Midwich Group Regulatory News (MIDW)

6 September 2022

Midwich Group plc

("Midwich" or the "Group")

Interim results for the six months ended 30 June 2022

 Significant organic growth delivered, well ahead of the overall market

Midwich Group (AIM: MIDW), a global specialist audio visual distributor to the trade market, today announces its Interim Results for the six months ended 30 June 2022 ("H1 2022").

Statutory financial highlights

Adjusted financial highlights

1Definitions of the alternative performance measures are set out in Note 2

Financial highlights

Operational highlights

Post period trading

There will be a webinar for sell-side analysts and investors at 9:30am today, 6 September 2022, the details of which can be obtained from FTI Consulting: midwich@fticonsulting.com.

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

"The Group delivered outstanding revenue growth of 45.8% to £568.6m in H1 2022. This reflected significant organic revenue growth of 27.9%, which was supplemented by a strong contribution from the two UK businesses acquired in early 2022. Our performance compares very favourably with AVIXA's global pro AV market growth estimate of 10.5% for 2022.

Trading performance in the UK & Ireland, and North America was particularly impressive, with growth on a constant currency basis of 86.3% and 81.5% respectively on H1 2021. Growth was driven by a combination of market share gains, new vendors and technologies and partial recovery in some end user markets.

We have also seen some recovery in the live events markets as well as for in-person activities such as in the theatre and leisure sectors, as people regain confidence to attend in-person events.

Although general macro-economic conditions are widely expected to remain challenging over the coming months, the Group has not seen a fall-off in demand. I believe that we have demonstrated the resilience of our business in more challenging economic conditions, as seen by our strong performance throughout prior recessions. Despite our overall scale, growth and geographic breadth, the opportunity for the Group to grow profitable market share remains strong. Furthermore, the evidence within our business supports the recent AVIXA report which points to any potential negative impact to the AV industry of a general economic downturn being balanced by increased demand from in-person events.

The Board believes that the Group's business and the broader AV market should continue to improve steadily across the remainder of 2022 and into 2023, although there remains a risk of negative impact due to a decline in general economic conditions. Shortages of product and supply chain challenges appear to be easing in some areas, although critical component shortages continue to cause difficulties in completing projects. Our order books remain strong. Trading since the end of H1 has been in line with the Board's recently upgraded expectations and well ahead of the comparative period."

For further information:

About Midwich Group

Midwich is a specialist AV distributor to the trade market, with operations in the UK and Ireland, EMEA, Asia Pacific and North America. The Group's long-standing relationships with over 600 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 20,000 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 around 1,500 employees across the UK and Ireland, EMEA, Asia Pacific and North America. 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 continued to make strong progress in H1 2022, with trading improving in all our key territories. Once again, I would like to thank our team for its exceptional performance in the face of ongoing business and personal challenges. Although the direct impact of the pandemic has lessened, we have dealt effectively with continuing challenges, such as product shortages, unpredictable supplies and inflation. However, with the return of in-person activity and meetings, such as trade shows, we have been able to rekindle personal relationships with colleagues, customers and vendors alike.

Maintaining a consistent high service level to our customers and vendors remains a key focus for the Group, such that we become a long-term trusted partner. We continue to work hard to provide exceptional service despite the well flagged broader industry challenges such as ongoing product shortages. Although we have seen shortages beginning to ease in a number of product areas (such as flat panel displays), ongoing shortages of some critical system components can cause difficulties in completing projects. Our focus on developing our offering in the AV market continues to be beneficial for our customers and vendors alike.

Working capital management remains a key focus for the Group. As expected, as the business has recovered, inventory levels have also increased. I remain comfortable that our inventories are aligned with sensible business requirements and our growth ambitions.

Trading performance

The Group has continued to build upon the recent trading momentum seen in the second half of 2021, with revenue increasing by 45.8% to £568.6 million (constant currency growth also 45.8%). Strong organic growth of 27.9% was supplemented by very positive contributions from the two businesses acquired earlier in the year. 

The gross margin percentage was 0.2% lower than H1 2021. This reduction was a combination of stronger sales of higher margin product areas being offset by an increase in the provision for aged inventory. The Group operates a strict provisioning policy based on the age of inventory. With unpredictable product supplies continuing, the Group has taken advantage of buying opportunities as they have arisen to ensure we are able to best service our clients. This has sometimes meant holding larger inventory levels, which takes time to reduce to normal levels. We expect that most of the aged stock provision will reverse by the end of 2022 without the need for substantial discounting. 

