Mincon Grp Regulatory News (MCON)

Mincon Group plc

2016 Half Year Financial Results

Mincon Group plc (ESM:MIO AIM:MCON), the Irish engineering group specialising in the design, manufacture, sale and servicing of rock drilling tools and associated products, announces its half year results for the six months ended 30 June 2016.

Joe Purcell, Chief Executive Officer, commenting on the results, said:

"Revenue for H1 was 11% ahead of last year at €36.3 million, which tracked through to an improvement of 11% in profit before tax to €5.0 million (H1 2015 €4.5 million), and a 12% improvement in earnings per share.

The gross profit margin in the first half of 2016 of 41% was consistent with the same period last year (H1 2015: 41%), the operating profit margin was 13.5% (H1 2015 13.8%), and the profit attributable to shareholders improved to 11.2% of sales (H1 2015 10.7%).

These are relatively satisfactory numbers against the backdrop of the cyclically depressed volumes and margins in some of the sectors we service.

These results were achieved after increasing provisions to continue building a robust balance sheet, increased R&D investment which we expense, and incurring a €0.4 million charge to reduce head count in operations. While some of these charges are not expected to repeat, we believe it is appropriate to approach our reserves on a considered basis while delivering organic growth in profits and sales.

We are seeing growth in the Americas and Australia, with only Africa retrenching in the first half. The instability of the South African rand, while relatively neutral in it's effect on our accounts during the first half of the year, has caused significant caution and margin pressure in the South African market in the short term and has had a knock on effect to neighbouring African countries.

We are investing in our factories to provide for the expansion of our product ranges, and new equipment is in the process of being commissioned in several of our manufacturing plants. We expect to begin to see sales growth from these products in the 2017 year, with the rest of 2016 being used to test and complete designs, and to develop marketing and sales plans.

In conjunction with the release of these half year results, the Board of Mincon Group plc has recommended the payment of an interim dividend in the amount of €0.01 (1 cent) per ordinary share, payable in September 2016".

Products & markets

Over 50% of Group revenue is derived from sales of Down The Hole (DTH) products and 77% of turnover is manufactured in the Mincon factories. Within the product line-up we have seen some cyclical lows in, for example, Reverse Circulation (RC) products for the exploration market, but on the other hand, some products have begun to grow quickly as drilling techniques change and new uses are found for existing and newly developed products.

We have been considering how to best develop the Group, and have followed up on our analysis by beginning to establish regional hubs in Chile for South America and in Perth for Australasia. Ireland acts as the base for Europe. In setting up these regional hubs we can locate inventory for onward distribution and facilitate better informed and timely decision making. Combining this with standardised, more operationally oriented reporting metrics and systems, we should see benefits in the years to come. The Americas and Australia are the fastest growing markets for the Group.

Since the majority of what we sell is Mincon-manufactured product, most of the inventory is either the raw materials that we use, our own products going through the factories as work in progress (WIP) or finished products located at our distribution points. Inventory reductions should be obtainable from redeploying our own inventory, and turning production over to back orders or tuning it down while we trade inventory down to target levels.

Acquisitions

We have been active in approaching potential acquisition targets, but we did not see value for the Group in the terms that were being sought by vendors, compared with the cost of investing in our own engineering competencies to build a competitive offering. We consider these opportunities on a case-by-case basis.

Through the cycle we have seen Private Equity owned companies being withdrawn from sale and refinanced, and other companies seeking unrealistic prices even while their sales and profits fall. However, we are still committed to growing both organically and by acquisition. We prefer to control our own products and our own channels to market.

We have elected to invest primarily in organic growth rather than exhaust our resources by buying that which we could competitively make ourselves. We also continue to invest in new products as they move into beta testing from the research stage, and in keeping with our R&D policy, we expense those costs as they are incurred.

Currency movements

We have put work into understanding and planning to mitigate the P&L impacts of currency movements, should these steps be required, but we have seen a broadly neutral position in the first half of the year. We make our decisions based on what the operations require for long term funding, and the standard operating terms between subsidiaries that allow predictability to our internal cash flows. We monitor this carefully with the aim of achieving neutrality in the P&L impact of movements.

Profit margins

The gross margin has been steady at 41% for the last few reporting periods as the growth of the Group normalises. Added volume delivers additional profit at these levels, and we continue to invest through the down cycle to improve our factories and the availability of our products to our customers. Our operating profit margin has been steady at 13.5% (H1 2015, 13.8%), and the profit attributable to shareholders at 11.2% (H1 2015, 10.7%) has improved over the same period last year. 

