Eurocell Regulatory News (ECEL)

2 August 2018

EUROCELL PLC (Symbol: ECEL)

HALF YEAR REPORT FOR THE SIX MONTHS ENDED 30 JUNE 2018

Financial results in line with expectations and good progress with strategic priorities

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

Financial Highlights

· Strong sales growth of 10%, with further gains in market share

· Gross profit in line with our expectations, albeit with lower gross margin %

- Short-term increase in manufacturing costs, following sharp uplift in demand in Q2

· Adjusted EBITDA down as anticipated, reflecting phasing of branch opening programme

Operational Highlights

· On track for up to 15 new branches in 2018 (including acquisitions), with six new sites so far this year

· Use of recycled material increased to 4.3k tonnes, or 17% (H1 2017: 3.7k tonnes, or 15%)

· Acquisition of Ecoplas (a PVC windows recycling business) on 1 August 2018

Mark Kelly, Chief Executive of Eurocell plc said:

"We made good progress with our strategic priorities in the first half and continued to invest in the growth of our business. In particular, the acquisition of Ecoplas in August will allow us to increase significantly our recycling capability and consolidate our position as the leading recycler of PVC windows in the UK.

"We have also delivered strong sales growth, driven by new fabricator account wins and by the new branches opened last year. As anticipated, there will be a greater phasing of profit to H2, due largely to the timing of our branch opening programme and selling price increases implemented at the end of 2017.

"Our focus for 2018 remains on growing market share, optimising our existing branch network and expanding further our recycling capability. We are in a strong financial position and, notwithstanding the impact of difficult weather conditions in the first four months, look forward to delivering another year of good progress, in line with our expectations."

NOTES FOR ANALYSTS AND EDITORS

Financial Review

· Revenue growth of 10% includes:

- Like-for-like(6) sales growth of 5%

o Profiles division like-for-like(6) sales growth of 9%, including benefit of new account wins

o Building Plastics division like-for-like(6) sales growth of 3%

- Sales from branches opened in 2017 and 2018 of £4.5 million

· Gross margin 50.0% (H1 2017: 51.4%)

- Short-term increase in manufacturing costs, following sharp uplift in demand in Q2

o Cost of co-extrusion capacity constraints and unplanned production outages

o Mitigating actions in progress, including addition of co-extrusion capacity

- Raw material price inflation (c.£2 million compared to H1 2017) offset with selling price increases, but dilutive to gross margin %

· Operating costs include the impact of acquisitions and investment in new branches

- Like-for-like(6) operating cost increase of 4%, including incremental labour and distribution costs incurred to maintain customer service

· Tax rate on adjusted profit before tax of 16.0% includes the benefit of Patent Box(7) relief

· Capital investment of £3.1 million (H1 2017: £3.6 million)

· Interim dividend of 3.1 pence per share (H1 2017: 3.0 pence per share) up 3%

Business Review

· New fabricator account wins in Profiles, along with strong performance in new build

· Good progress with initiatives to ensure a more consistent offering across the branch network

- Sales of made-to-order value added products through branches up 9% to £14.9 million (H1 2017: £13.7 million)

· Ecoplas acquisition fulfils a key strategic priority, to increase the use of recycled materials

- Recycler of PVC windows, with current output of approximately 7k tonnes of recycled compound per annum

- Helps to mitigate raw material price inflation and enhances product and business sustainability

- Initial consideration of £5.0 million for 95% of Ecoplas, funded through existing bank facility

Notes:

(1) Adjusted EBITDA represents earnings before interest, tax, depreciation, amortisation and non-underlying costs.

(2) Adjusted profit before tax represents profit before tax and non-underlying costs.

(3) Adjusted basic earnings per share excludes non-underlying costs and the related tax effect.

(4) There are no non-underlying costs for H1 2018. Non-underlying costs for H1 2017 of £0.5 million comprise professional fees and earn-out costs related to the acquisition of Security Hardware, as well as the redundancy and settlement costs of a staff reorganisation.