The Group benefitted from operational leverage particularly in the UK&I and North America, with the result that despite the 0.2% reduction in the gross margin we achieved an increase in the net margin from 3.3% to 3.4% during the period.

Products

Revenue from the two mainstream product areas (displays and projection) increased by 21%, which is below the overall rate of growth of the Group. These mainstream categories now account for an aggregate of just 42% of Group revenue as we continue to diversify into specialist areas. The gross margin on mainstream categories reduced a little due to the impact of the aged stock provision movement.

Revenue in specialist product areas, such as technical video, audio, broadcast and lighting grew by 86%. Technical products now account for over half of the Group's revenue. The Group's long-term strategy is to continue developing its presence and expertise in more specialist product categories where there are attractive growth and margin opportunities. This includes new categories such as security and telecoms products, in addition to the growing unified communications and collaboration segment.

As expected, revenues in the broadcast segment fell as the strong demand for home broadcast equipment seen through lockdowns returned to normal levels. Overall, gross margins in technical product categories reduced by around 1.3% - a combination of prudent aged stock provision movements and the inclusion of lower margin telecoms products.

The Board believes that the current market conditions, highlight more than ever, the need for manufacturers to use a high-quality specialist distributor, such as Midwich. As such, our new vendor launch programme has continued, with significant success. 

Customers

The Group's focus has always been on seeking to provide our customers with consistently high levels of service and support. Although our customer base tends to be adaptable and resilient, we are aware that they continue to face challenges with shortages of skilled staff and of products, and of unpredictable demand. We have sought to flex our model in order to support our customers and to accommodate the needs of the channel. A number of markets (such as live events and hospitality) have seen a return to growth in the first half of 2022 which we anticipate will continue to recover over the short to medium term.

Our expansion into new product categories over the last couple of years (such as unified communications, security and telecoms) has broadened the Group's customer base, and also its level of engagement with major international integrators.

End-user markets

A number of end user markets, such as education and government, have remained strong in H1 2022. We have seen some return of the corporate market, although this recovery is still ongoing. The live events and hospitality markets are starting to recover, with notable growth in corporate events in the UK&I and outdoor events in parts of southern Europe. The high street retail market remains very subdued, and we note that AXIVA predicts that this market will not return to pre-pandemic levels until 2025. 

Strategy

The Group's strategy remains clearly focused 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 acquisitions.

Using its 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. 

During the period, the Group continued to deliver successfully on this strategy, including building expertise and reach in the unified communications market and continuing to launch with new vendors and technologies. 

Historically, the Group has successfully used acquisitions 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, either self-sourced or, increasingly, through approaches by business owners who wish to join a strong AV focused group.

The Board continues to focus on strengthening the Group's product offering, technical expertise and geographical reach.

Acquisitions

The Group completed two acquisitions during the first half of 2022.

In January 2022, the Group completed the acquisition of a 65% controlling stake in Cooper Projects Limited, the parent company of DVS Limited ("DVS"), a UK based distributor of video security products.

Based in Cardiff, DVS is a specialist distributor of CCTV and associated video recording technologies together with complementary technologies, such as access control, intercom, and intruder detection. DVS provides solutions for trade customers throughout the UK, across key verticals including the corporate, retail and residential markets.

This acquisition gives the Group access to a significant segment of the AV market in which it had little presence, and which is expected to grow at around 8% per annum for the next five years. 

In February 2022, the Group acquired Nimans Limited and its subsidiaries (collectively "Nimans"). Nimans is a UK based specialist distributor of unified communications, telecoms, collaboration and audio visual technologies.

The Group continues to grow its unified communications offering and Nimans brings further opportunities to the Group, in terms of skills in new product and technology areas, service offerings to the trade, a large new customer base and new vendor relationships.

These acquisitions bring new technologies, customers and vendors and further deliver on the Group's strategy to grow earnings both organically and through selective acquisitions of strong, complementary businesses.

In the period, the Group acquired the remaining minority shareholding in Earpro S.A. and Entertainment Equipment Supplies SL, its Spanish audio and lighting businesses. Following the period end, the Group also acquired the remaining minority shareholding in Prase Engineering SpA, its Italian audio specialist.

Today, the acquisition pipeline remains healthy and the management team continue to review attractive opportunities in a number of markets and regions.

Outlook

According to research published by industry trade body AVIXA in July 2022, the global market for AV grew by 11% in 2021 and is expected to grow by a further 10.5% in 2022. The market is expected to have recovered to its 2019 size (pre-covid pandemic) by the end of 2022, from when AVIXA predicts an annualised growth rate of 5.9% to 2027.

The Board concurs that the wider AV industry is well positioned for long-term growth and believes that the Group is very well positioned to take advantage of growth opportunities.

