Midwich Group Regulatory News (MIDW)

10 September 2019

Midwich Group plc

("Midwich" or the "Group")

Interim results for the six months ended 30 June 2019

Strong revenue and profit growth together with further acquisitions in H1 2019

Midwich, a specialist audio visual ("AV") distributor to the trade market with operations across the UK and Ireland, Continental Europe and Asia Pacific, today announces its Interim Results for the six months ended 30 June 2019.

Statutory financial highlights

Adjusted financial highlights

1Restated to reflect the adoption of IFRS 16. Adjusted measures are also restated to include amortisation of patents and software

2Definitions of the alternative performance measures are set out in Note 2

Financial highlights

·; Revenue increased 19.2% to £314.8 million (19.7% on constant currency basis) including organic revenue growth of 5.1%

·; Gross margin of 16.6%, 0.4 percentage points ahead of H1 2018

·; Adjusted operating profit2 increased by 8.6% to £14.6 million (9.1% on constant currency basis)

·; Adjusted profit before tax2 increased by 6.2% to £13.7 million (6.7% on constant currency basis)

·; Adjusted EPS2 increased 6% to 12.78p (H1 2018: 12.02p)

·; Operating cash conversion ahead of prior year at 28% of adjusted EBITDA (H1 2018: 7%)

·; Interim dividend declared of 4.85 pence per share (Interim 2018: 4.60 pence per share)

Operational highlights

·; Revenue growth across all territories

·; Strong net operating profit growth in UK & Ireland and Continental Europe

·; Lower Asia Pacific profit compared with very strong, project-driven, prior year comparatives

·; Prior year acquisitions integrated and performing well

·; The three businesses acquired in the first half of 2019 have increased both our geographic presence and specialist audio capabilities, with these value-added businesses positively impacting Group gross margin

·; Strong acquisition pipeline across a number of regions

·; Investments to enter two new markets organically:

o Broadcast in Benelux

o Core AV distribution in South East Asia

·; Investments in information technology, compliance, acquisition and integration capabilities support the Group's growth strategy.

Post period highlights

·; July 2019 - Complementary specialist lighting capabilities added to Earpro in Iberia through the acquisition of 100% of the share capital of Entertainment Equipment Supplies S.L. ("EES")

·; July 2019 - Opened a new UK & Ireland southern showroom and demo facility in Bracknell

Stephen Fenby, Managing Director of Midwich Group plc, commented:

"The Group has had another strong first half and I am pleased with our overall performance, particularly given political and economic uncertainties around the globe. The increase in the Group's gross margin percentage reflects strong performance from the core business and a positive contribution from the acquisitions made in 2018 and the first half of 2019. The more specialist nature of the acquired businesses ensures that our value add to customers and vendors continues to increase.

We have been busy working on opportunities to extend the Group's reach and capabilities through the period and were pleased to complete the acquisitions of MobilePro (Switzerland), Prase (Italy) and AV Partner (Norway), each of which represents the Group's entry into a new territory. In addition, the acquisitions of Prase and (post period end) EES in Spain have strengthened the Group's capabilities in the audio and lighting markets respectively. We continue to have a healthy pipeline of strategic opportunities and have invested in the Group's acquisition and integration teams in the first half. We will continue our disciplined approach to acquire businesses that add value while both strengthening and diversifying our product offering and geographical reach.

The strong performance reported in the first half and contributions from recent acquisitions, give the Board confidence in the prospects for the Group."

Enquiries:

Notes to editors

Midwich is a specialist AV distributor to the trade market, with operations in the UK and Ireland, Continental Europe and Asia Pacific. The Group's long-standing relationships with over 400 vendors, including blue-chip organisations, support a comprehensive product portfolio across major audio visual categories such as large format displays, projectors, digital signage and professional audio. The Group operates as the sole or largest in-country distributor for a number of its vendors in their respective product sets.

The Directors attribute this position to the Group's technical expertise, extensive product knowledge and strong customer service offering built up over a number of years. The Group has a large and diverse base of over 17,000 customers, most of which are professional AV integrators and IT resellers serving sectors such as corporate, education, retail, residential and hospitality. Although the Group does not sell directly to end users, it believes that the majority of its products are used by commercial and educational establishments rather than consumers.