(5) Net debt is cash and cash equivalents less bank overdrafts, bank borrowings and other borrowings.

(6) Like-for-like sales and operating costs exclude acquisitions and branches opened in 2017 and 2018.

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

CHIEF EXECUTIVE'S REVIEW

We have continued to deliver strong sales growth, with reported revenues up 10%, a little better than we expected at the beginning of the year. A slow first four months caused by bad weather was made good by an over performance on sales in May and June. However, our gross margin % is down. We experienced a short-term increase in manufacturing costs following this sharp uplift in demand in Q2, leaving gross profit for the period in line with our expectations.

As anticipated, there will be a greater phasing of profit for 2018 to the second half. Adjusted EBITDA for H1 is down on last year, impacted by the phasing of our branch opening programme and the short-term manufacturing conditions, where mitigating action is in progress.

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:

· Target growth in market share

· Expand the branch network

· Increase the use of recycled materials

· Develop innovative new products

· Explore potential bolt-on acquisition opportunities

We made good progress with our strategic priorities in H1 and continued to invest in the growth of our business, with the key aspects described below. In particular, the acquisition of Ecoplas will allow us to increase significantly our recycling capability and consolidate our position as the leading recycler of PVC windows in the UK.

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 good safety performance. Our Lost Time Injury Frequency Rate (LTIR) was 1.09 in H1 2018, compared to 1.42 for the whole of 2017. We reported four accidents under the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 2013 (RIDDOR) in the period (H1 2017: 6).

Production

In the first half of 2018 we manufactured approximately 23.3k tonnes of rigid and foam PVC profiles, up from 22.2k tonnes in H1 2017, an increase of 5%. This increase in tonnage includes a sharp uplift in demand in Q2 and a significant mix change, with sales of co-extruded products now well ahead of expectations. This resulted in the depletion of safety stocks and a shortage in co-extrusion capacity, particularly in Q2, compounded by two co-extrusion lines being out of service for an extended period.

The associated increase in manufacturing costs, which includes the impact of making products with 100% virgin resin that would ordinarily include recycled material and increased levels of scrap, was a significant driver of the reduction in our gross margin % in the period.

We have already taken action to address the co-extrusion capacity constraint and improve plant performance. Our original 2018 capital expenditure plans included two new co-extrusion lines which, following a period of commissioning, entered full service in July. In the light of on-going strong demand for co-extruded products, we have now placed orders for a further two machines, which we expect to be operational by the end of September. The additional co-extrusion capacity will also enable us to increase preventative maintenance on our plant and tooling, and thereby help to optimise Overall Equipment Effectiveness ("OEE") and scrap levels.

In addition we have secured further recycled material for use in the co-extrusion process through the acquisition of Ecoplas (see below).

Recycling

In H1 2018 we used 4.3k tonnes of recycled PVC compound alongside virgin resin in the manufacture of co-extruded rigid profiles. This represents 17% of overall material consumption, up from 3.7k tonnes, or 15%) in H1 2017.

The project to expand the capacity of our recycling facility in Ilkeston continues. During the course of 2016/17 we invested approximately £1.8 million to boost usage in primary extrusion from 4.1k tonnes of material consumption in 2015 to 8.3k tonnes in 2017. With further investment in the Ilkeston site for 2018 on track, we expect usage to increase to approximately 10k tonnes this year, representing almost 20% of material consumption and driving a substantial saving compared to the cost of using virgin material.

ACQUISITION OF ECOPLAS

One of our five key strategic priorities is to increase the use of recycled materials in our primary extrusion processes. The combination of planned growth in our business and developments in extrusion tooling indicate that our demand for recycled material could be greater than our existing in-house production capability within two years. We have also been keen to develop a larger presence in the recycling market in the face of increasing competition.

We were therefore very pleased to complete the acquisition of Ecoplas on 1 August 2018. Ecoplas is a recycler of PVC windows, operating from a single site near Selby, North Yorkshire. The operation is similar to our existing facility in Ilkeston. Current output is approximately 7k tonnes of recycled compound per annum, sold into the building trade (including windows). The initial consideration is £5.0 million. Further details on the financial aspects of the transaction are included in the Group Financial Review.