Balance sheet and cash flows

The Mincon Group balance sheet remains strong with net assets of €99.9 million. Receivables have increased by €3.1 million in H1 this year, following the normal seasonal pattern, and 74% of these balances are current, which is not significantly different from usual.

Inventory has seen some growth since the year end, due to a number of factors including replacing inventory that was previously consignment inventory from third parties, and taking back inventory from distributors being replaced by our own subsidiaries. Raw materials also increased as orders reached a seasonal peak for volumes to be delivered in the second half. Working capital again absorbed approximately €5 million of cash in H1 as it did during the same period last year, and if the cycle follows through we should aim to recover this from working capital by the year end, subject to the requirements of the new product cycles.

The Group had net cash of €33.8 million at 30 June 2016, (31 December €38.6 million), with capital expenditure of c.€3 million (H1 2015, €0.84 million) replacing acquisition investment in the first half compared to last year. The investment is directed at expanding production of the current ranges, improved processes and equipment for the underinvested Marshall's factory and on the equipment for new products. We see this investment trend continuing for the next two years, subject to the strategy being successful, and itemised approval from the Board.

This engineering investment path is designed to result in external work being brought in-house and manufacturing being expanded and standardised to protect quality, deliver improved consistency and support production efficiency.

Dividend

The Board of Mincon Group plc has recommended the payment of an interim dividend in the amount of €0.01 (1 cent) per ordinary share, which will be paid on 26 September, 2016 to shareholders on the register at the close of business on 2 September, 2016.

Outlook

We are seeing growth in our sales, which we believe is due to increased market share rather than a general improvement in our target markets. Having said that, there are improvements in some commodity prices and certain end-markets appear to be beginning to return to growth. This should lead on to a recovery in the exploration businesses in due course and then across the mining sector. We believe that the underlying tone is improving, even if this is anecdotal rather than observable.

We continue to engage in dialogue with potential acquisitions and investments, but in some cases, the asking price is not supported by the earnings, and others have withdrawn to work through the down-turn in private. Nevertheless there are fine companies in the sector, worth acquiring, and we are actively continuing to identify and engage with those that we believe would add more than they would cost, and which would continue to fill out our geographic footprint, and our product and service offering.

19 AUGUST 2016

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The accompanying notes are an integral part of these financial statements. 

The accompanying notes are an integral part of these financial statements.

The accompanying notes are an integral part of these financial statements. 

The accompanying notes are an integral part of these financial statements.

Unaudited condensed consolidated statement of changes in equity for the 6 months ended 30 June 2016

The accompanying notes are an integral part of these financial statements.

Notes to the consolidated interim financial statements

1 General information and basis of preparation

Mincon Group plc ("the Company") is a company incorporated in the Republic of Ireland. The unaudited consolidated interim financial statements of the Company for the six months ended 30 June 2016 (the "Interim Financial Statements") include the Company and its subsidiaries (together referred to as the "Group"). The Interim Financial Statements were authorised for issue by the Directors on 18 August 2016.

The Interim Financial Statements have been prepared in accordance with IAS 34, 'Interim Financial Reporting', as adopted by the EU. The Interim Financial Statements do not include all of the information required for full annual financial statements and should be read in conjunction with the Group's consolidated financial statements for the year ended 31 December 2015 as set out in the 2015 Annual Report (the "2015 Accounts").

The Interim Financial Statements do not constitute statutory financial statements. The statutory financial statements for the year ended 31 December 2015, extracts from which are included in these Interim Financial Statements, were prepared under IFRSs as adopted by the EU and will be filed with the Registrar of Companies with the Company's 2015 annual return. They are available from the Company website www.mincon.com and, when filed, from the registrar of companies. The auditor's report on those statutory financial statements was unqualified.

The Interim Financial Statements are presented in Euro, rounded to the nearest thousand, which is the functional currency of the parent company and also the presentation currency for the Group's financial reporting.

The financial information contained in the Interim Financial Statements has been prepared in accordance with the accounting policies applied in the 2015 Accounts. 

Critical accounting estimates and judgements

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 expenses. The estimates and associated assumptions are based on historical experience and other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates. In preparing the 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 2015 Accounts.

2. Revenue

3. Operating Segments

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker (CODM). Our CODM has been identified as the Board of Directors.

Having assessed the aggregation criteria contained in IFRS 8 operating segments and considering how the Group manages its business and allocates resources, the Group has determined that it has one reportable segment. In particular the Group is managed as a single business unit that sells drilling equipment, primarily manufactured by Mincon manufacturing sites.

Entity-wide disclosures

The business is managed on a worldwide basis but operates manufacturing facilities and sales offices in Ireland, Australia, the United States and Canada and sales offices in nine other locations including South Africa, Senegal, Ghana, Namibia, Tanzania, Sweden, Poland, Chile and Peru. In presenting information on geography, revenue is based on the geographical location of customers and non-current assets based on the location of these assets.