Initially a UK only distributor, the Group now has over 900 employees across the UK and Ireland, Continental Europe and Asia Pacific. A core component of the Group's growth strategy is further expansion of its international operations and footprint into strategically targeted jurisdictions.

For further information, please visit www.midwichgroupplc.com

Managing Director's Report

Overview

The Group has performed strongly in the first six months of 2019, with double digit revenue growth and a further increase in our gross margin percentage.

Acquisitions made in the last twelve months are performing well and have contributed positively towards the Group's gross and net profits. These acquisitions have helped to grow the Group's presence in Europe and South East Asia, as well as strengthening our capabilities in the broadcast and professional audio markets.

We have also launched a start-up broadcast activity in the Benelux and opened a new office in Singapore to help drive our business across South East Asia.

The Group continues to experience growth in the displays, broadcast and audio categories.

Strategy

The Group's strategy is to focus on markets and product areas where it can leverage its value-add services, technical expertise, and sales and marketing skills. Services, skills and geographies are developed either in-house or through acquisition.

Using its focused market knowledge and skills, the Group provides its vendors with support to build and execute plans to grow market share. The Group supports its customers to win and then deliver successful projects. 

The Group has successfully used acquisitions both to enter new geographical markets and to add both expertise and new product areas. Once acquired and integrated, businesses are supported to grow organically and increase profitable market share. The Group continues to pursue a strong pipeline of opportunities across a number of regions.

Acquisitions

The Group completed three acquisitions in the first half of 2019 with an additional acquisition closing shortly after the period end.

On 17 January 2019, the Group acquired 100% of the share capital of MobilePro AG ("MobilePro"), a Swiss value-added distributor of audio visual products. Based in Zurich, MobilePro is a market leading AV distributor to the Swiss trade market. The business provides a comprehensive product offering across projection, display and interactive technologies.

On 31 January 2019, the Group acquired 80% of the share capital of Prase Engineering S.p.A ("Prase"), an Italian value-added distributor of AV products. Based near Venice, Prase is a specialist AV distributor, with a strong heritage in the solution driven professional audio market, where the business operates with high-end specialist brands. More recently, the Company has successfully added key video brands, such as LG and Epson, to its portfolio.

On 3 May 2019, the Group acquired 100% of the share capital of AV Partner AS ("AV Partner"), a Norwegian value-added distributor of AV products. Based in Oslo, AV Partner is a specialist distributor, with a market leading position in the Norwegian projection market. In recent months, it has built a displays business and has also moved into new enlarged premises with dedicated warehousing and demo facilities.

Post period end, on 1 July 2019, the Group completed the acquisition of 100% of EES, a Spanish value-added distributor of lighting and lighting infrastructure products. Based near San Sebastian, EES distributes products from key vendors including Robe, Verlinde and Prolyte on an exclusive basis to the Spanish trade market, with a particular focus on customers servicing the live events and rental sectors.

On 29 April 2019, the Group also acquired the remaining 10.5% of the issued share capital of Holdan, a value-added distributor of technology solutions focused on the broadcast, professional video and traditional audio-visual markets. The consideration for this was satisfied by the issue of 300,212 new ordinary shares of 1p each in the Group.

A strong acquisition pipeline, together with the Group's strong balance sheet, means it is well placed to continue its buy and build strategy both in new and existing territories.

New showroom facility

In July 2019, Midwich UK & Ireland opened a new 50,000 sqft+ southern showroom and demo facility (Innovation House) located in Bracknell, Berkshire. 

This state-of-the-art showroom will be one of the largest multi-vendor experience centres in the UK and will showcase the Group's wide-ranging technologies.

Trading and financial review

Group revenue increased by 19.2% to £314.8 million for the six months to 30 June 2019 (H1 2018: £264.1 million).

The Group achieved a gross profit margin for the period of 16.6%, a 0.4 percentage point increase on H1 2018 and a 0.1 percentage point increase on FY 2018. Growth in margin resulted from both a positive mix effect from the higher gross profit margin businesses acquired in the last twelve months and continued gross profit improvement in the core business. Reported operating profit was impacted by growth in acquisition related expenses and amortisation of acquired intangibles, reflecting the increase in acquisition activity across the Group; together with an increase in share based payment charges.