Significant raw material cost inflation, with average resin prices up by approximately £150 per tonne over the last two 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. As well as driving strong returns, investments in recycling also support the increasing demand for co-extruded profiles and improve the sustainability of our products and our business. As described above, we have made substantial investments in our existing recycling facility in Ilkeston over the last three years, which has increased our planned use of recycled materials for 2018 to approximately 10k tonnes (almost 20% of material consumption).

Capital investment will be required to improve the environment and reliability of the Ecoplas plant, to eliminate bottlenecks from production processes and to expand capacity. We will also need to accelerate investment in co-extrusion tooling at our primary manufacturing facility. This will begin immediately and take approximately 18 months to complete.

In terms of material usage, following these investments, with increased capacity we expect to consume approximately 2k tonnes of recycled compound from Ecoplas in our primary extrusion processes in 2019 and around 4k tonnes in 2020.

The acquisition of Ecoplas represents a significant step change in our recycling capability and also reduces our dependence on the Ilkeston plant. Recycling now sits demonstrably at the heart of our business and I am delighted to welcome the Ecoplas team into the Eurocell Group.

PROFILES DIVISION REVIEW

(1) Full manufacturing margin recorded in Profiles division (which therefore benefits from pull-through demand generated by branch expansion)

Profiles revenue

Profiles third-party like-for-like revenue was up 9% in H1 to £50.5 million (H1 2017: £46.4 million). We have continued to gain share, with growth in the first half driven by sales to accounts won in 2017. We have contracted more new accounts in 2018 and our prospect pipeline remains good.

The underlying Profiles business has been supported by continued good growth in the private new build sector, where sales were up approximately 8% in H1 2018. This followed growth of more than 15% in 2017 and we believe we are now the largest supplier of window profile to this market. Our dedicated specifications teams have been successful in generating demand, well supported by our ability to supply a comprehensive product range through the new build fabricator network. As well as windows, this includes composite doors, PVC and aluminium bi-fold doors and the only sixty-minute fire rated cavity closure system. Further, our InSite construction hinge allows timber frame and modular home manufacturers to install fully glazed windows into wall panels in the factory for off-site construction.

Profiles adjusted EBITDA

Adjusted EBITDA in H1 2018 was £11.5 million (H1 2017: £11.7 million), a decrease of 2%.

Gross margin and return on sales %'s in the Profiles division are lower in H1 2018, largely as a result of the manufacturing conditions described above and, as noted earlier, we are taking corrective action. We also incurred some incremental labour and distribution costs to maintain customer services during the period. Further information on our gross margin performance (including the impact of increasing raw material costs and selling prices) and EBITDA is included in the Group Financial Review.

The decrease in adjusted EBITDA is therefore a function of sales growth, offset by increased manufacturing costs and higher overheads.

BUILDING PLASTICS DIVISION REVIEW

(1) Acquired February 2017

Building Plastics revenue

Building Plastics third-party revenue was up 11% to £68.3m (H1 2017: £61.8m). We have continued to gain share here too, with growth comprising an increase in like-for-like sales of 3%, as well as the impact of branch openings and the acquisition of Security Hardware in February 2017.

Like-for-like sales includes growth from branches opened in 2016 and prior, as the more recent sites from that vintage begin to mature. Growth also includes the benefit of the initiative to improve our proposition as a one-stop shop for customers, via the roll-out of additional product lines, with like-for-like sales of traded goods up 9% in the period.

In terms of new branches, we have opened six new sites so far this year. We now have a total of 196 branches providing national coverage across the UK, which offers a significant competitive advantage. Sites opened in 2017/18 added £4.5 million to sales in H1 2018.

Expanding the branch network secures sales growth and delivers good returns in the medium-term, as new branches begin to mature. It also provides an increasing opportunity for sales of windows and other high-value products through the branch network, and pulls through demand for our manufactured products. It does however create downward pressure on profitability in the near-term, as new branches work towards a break-even position, which historically has taken more than two years.

