payments relating to our significant capital investment programme and the impact of early settlement discounts.

Other payments include capital investment of £8.8 million (H1 2018: £3.2 million) and financing costs of £0.4 million (H1 2018: £0.2 million). Acquisition costs of £1.1m comprised £0.5 million for the acquisition of Trimseal, and payments of deferred consideration in respect of the acquisitions of Kent Building Plastics, Security Hardware and S&S Plastics of £0.6m.

Dividends paid in H1 2019 represent the final dividend for 2018 of 6.2 pence per share, or £6.2 million (H1 2018: 2017 final dividend of 6.0 pence per share, or £6.0 million).

Finally, following the adoption of IFRS 16 Leases, we have recognised the discounted value of future lease liabilities within net debt with effect from 1 January 2019. As a result, net debt at 30 June 2019 increased by £32.6 million. The principal elements of lease payments of £4.9 million are presented within cash flows arising from financing activities.

Taking all of these factors into account, net debt increased by £45.9 million to £69.4 million at 30 June 2019. Excluding the impact of IFRS 16, underlying net debt increased by £13.2 million to £36.7 million (31 December 2018: £23.5 million).

BANK FACILITIES 

We have an unsecured, multicurrency, revolving credit facility of £60 million, provided by Barclays and HSBC. We operate comfortably within the terms of the facility and related financial covenants, which are based upon accounting standards in effect at 8 December 2018 and are therefore not impacted by IFRS 16. The facility matures in 2023.

SEASONALITY OF TRADING

We are affected by seasonality. Demand in the second half of the year is usually higher than in the first half, with September to November typically representing our peak sales period to the RMI market. In addition, our sales to the new build market are usually slower during the first quarter of the year.

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties faced by the Group are set out in the 2018 Annual Report (pages 34-39). These risks remain unchanged and are as follows:

·; Macro-economic conditions

·; Brexit

·; Raw material supply

·; Raw material prices

·; Manufacturing capacity constraints

·; Unplanned plant downtime

·; Unsuccessful branch network expansion

·; Ability to attract and retain key personnel and highly skilled individuals

·; Shortages or increased costs of appropriately skilled labour

·; Customer credit risk

·; Competitor activity

·; Corporate and regulatory risks

·; Cyber security

·; Failure to develop new products

·; Failure to identify, complete and integrate bolt-on acquisitions

Michael Scott 

Chief Financial Officer

RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE HALF YEAR REPORT

We confirm that to the best of the Directors' knowledge:

·; The condensed set of financial statements has been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting (IAS 34) 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 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 set of 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 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.

By Order of the Board

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the six months ending 30 June 2019