Adjusted operating profit was £14.6 million (H1 2018: £13.5 million), which represents growth of 8.6%. The growth in adjusted operating profit reflects the overall increase in revenue and gross profit partially offset by investment in the infrastructure required to support the anticipated continued growth of the Group, in particular the central acquisition & integration teams, as well as its start-up businesses in South East Asia and Benelux.

Based on a constant currency analysis, using the current period exchange rates across both periods, Group revenue grew by 19.7% and Group Adjusted operating profit grew by 9.1%. The Group received only a marginal negative impact from movements in foreign exchange rates in the period to 30 June 2019.

Regional highlights

1Restated to reflect the adoption of IFRS 16. Adjusted measures are also restated to include amortisation of patents and software

2Definitions of the alternative performance measures are set out in Note 2

UK & Ireland

Revenue in the UK & Ireland increased by 0.4% in the period on a constant currency basis. There was good growth in the core AV business, driven by demand for large format displays, LED and broadcast technologies. As expected, this was partially offset by managed decline in document solutions, and tougher trading conditions for the small part of the business that addresses the consumer market.

The UK & Ireland segment's gross profit margin increased to 17.8%, a 0.7 percentage point increase on H1 2018 and a 0.4 percentage point increase on FY 2018. The UK & Ireland has benefitted from a favourable product mix attributable to an increase the proportion of display sales.

Adjusted operating profit increased by 7.2% in the UK & Ireland.

Continental Europe

Revenue in Continental Europe increased by 47.5% due to the impact of recent acquisitions and particularly strong performances in France, Germany and the Netherlands. Organic growth of 14.0% reflected strong performance in all major product categories, with particularly strong growth in displays, audio and broadcast. We entered three new geographies in the first half though the acquisitions of Prase in Italy, MobilePro in Switzerland and AV Partners in Norway. These recent acquisitions, together with the two prior year acquisitions in France and Germany, have traded well and are contributing to an increase in the region's gross profit margin to 15.0% compared with 14.2% in the first half of 2018.

Adjusted operating profit in Continental Europe grew by 38.6%, at constant currency, benefitting from the impact of recent acquisitions.

Asia Pacific

Growth in Asia Pacific revenues of 33.9% (36.6% at constant currency) benefitted from the Blonde Robot acquisition completed in December 2018. On an organic basis, Asia Pacific was marginally down on the same period in 2018, which included an exceptional level of project activity.

The Asia Pacific gross profit margin of 18.1%, was 1.9 percentage points below H1 2018, due to the high margin project activity in the prior year.

Adjusted operating profit in Asia Pacific at £1.2 million (H1 2018: £1.8 million) was impacted by the reduction in gross profit together with the investment in opening a new South East Asia AV business in H1 2019.

The Board notes that, according to trade body AVIXA, Asia Pacific is the largest AV region in the world. The market appears to be fragmented but represents an interesting opportunity for the Group over the long term.

Group costs

Group costs for the half year were £1.4 million (H1 2018: £1.1 million). The increase reflects additional investment in legal, compliance, information technology and acquisition & business integration capabilities to support the Group's growth strategy.

Adoption of IFRS 16 and update to alternative performance measures

The Group adopted IFRS 16 Leases for H1 2019 and prior period comparatives have been restated. The IFRS 16 adoption has not materially affected the results and a reconciliation to amounts previously reported is included in Note 10.

As a result of the adoption of IFRS 16 the Group has revised its definitions of adjusted profit measures. The revised adjusted operating profit includes depreciation and amortisation of right to use assets, patents and software. Adjusted profit before tax also includes these charges and the interest cost of leases recognised under IFRS 16.

IFRS 16 adoption and inclusion of amortisation of patents and software in adjusted metrics reduce adjusted operating profit in H1 2019 by £0.1 million (H1 2018: £Nil) and adjusted profit before tax by £0.2 million (H1 2018: £0.1 million).