Revenue by region (by location of customers):

4. Cost of Sales and operating expenses

Included within cost of sales, selling and distribution expenses and general and administrative expenses were the following major components: 

Other operating expenses

6.  Income Tax

The Group's consolidated effective tax rate in respect of operations for the six months ended 30 June 2016 was 18.6% (30 June 2015: 21.3%). The decrease in the effective rate of tax to 18.6% in 2016 was due to the change in the geographic spread of profits of the Group entities, reflective of the impact on margins of the strengthening of currencies in non-euro jurisdictions. The tax charge for the six months ended 30 June 2016 of €0.9 million (30 June 2015: €1 million) comprises a deferred tax charge relating to movements in provisions, net operating losses forward and the temporary differences for property, plant and equipment recognised in the income statement.

The net current tax liability at period-end was as follows:

The net deferred tax liability at period-end was as follows:

7. Earnings per share

Basic earnings per share (EPS) is computed by dividing the profit for the period available to ordinary shareholders by the weighted average number of Ordinary Shares outstanding during the period. Diluted earnings per share is computed by dividing the profit for the period by the weighted average number of Ordinary Shares outstanding and, when dilutive, adjusted for the effect of all potentially dilutive shares. The following table sets forth the computation for basic and diluted net profit per share for the six months ended 30 June:

8. Share based payment

During the half year ended 30 June 2016, the Remuneration Committee of the Board of Directors made a grant of approximately 500,000 Share Awards (SAs) to members of the senior management team, excluding executive directors. Vesting of awards is conditional on the Company attaining specified performance targets over a period of at least three financial years. Those targets will be aligned with the Company's long term business strategy. These awards will vest three years after the date of the award, subject to the group achieving compound growth in EPS of CPI plus 5% over 2016, 2017 and 2018.

The fair value of services received in return for SAs granted is measured by market value of the shares, at €0.70 per share, on the day the awards were granted.

9. Goodwill

10. Property, Plant and Equipment

Capital expenditure in the first half-year amounted to €3 million (30 June 2015: €0.8 million) of which €0.2 million (30 June 2015: €0.1 million) was invested in buildings and €2.8 million (30 June 2015: €0.7 million) was invested in plant and machinery.

The depreciation charge for property, plant and equipment is recognised in the following line items in the income statement:

11. Inventory

There was no material write-down of inventories to net realisable value during the period ended 30 June 2016 (30 June 2015: €Nil).

12. Trade and other receivables

At 30 June 2016, €2.1 million (13%) of trade receivables of our total trade and other receivables balance was past due but not impaired (31 December 2015, €1.5 million (11%)).

No customer accounted for more than 10% of trade and other receivables balance at any period end.

Credit Risk

The majority of the Group's customers are third party distributors of drilling tools and equipment. The maximum exposure to credit risk for trade and other receivables by geographic region was as follows at the balance sheet dates presented:

13. Loans and borrowings

The Group has a number of bank loans and finance leases in Australia, the United States, Canada, Chile and Namibia with a mixture of variable and fixed interest rates. The Group has been in compliance with all debt agreements during the periods presented. None of the debt agreements carry restrictive financial covenants. Bank loans are secured on land & buildings with a net book value of approximately AUS$3,500,000 (circa €2.3 million) and on plant and equipment with a net book value of US$682,000 (circa €0.6 million).

During the year there was a drawdown of €40,000 in new finance debt and repayment of €0.6 million of existing finace debt.

14. Financial Risk Management

We are exposed to various financial risks arising in the normal course of business. Our financial risk exposures are predominantly related to changes in foreign currency exchange rates as well as the creditworthiness of our financial asset counterparties.

The half-year financial statements do not include all financial risk management information and disclosures required in the annual financial statements, and should be read in conjunction with the 2015 Annual Report. There have been no changes in our risk management policies since year-end and no material changes in our interest rate risk.

The Group defines liquid resources as the total of its cash, cash equivalents and short term deposits. Capital is defined as the Group's shareholders' equity and borrowings.

Liquid and capital resources are monitored on the basis of the total amount of such resources available and the Group's anticipated requirements for the foreseeable future. The Group's liquid resources and shareholders' equity at 30 June 2016 and 31 December 2015 were as follows:

14. Financial Risk Management (continued)

b) Foreign currency risk

The Group is a multinational business operating in a number of countries and the euro is the presentation currency. The Group, however, does have revenues, costs, assets and liabilities denominated in currencies other than euros. Transactions in foreign currencies are recorded at the exchange rate prevailing at the date of the transaction. The resulting monetary assets and liabilities are translated into the appropriate functional currency at exchange rates prevailing at the reporting date and the resulting gains and losses are recognised in the income statement.