We opened 31 branches in 2017, which is a record number of new sites introduced by Eurocell in a 12-month period and represents a significant investment in the expansion of our business. In order to allow our teams to optimise the existing estate and progress the work on reducing break-even times, at the end of last year we set a target for 2018 at up to 15 new branches (including acquisitions), and we are on track to achieve that.

Initiatives to reduce start-up costs and shorten break-even times include more focused direct marketing campaigns, sharing resources with established sites in the same region and, importantly, ensuring a consistent product offering across the network. We have made good progress particularly in this area, with sales of made-to-order value added products (e.g. windows and doors) through branches up 9% to £14.9 million, as well as much improved participation in group-wide promotions. Whilst there is more work to do, we remain confident that, in future, new branches will reach a break-even run-rate before their two-year anniversary.

Our intention remains to develop an estate of approximately 250 branches in the medium-term. Subject to the success of the current programme, consideration of the sites available, potential branch maturity and sales saturation rates, we continue to believe that an estate of around 350 sites is a realistic long-term aspiration for Eurocell.

Building Plastics adjusted EBITDA 

Adjusted EBITDA for H1 2018 was £2.7 million (H1 2017: £3.2 million), a decrease of 16%.

We maintained our gross margin % in Building Plastics in H1 2018. Further information on our gross margin performance (including the impact of increasing raw material costs and selling prices) is included in the Group Financial Review.

Higher overheads in Building Plastics includes significant investments made to expand the branch network. As described above, new branches create downward pressure on profitability in the short term due to investment in our teams at new sites and in supporting central infrastructure. We have opened 37 branches since the beginning of last year, with 2017 additions weighted heavily towards the second half. We estimate this created an incremental drag on EBITDA of approximately £0.5 million in H1 2018.

The reduction in adjusted EBITDA and return on sales in H1 2018 is therefore a function of sales growth offset by the phasing impact of the branch roll-out programme. As noted above, we are making progress with initiatives to support new branches reaching profitability sooner. When the 37 branches opened in the last two years mature, we expect a good improvement in performance for the division.

Finally, Tony Smith, who has led the Building Plastics division for over 25 years has signalled his intention to retire from the business. Tony has made a huge contribution to the Group, having overseen a period of tremendous growth in Building Plastics, and he leaves with our very best wishes. I am delighted to report that Andy McDonnell has joined Eurocell and, after a handover period, will take over from Tony. Andy joins from Oak Furniture Land and, prior to that, B&Q where he was instrumental in the successful development of the TradePoint division. I am confident that, in Andy, we have the right person to deliver our strategic objectives for Building Plastics.

OUTLOOK

Our focus for 2018 remains on growing market share, optimising our existing branch network and expanding further our recycling capability, including the integration of Ecoplas. We are in a strong financial position and, notwithstanding the impact of difficult weather conditions in the first four months, look forward to delivering another year of good progress, in line with our expectations.

Mark Kelly

Chief Executive Officer

GROUP FINANCIAL REVIEW

(1) See Adjusted Profit measures

REVENUE 

Revenue for H1 2018 was £118.8 million (H1 2017: £108.1 million), which represents growth of 10%, (also 10% excluding acquisitions). Like-for-like sales growth (i.e. excluding the impact of acquisitions and branches opened in 2017/18) was 5%.

As described in the Divisional Reviews, sales have been driven by good like-for-like growth in Profiles (£4.1 million, or 9% for the division, including benefit of new fabricator account wins and a strong performance in new build), solid like-for like growth in the branch network (£1.6 million, or 3% for the division) and the positive impact from branches opened in 2017/18 (£4.5 million, or 7% for the division). The acquisition of Security Hardware in 2017 added an incremental £0.5 million to sales in H1 2018. 

GROSS MARGIN 

Overall, our gross margin reduced by 140 bps from 51.4% in H1 2017 to 50.0% in H1 2018. The manufacturing conditions described in the Chief Executive's Review are a significant driver of this reduction, and as noted earlier, we are taking corrective action.