The Board believes that the Group's markets and business should continue to improve steadily across the remainder of 2022 and into 2023, although there remains a risk of negative impact due to a decline in general economic conditions. Shortages of product appear to be easing somewhat, although ongoing shortages of some critical system components continue to cause difficulties in competing projects. Order books remain strong and underpin the Board's confidence in the Group's outlook for the current year and beyond.

Trading since the end of H1 has been in line with the Board's recently upgraded expectations for the full year, and well ahead of the comparative period.

Regional highlights

1Definitions of the alternative performance measures are set out in Note 2

All percentages referenced in this section are at constant currency unless otherwise stated.

UK & Ireland

Revenue in the UK & Ireland (UK&I) increased by 86.3% in the period, including the impact of the acquisitions of DVS and Nimans at the beginning of the year. Acquisition integration is proceeding well, reflecting the strong cultural fit. Both businesses are performing strongly and have delivered revenue synergies earlier than expected.

Organic revenue growth was exceptionally strong at 30.6% with the business benefitting from the return to normal working practices following the cessation of pandemic restrictions and further significant market share gains. The market share gains are attributed particularly to the contribution from new vendors launched in the last two years, combined with strong long-term value added partnerships with our customers. 

The gross margin percentage improved by 0.3 ppts compared with H1 2021, reflecting a partial recovery in higher margin markets such as live events, entertainment and hospitality.

Adjusted operating profit increased by 119.7% in the UK&I to £10.8m.

EMEA

After an exceptionally strong performance in 2021, EMEA achieved further market share gains with growth of 20.4% to £247.9m in the period. There was good growth across the region with notable performances in the Middle East, as a result of project demand and the benefit of new vendors added in prior periods; in Southern Europe, due to a rebound in demand from corporates and live events; and in Germany, where the education market demand remains high. After two years of unprecedented demand, broadcast solutions revenue returned to normal levels.

Gross margin at 14.1% was below the prior year reflecting both the impact of an increase in the aged inventory provision, due to holding some additional volumes to ensure continuity of supply, and product mix. There were signs of product supply issues beginning to ease during the period, although this continues to have an impact especially with respect to complex/higher margin projects.

Adjusted operating profit in EMEA at £8.7m was broadly in line with the same period in 2021.

Asia Pacific

Revenue in Asia Pacific was up 12.2% on the prior year. The region continued to be impacted by COVID-19 restrictions, although these have eased in recent months. Revenue growth was driven by increased sales of displays into the education and corporate markets. We continue to see a higher level of enquiries for larger projects, although ongoing product supply challenges and the delayed market recovery mean that the timing of delivery is uncertain.

The Asia Pacific gross profit margin of 15.7% was 2.0 percentage points below H1 2021, reflecting the less technical product mix.

Adjusted operating profit in Asia Pacific was £0.2m (H1 2021: £0.5m).

North America

Trading in North America was very strong, reflecting the strategic focus on its specialist AV business and the benefit of investment in sales capabilities. The Starin business is performing well and has added new brands over the last two years and increased both its customer base and its share of wallet with existing customers. Revenue in North America increased by 81.5% to £56.4m.

The increased scale and focus on core AV activity resulted in gross margins of 14.7% which we understand is ahead of the wider North American market. Gross margins in the prior period benefitted from the release of provisions in respect of aged stock sold in the period.

Adjusted operating profit in North America increased by 156.4% to £3.1m (H1 2021: £1.1m).

Group costs

Group costs for the half year were £2.6m (H1 2021: £1.7m). The increase reflects investment in Group IT and security and increased travel expenses.

Operating profit

Adjusted operating profit for the period at £20.2m (H1 2021 £13.9m) is stated before the impact of acquisition related expenses of £0.4m (H1 2021: £0.3m), share based payments and associated employer taxes of £2.8m (H1 2021: £2.4m) and amortisation of acquired intangibles of £4.3m (H1 2021: £3.6m). The reported operating profit for the period was £12.7m (H1 2021: £7.6m).

Movement in foreign exchange

Compared to the prior period Sterling has appreciated against the Euro but depreciated against the US Dollar. These movements have largely offset each other with reported growth at the Group level broadly in line with constant currency growth. Note, the Group makes most of its sales and purchases in local currency; this provides a natural hedge for transactional activity.

Finance costs

Adjusted finance costs for the period were an expense of £1.0m (H1 2021: £0.9m) and included the benefit of £0.6m of fair value movements on foreign exchange derivatives.