Finance costs

Finance costs for the period were an income of £0.8 million (H1 2018: £0.7 million). Adjusted finance costs for the period were an expense of £0.9 million (H1 2018: £0.5 million). The increase in adjusted finance costs reflects the additional finance costs associated with financing the Group's acquisitions. The adjustments to finance costs include foreign exchange losses on borrowings for acquisitions of £0.1 million (H1 2018: Nil), an income from movements in deferred and contingent considerations of £0.9 million (H1 2018: £0.1 million), and an income from movements in put option liabilities over non-controlling interests of £0.9 million (H1 2018: £1.1 million).

Taxation

The reported tax charge for the period was £2.3 million (H1 2018: £2.7 million). The adjusted effective tax rate for the period was 23.8% (H1 2018: 24.8%) calculated based on the adjusted tax charge for the period divided by adjusted profit before tax.

Cash flows and financing

The Group had an adjusted net cash inflow from operations before tax of £4.9 million for the period (H1 2018: £1.1 million) which benefitted from strong working capital management and was ahead of the Board's expectations given the traditionally more working capital intensive first half when compared with the full year. The Board is comfortable that the Group's long term average cash conversion rate remains unchanged.

In February, the Group increased its revolving credit facility to £20 million (£15 million at 31 December 2018) and added a small term facility in Spain to support its acquisition strategy.

The Group has acted to hedge certain exchange rate and interest rate exposures in H1. This includes borrowing in Euros to finance European acquisitions and using financial instruments to fix part of the Group's interest charges. These instruments are marked to market at the end of each reporting period, with the change in valuation recognised in the income statement. Given any amounts recognised generally arise from market movements and accordingly bear no direct relation to the Group's underlying performance any gains or losses have been excluded from adjusted profit measures.

Net debt

Net debt, excluding IFRS 16 Leases liabilities, was £53.8 million at 30 June 2019 (£41.2 million at 30 June 2018) and net debt at 30 June 2019 including IFRS 16 was £71.3 million (£51.1 million at 30 June 2018). The adoption of IFRS 16 resulted in an increase in net debt of £17.1 million at 30 June 2019 (£9.6 million at 30 June 2018).

Dividend

The Board is pleased to declare an interim dividend of 4.85 pence per share (H1 2018: 4.60 pence per share), which will be paid on 25 October 2019 to those shareholders on the Company's register as at 20 September 2019. The last day to elect for dividend reinvestment ("DRIP") is 4 October 2019.

The Board continues to adopt a progressive dividend policy to reflect the Group's strong earnings and cash flow while maintaining an appropriate level of dividend cover to allow for investment in longer-term growth. The Board intends to pay future dividends within a cover range of 2 to 2.5 times adjusted earnings.

Outlook

The Board recognises that there is negative sentiment in the global economy, impacted by matters such as the US/China tariff dispute, Brexit and political change in certain territories. Historically, the AV industry has proven to be relatively robust in challenging economic periods. Performance in the year to date has been in line with the Board's expectations and we remain confident in the prospects for the Group.

Stephen Fenby

Managing Director

Unaudited consolidated income statement for the 6 months ended 30 June 2019

1 Comparative information is restated for the adoption of IFRS 16 (note 10) and reclassification of the amortisation for patents and software within the adjusted profit alternative performance measures.

Unaudited consolidated statement of comprehensive income for 6 months ended 30 June 2019

1 Comparative information is restated for the adoption of IFRS 16 (note 10).

Unaudited consolidated statement of financial position as at 30 June 2019

Unaudited consolidated statement of changes in equity for 6 months ended 30 June 2019

For the period ended 30 June 2019

For the period ended 30 June 2018 (restated)1

1 Comparative information is restated for the adoption of IFRS 16 (note 10).

For the year ended 30 December 2018 (Restated)1

1 Comparative information is restated for the adoption of IFRS 16 (note 10).

Unaudited consolidated cashflow statement for 6 months ended 30 June 2019

1 Comparative information is restated for the adoption of IFRS 16 (note 10).

Notes to the interim consolidated financial information

1. General information

The interim financial information for the period to 30 June 2019 is unaudited and does not constitute statutory financial statements within the meaning of Section 434 of the Companies Act 2006.

The interim consolidated financial information does not include all the information required for statutory financial statements in accordance with IFRS, and should therefore be read in conjunction with the consolidated financial statements for the year ended 31 December 2018.