In terms of raw material cost inflation, resin prices are up £50 per tonne (or 7%) on average compared to H1 2017. We continue to mitigate raw material and traded goods cost inflation via the implementation of selling price increases where possible. We believe we recovered all of the c.£2 million cost inflation experienced in H1 2018 compared to last year, however the effect of such increases remains dilutive to gross margin (-80 bps). This was offset by a benefit (+30 bps) from the increased use of recycled material in our manufactured goods to 4.3k tonnes, or 17% (H1 2017: 3.7k tonnes, or 15%).

DISTRIBUTION COSTS AND ADMINISTRATIVE EXPENSES (OVERHEADS)

Overheads for the half year were £45.2 million compared to £40.7 million in H1 2017, representing a consistent percentage of sales for both periods. The increase includes £2.2 million as a result of new branches opened in 2017/18 and an incremental £0.2 million from acquisitions. The balance of £2.1 million relates to an increase of 4% in the like-for-like business, where sales growth was 5% as described above.

We continue to focus on the tight control of underlying overheads, with the increase driven largely by the impact of the Minimum Wage legislation, higher volume related distribution costs and incremental central infrastructure required to support the Group as it grows. In addition, we have incurred some extra labour and distribution costs in order to maintain good customer service whilst our manufacturing challenges are resolved.

DEPRECIATION AND AMORTISATION

Depreciation and amortisation for H1 2018 is £3.4 million (H1 2017: £3.3 million).

FINANCE COSTS

Finance costs for H1 2018 of £0.3 million (H1 2017: £0.3 million).

ADJUSTED PROFIT MEASURES

Adjusted EBITDA, adjusted operating profit and adjusted profit before tax all exclude non-underlying costs (see below). Adjusted profit after tax and adjusted earnings per share exclude non-underlying costs and the related tax effect.

Adjusted profit measures are used by management to assess business performance and are provided here in addition to statutory measures to help describe the underlying results of the Group.

NON-UNDERLYING COSTS

There are no non-underlying costs for H1 2018. Non-underlying costs for H1 2017 of £0.5 million comprise professional fees and earn-out costs related to the acquisition of Security Hardware, as well as the redundancy and settlement costs of a staff reorganisation.

TAX

The effective tax rate on adjusted profit before tax for H1 2018 of 16.0% (H1 2017: 17.2%) 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 2017 of 17.0% was lower than the standard rate of 19.25%, also due to the benefit of Patent Box relief.

EARNINGS PER SHARE

Taking into account all of the factors described above, adjusted basic earnings per share for the period was 8.8 pence (H1 2017: 9.4 pence). Reported basic earnings per share was 8.8 pence (H1 2017: 8.9 pence). The dilutive impact of outstanding share options is not significant.

ACQUISITIONS 

As previously noted, the Group acquired Ecoplas on 1 August 2018. The initial consideration for 95% the business is £5.0 million, with the remaining 5% to be acquired in three to five years' time for up to £1.0 million based on business performance. We assumed debt of c.£1 million on acquisition and will provide incremental working capital funding to the business also of around £1 million, primarily to ease the supply chain for waste material.

As described in the Chief Executive's Review, capital investment of approximately £3 million is required over the next 18 months to expand Ecoplas' capacity and purchase new co-extrusion tooling for our primary manufacturing site.

The consideration and other related investments described above are all being financed out of our existing debt facility. We expect the impact of the acquisition materially to exceed our cost of capital and to be earnings accretive in its first full year.

DIVIDENDS 

On 1 August 2018, the Board approved an interim dividend for the six months ended 30 June 2018 of 3.1 pence per share (£3.1 million), representing an increase of 3% on the corresponding period.

The interim dividend will be paid on or before 5 October 2018 and shares will be marked ex-dividend on 6 September 2018.

CAPITAL EXPENDITURE 

Capital expenditure for H1 2018 was £3.1 million (H1 2017: £3.6 million).