The Group's global operations create a translation exposure on the Group's net assets since the financial statements of entities with non-euro functional currencies are translated to euro when preparing the consolidated financial statements. The Group does not use derivative instruments to hedge these net investments. The principal foreign currency risks to which the Group is exposed relate to movements in the exchange rate of the euro against US dollar, South African rand, Australian dollar, Sterling and Swedish Krona.

Almost 63% of Mincon's revenue is generated in these currencies, compared to less than 15% of the Group's cost of sales. This had a significant translational impact on revenue when sales in local currency are converted into euro with a knock-on impact on the Group's gross margin and net margin. The majority of the group's manufacturing base has a euro or US dollar cost base. While Group management makes every effort to reduce the impact of this currency volatility, it is impossible to eliminate or significantly reduce given the fact that the highest grades of our key raw materials are either not available or not denominated in these markets and currencies. Additionally, the ability to increase prices for our products in these jurisdictions is limited by the current market factors.

Currency also has a significant transactional impact on the group as outstanding balances in foreign currencies are retranslated at closing rates at each period end. The strengthening of the US Dollar and other currencies has impacted upon equity with an increase in recognised net assets of non-Euro reporting subsidiaries of €2 million due to foreign exchange movements in the year on the retranslation of the net investment in foreign operations.

Average and closing exchange rates for the Group's primary currency exposures were as disclosed in the table below for the period presented.

There has been no material change in the Group's currency exposure since 31 December 2015. Such exposure comprises the monetary assets and monetary liabilities that are not denominated in the functional currency of the operating unit involved.

14. Financial Risk Management (continued)

c) Fair values

Fair value is the amount at which a financial instrument could be exchanged in an arms-length transaction between informed and willing parties, other than in a forced or liquidation sale. The contractual amounts payable less impairment provision of trade receivables, trade payables and other accrued liabilities approximate to their fair values. Under IFRS 7, the disclosure of fair values is not required when the carrying amount is the reasonable approximation of fair value.

There are no material differences between the carrying amounts and fair value of our financial liabilities as at 31 December 2015 or 30 June 2016.

Financial instruments carried at fair value

The deferred contingent consideration payable represents management's best estimate of the fair value of the amounts that will be payable, discounted as appropriate using a market interest rate. The fair value was estimated by assigning probabilities, based on management's current expectations, to the potential pay-out scenarios. The fair value of deferred contingent consideration is primarily dependent on the future performance of the acquired businesses against predetermined targets and on management's current expectations thereof. An increase and decrease of 10% in management's expectation as to the amounts that will be paid out would increase or decrease the value of contingent deferred contingent consideration at 30 June 2016 by €0.6 million. The significant unobservable inputs are the performance of the acquired businesses and the timing of the pay-out.

Movements in the year in respect of Level 3 financial instruments carried at fair value

The movements in respect of the financial assets and liabilities carried at fair value in the year to 30 June are as follows:

15. Litigation

The Group is not involved in legal proceedings that could have a material adverse effect on its results or financial position.

16. Related Parties

We have related party relationships with our subsidiaries, directors and senior key management personnel. All transactions with subsidiaries eliminate on consolidation and are not disclosed.

As at 30 June 2016 and 31 December 2015, the share capital of Mincon Group plc was 56.84% owned by Kingbell Company which is ultimately controlled by Patrick Purcell and members of the Purcell family. Patrick Purcell is also a director of the Company. On 9 and 10 June 2016, Ballybell Ltd, a compay controlled by non-Executive Director Kevin Barry, reduced it's shareholding in Mincon Group to 7.09% (31 December 2015 14.21%). In June 2016, the Group paid a final dividend of €0.01 to all shareholders on the register at 27 May 2016. The total dividend paid to Kingbell and Ballybell Limited was €1,196,712 and €299,178 respectively.

There were no other related party transactions in the half year ended 30 June 2016 that affected the financial position or the performance of the Company during that period and there were no changes in the related party transactions described in the 2015 Annual Report that could have a material effect on the financial position or performance of the Company in the same period.

17. Events after the reporting date

Dividend

On 18 August 2016, the Board of Mincon Group plc approved the payment of an interim dividend in the amount of €0.01 (1 cent) per ordinary share. This amounts to a total dividend payment of €2.1m which will be paid on 26 September 2016 to shareholders on the register at the close of business on 2 September 2016.

18. Approval of financial statements

The Board of Directors approved the interim condensed consolidated financial statements for the six months ended 30 June 2016 on 18 August 2016.