Reported finance costs were £2.3m (H1 2021: £0.5m). The adjustments to finance costs include fair value movements in derivatives and foreign exchange movement on borrowings for acquisitions of (£0.2m) (H1 2021: £1.4m), valuation changes in deferred and contingent considerations of £0.4m (H1 2021: £0.1m), and movements in put option liabilities over non-controlling interests of £1.1m (H1 2021: £1.0m).

Taxation

The reported tax charge for the period was £2.8m (H1 2021: £2.5m). The adjusted effective tax rate was 24.9% (H1 2021: 27.8%) calculated based on the adjusted tax charge divided by adjusted profit before tax. The decrease in effective tax rate is attributable to a shift in geographic mix towards lower tax jurisdictions.

Cash flows and net debt

The Group had an adjusted net cash outflow from operations before tax of £7.6m for the period (H1 2021: £5.1m). The first half is traditionally more working capital intensive when compared with the full year due to the seasonality of demand, especially in the education sector. Overall working capital levels, as a percentage of annualised revenue, were in line with H1 2021, whilst absolute working capital increased due to the growth in revenue, the impact of acquisitions and some additional inventory holdings to manage product shortage risk and maintain our service levels. The Board is comfortable that the Group's long-term average annual cash conversion rate (70-80%) remains sustainable.

Adjusted net debt (excluding leases liabilities), was £112.5m at 30 June 2022 (£56.0m at 30 June 2021), equivalent to 2.1x adjusted EBITDA.

The adoption of IFRS 16 in 2019 resulted in an increase in recognised lease liabilities (predominantly for office, showroom and warehouse facilities). Lease liabilities excluded from adjusted net debt totalled £23.0m at 30 June 2022 (£17.2m 30 June 2021). Total net debt was £135.5m at 30 June 2022 (£73.3m at 30 June 2021).

Adjusted net debt was impacted by the net payments totalling £23.5m in respect of the acquisitions and purchase of minority shareholdings in the period.

The Group has access to an £80m revolving credit facility (RCF) which it uses to finance acquisition investments. Other borrowing facilities are to provide working capital financing. There were no significant changes to facilities during the period and as at 30 June 2022, the Group has access to total facilities of over £200m.

The Group has various instruments to hedge certain exchange rate and interest rate exposures. These include borrowings in Euros to finance European acquisitions and 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.

Dividend

The Board is pleased to declare an interim dividend of 4.5 pence per share (H1 2021: 3.3p), an increase of 36%. This will be paid on 26 October 2022 to those shareholders on the Company's register as at 16 September 2022. The last day to elect for dividend reinvestment ("DRIP") is 3 October 2022.

The Board believes in 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 anticipates that future dividends will continue to be covered in the range of 2-2.5 times by adjusted earnings per share.

Stephen Fenby

Managing Director

Unaudited consolidated income statement for the 6 months ended 30 June 2022

Unaudited consolidated statement of comprehensive income for 6 months ended 30 June 2022

Unaudited consolidated statement of financial position as at 30 June 2022

Unaudited consolidated statement of changes in equity for 6 months ended 30 June 2022

For the period ended 30 June 2022

For the period ended 30 June 2021

For the year ended 31 December 2021 (audited)

Unaudited consolidated cashflow statement for 6 months ended 30 June 2022

Notes to the interim consolidated financial information

1. General information

The interim financial information for the period to 30 June 2022 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 UK adopted International Accounting Standards ("IAS"), and should therefore be read in conjunction with the consolidated financial statements for the year ended 31 December 2021.

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 2021. The audited financial statements for the year ended 31 December 2021 were prepared in accordance with UK adopted International Accounting Standards ("IAS") in conformity with the requirements of the Companies Act 2006.

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 2021, 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 IAS 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 IAS 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. Share based payments are adjusted to the provide transparency over the costs.

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: Adjusted EPS is EPS calculated using the basis of adjusted profit after tax instead of profit after tax after deducting adjustments to profit after tax due to non-controlling interests. 

Adjusted net debt: Net debt is borrowings less cash and cash equivalents. Adjusted net debt excludes leases.

Adjusted net debt:Adjusted EBITDA: This is calculated as per the Group's RCF debt facility covenant and includes the benefit of proforma annualised earnings for acquisitions completed in the last 12 months.

3. Earnings per share

Basic earnings per share is calculated by dividing the profit after tax attributable to equity shareholders of the Company by the weighted average number of shares outstanding during the year. Shares outstanding is the total shares issued less the own shares held in employee benefit trusts. Diluted earnings per share is calculated by dividing the profit after tax attributable to equity shareholders of the Company by the weighted average number of shares in issue during the 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:

4. Segmental reporting