2. Accounting policies

Basis of preparation

The interim financial information in this report has been prepared on the basis of the accounting policies set out in the audited financial statements for the year ended 31 December 2018, except as amended for the implementation of IFRS 16 'Leases', which was adopted on 1 January 2019. The audited financial statements for the year ended 31 December 2018 complied with International Financial Reporting Standards as adopted for use in the European Union ("IFRS").

The Group has elected to apply the full retrospective approach to the transition to IFRS 16. The full retrospective approach requires the transition to be implemented with restatement of the prior year results as if IFRS 16 had always been applied. Adoption of the IFRS 16 has resulted in the recognition of Right of use assets and lease liabilities with a corresponding increase in depreciation charges and finance costs offset by a reduction in operating lease costs in the income statement.

The directors have adopted the going concern basis in preparing the financial information. In assessing whether the going concern assumption is appropriate, the directors have taken into account all relevant available information about the foreseeable future.

The statutory accounts for the year ended 31 December 2018, which were prepared under IFRS, have been delivered to the Registrar of Companies. The auditors reported on these accounts; their report was unqualified; did not contain a statement under section 498(2) or 498(3) of the Companies Act 2006, and did not include reference to any matters to which the auditor drew attention by way of emphasis.

Use of alternative performance measures

The Group has defined certain measures that it uses to understand and manage performance. These measures are not defined under IFRS and they may not be directly comparable with other companies' adjusted measures. These non-GAAP measures are not intended to be a substitute for any IFRS measures of performance, but management has included them as they consider them to be key measures used within the business for assessing the underlying performance.

Growth at constant currency: This measure shows the year on year change in performance after eliminating the impact of foreign exchange movement, which is outside of management's control.

Organic growth: This is defined as growth at constant currency growth excluding acquisitions until the first anniversary of their consolidation.

Adjusted operating profit: Adjusted operating profit is disclosed to indicate the Group's underlying profitability. It is defined as profit before acquisition related expenses, share based payments and associated employer taxes and amortisation of brand, customer and supplier relationship intangible assets.

Adjusted EBITDA: This represents operating profit before acquisition related expenses, share based payments and associated employer taxes, depreciation and amortisation.

Adjusted profit before tax: This is profit before tax adjusted for acquisition related expenses, share based payments and associated employer taxes, amortisation of brand, customer and supplier relationship intangible assets, changes in deferred or contingent considerations and put option liabilities over non-controlling interests, foreign exchange gains or losses on borrowings for acquisitions, fair value movements on derivatives for borrowings, and financing fair value remeasurements.

Adjusted profit after tax: This is profit after tax adjusted for acquisition related expenses, share based payments and associated employer taxes, amortisation of brand, customer and supplier relationship intangible assets, changes in deferred or contingent considerations and put option liabilities over non-controlling interests, foreign exchange gains or losses on borrowings for acquisitions, fair value movements on derivatives for borrowings, and financing fair value remeasurements and the tax thereon.

Adjusted EPS: This is adjusted profit after tax less profit, amortisation of brand, customer and supplier relationship intangible assets and tax thereon due to non-controlling interests divided by the weighted number of shares outstanding.

3. Earnings per share

Basic earnings per share is calculated by dividing the profit after tax for the period/year attributable to equity shareholders of the Company by the weighted average number of shares outstanding during the period/year.

Diluted earnings per share is calculated by adjusting the profit after tax for the period/year attributable to equity shareholders of the Company for the fair value (measured in accordance with IFRS 2) of any goods or services to be supplied to the Group in the future under the share options granted by the financial reporting date and dividing it by the weighted average number of shares outstanding during the period/year adjusted for the effects of all dilutive potential ordinary shares.

The Group's earnings per share and diluted earnings per share, are as follows:

1 Comparative information is restated for the adoption of IFRS 16 (note 10).

2 Comparative earnings per share calculations were based on the number of shares issued rather than the number of shares outstanding and therefore excluded the weighted average number of own shares held. Comparative earnings per share calculations have not been restated for the weighted average number of own shares held as the effect is not material.

4. Segmental reporting

1 Comparative information is restated for the adoption of IFRS 16 (note 10) and reclassification of the amortisation for patents and software within the adjusted profit alternative performance measures.