Capital expenditure in Operations includes £0.6 million general maintenance capex. We have also invested £1.2 million to increase our recycling capacity (including new co-extrusion lines and tooling) and £0.4 million in new branches. Other capital expenditure of £0.9 million includes a new product showroom, branch refurbishments and various IT-related costs.

CASH FLOW 

Net cash generated from operating activities was £7.6 million for the period, compared to £10.3 million in H1 2017.

This includes a net outflow from working capital for H1 2018 of £4.7 million, comprised of an increase in stocks (£2.8 million), an increase in trade and other receivables (£8.7 million) and an increase in trade and other payables (£6.8 million). This compares to a net outflow from working capital of £1.9 million in H1 2017. It also includes tax paid of £2.1 million (H1 2017: £2.6 million).

A higher outflow in H1 2018 reflects the impact on working capital of growth and the changing customer mix in our business. The increase in stocks is driven largely by raw materials (rebuilt post December factory shut down), new branches and the continued introduction of new product lines to the branch network. Stock days were 58 at 30 June 2018, compared to 58 at 30 June 2017 and 55 at 31 December 2017.

Underlying increases in trade receivables and payables reflect normal business seasonality, alongside increased activity and growth in 2018. There is also an impact on receivables from increased sales to larger / new build fabricators, who tend to buy on better terms than smaller customers, and a timing difference with cash of approximately £2 million received in December 2017 that had been expected in January 2018.

Other payments include capital investment of £3.2 million (H1 2017: £3.6 million), financing costs of £0.2 million (H1 2017: £0.3 million) and an earn-out payment in respect of the acquisition of Security Hardware of £0.1m (H1 2017: initial consideration of £1.3 million).

Dividends paid in H1 2018 represent the final dividend for 2017 of 6.0 pence per share (or £6.0 million). (H1 2017: 2016 final dividend of £5.7 million).

Taking all of these factors into account, net debt increased by £1.9 million during the first half to £16.4 million at 30 June 2018 (31 December 2017: £14.5 million).

BANK FACILITIES 

We have an unsecured, multicurrency, revolving credit facility of £45 million, provided by Barclays and Santander. The Group operates comfortably within the terms of the facility and related financial covenants. The facility matures in 2020.

SEASONALITY OF TRADING

The Group is 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.

As described earlier in this report, we expect there will be greater than normal phasing of profit for 2018 to the second half, due largely to the timing of our branch opening programme and selling price increases implemented at the end of last year.

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties faced by the Group are set out in the 2017 Annual Report (pages 34-38). These risks remain unchanged and are as follows:

· Macro-economic conditions

· EU Referendum

· Raw material prices

· Raw material supply

· Unplanned plant downtime

· Corporate and regulatory risks

· Unsuccessful branch openings

· Customer credit risk

· Competitor activity

· Failure to develop new products

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

· Shortages or increased costs of appropriately skilled labour

· Cyber security

· 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

Mark Kelly Michael Scott

Chief Executive Officer Chief Financial Officer

1 August 2018 1 August 2018

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the six months ending 30 June 2018

The following balances are outstanding at the period end:

INDEPENDENT REVIEW REPORT TO EUROCELL PLC

REPORT ON THE HALF YEAR CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Our conclusion

We have reviewed Eurocell plc's half year condensed consolidated financial statements (the "interim financial statements") in the half-year report of Eurocell plc for the six month period ended 30 June 2018. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

· the condensed consolidated statement of financial position as at 30 June 2018;

· the condensed consolidated statement of comprehensive income for the period then ended;

· the condensed consolidated cash flow statement for the period then ended;

· the condensed consolidated statement of changes in equity for the period then ended; and

· the explanatory notes to the interim financial statements.

The interim financial statements included in the half-year report have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the Directors

The half-year report, including the interim financial statements, is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-year report in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express a conclusion on the interim financial statements in the half-year report based on our review. This report, including the conclusion, has been prepared for and only for the Company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What a review of interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the half-year report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

PricewaterhouseCoopers LLP

Chartered Accountants

Birmingham

1 August 2018