Midwich Group Regulatory News (MIDW)

5 September 2023

Midwich Group plc

("Midwich", the "Company" or the "Group")

Interim results for the six months ended 30 June 2023

 Strong performance despite market challenges; full year expectations unchanged

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 2023 ("H1 2023").

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 and outlook

^RCF covenant is 3x Adjusted net debt/adjusted EBITDA. For these purposes Adjusted EBITDA includes proforma EBITDA for acquisitions acquired in the last 12 months.

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

"Our performance in H1 2023 was strong, with the Group delivering revenue growth of 7.4% and adjusted operating profit improving by 30.9% compared with H1 2022, despite continued challenging market conditions in a number of key markets. Particularly notable was the significant improvement in our gross profit percentage, moving from 14.9% in H1 2022 to 16.3% in H1 2023 and our adjusted operating profit percentage which increased from 3.6% to 4.3%. Higher interest charges impacted our adjusted profit before tax, which nonetheless still increased by 13.4% to £21.8 million in the period.

Slower than expected corporate and education markets were more than compensated for by strength in the live event and entertainment sectors. The change in mix attributable to the significant growth of technical video and audio products resulted in a favourable product margin mix.

The EMEA region performed particularly well, with strong improvements in organic revenue, gross margin and adjusted operating profit. Although general macro-economic conditions are widely expected to remain challenging over the coming months, the Group continues to be well placed to identify and benefit from organic and inorganic business development opportunities. I believe our demonstrable track record of performing well despite challenging broader economic conditions is a testament to the quality of our business and our ability to grow market share profitably. Furthermore, our order books remain strong and as a result the Board's expectations for the full year remain unchanged."

There will be a meeting and webinar for sell-side analysts and investors at 9:30am today, 5 September 2023, the details of which can be obtained from FTI Consulting: midwich@fticonsulting.com.

For further information:

About Midwich Group

Midwich is a specialist AV distributor to the trade market, with operations in EMEA, the UK and Ireland, 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 1,800 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 progress in H1 2023, despite continued challenging market and macro-economic conditions in a number of key markets leading to some softness in mainstream product demand. In line with our long-term strategy, we achieved strong sales growth in higher margin technical products, with the result that both gross and operating margins increased significantly and adjusted operating profit increased by 30.9% in the period compared with H1 2022.

Maintaining a consistent high service level to our customers and vendors remains a key focus for the Group, so we remain a long-term trusted partner. We continue to work hard to provide exceptional service and have also increased our market share with many of the Group's key vendors in the period. Our focus on developing our offering in the AV market continues to be beneficial for our customers and vendors alike.

Working capital management continues to be a key focus for the Group with a positive operating cash flow in the period despite the normal seasonal investment in working capital. We expect operating cash generation for the full year to be in line with our long-term trend of 70-80% of adjusted EBITDA.

Trading performance

Revenue in H1 2023 grew by 7.4% (5.1% on a constant currency basis) to reach £610.4 million. Organic growth was 2.3%. Compared with H1 2022, revenue growth was strong in EMEA (+13.5%) and North America (+23.9%), but declined by 2.2% in the UK & Ireland. Based on independent market data, we believe that the decline in our UK & Ireland revenue is significantly less than the overall market decline in that territory.

The gross margin percentage was 1.4 percentage points higher than in H1 2022, with improvements seen in all territories except North America. The increase was a combination of stronger sales of higher margin product areas - particularly in pro audio where improved availability of product led to increased sales. With product being more readily available, inventory levels have been more stable, and we saw a relatively small change in the aged inventory provision in the period.

Investments in headcount, made primarily in 2022, led to an increase in overheads, although this was more than covered by the improvement in gross profit. As a result, the adjusted operating profit margin improved from 3.6% in H1 2022 to 4.3% in H1 2023.

Products

Overall revenue from the two mainstream product areas (displays and projection) declined by around 4%, with a decrease in display sales being partially offset by an increase in projection revenue. These mainstream categories now account for an aggregate of 38% of Group revenue as we continue to diversify into specialist areas. The gross margin on mainstream categories increased slightly.

Revenue in the specialist product areas of technical video, audio and lighting grew strongly, with pro audio recording the largest at 52% growth on the prior year. The overall margin on these categories also improved strongly.

As expected, revenues in the broadcast segment fell as the strong demand for home broadcast equipment seen through lockdowns returned to normal levels.

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. We continue to have significant success with the roll out of brand relationships acquired over the last few years, together with the expansion of existing relationships into new territories in EMEA.

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 softer demand in some areas, combined with higher interest rates, have caused some challenges. We continue to use our distribution expertise and value add advice to support our customers through these challenges and to accommodate the needs of the channel.

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, expertise 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.

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 Group has continued to deliver successfully on this strategy, completing six strategically aligned acquisitions to date in 2023 with a strong pipeline of further opportunities.

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

Acquisitions

The Group completed one acquisition during H1 2023.

In June 2023, the Group completed the acquisition of S.F. Marketing, Inc. ("SFM"), a specialist value-add AV distributor based in Canada.

Founded in 1978 and based in Montreal, SFM is a leading value-add distributor of professional AV, with heritage in the professional audio market. It has 146 employees and over 1,500 customers. The business has grown through long standing relationships with tier-1 brands and developing a reputation for offering exceptional levels of service, which remains a key focus of the business's strategy.

SFM is the Group's second investment in the strategically important North American region, following the acquisition of Starin in 2020. SFM also represents Midwich's first physical presence in Canada, which represents 2.6% of the global AV market, with the Canadian market expected to grow at a CAGR of 5.4% over the next 5 years to $11.9bn in 2027. The initial consideration, plus acquired net debt, for SFM was £24.1m.

In July 2023, post the period-end, the Group made five further acquisitions, each of which add expertise and new product areas to existing territories.

Starin, the US arm of the Group, expanded its broadcast technology offering with the acquisitions of Toolfarm.com, Inc and Digital Media Promos, Inc (trading as 76 Media).

Toolfarm.com, distributes video software products and plugins, with a particular focus on 3D and motion graphics, whilst 76 Media is a value-add distributor of high-end video storage and media asset management hardware to the US market.

In the UK&I, the Group completed the acquisition of HHB Communications Holdings Limited ("HHB"), a leading supplier of specialist professional audio equipment, content creation products, and music technology. Founded in 1976 and with 55 employees, HHB has built a name for itself in the broadcasting, media and entertainment market and has supported many notable postproduction facilities, film, gaming, recording studios, and broadcasters with its products used by the likes of Warner Brothers, BBC, Sky and Pinewood Studios.

Representing manufacturers such as RØDE, Genelec, and AVID from its three London locations, HHB joining the Group further develops Midwich's offering in these strategically important markets.

Also in the UK&I, the Group acquired Pulse Cinemas Holdings Limited trading as Pulse Cinemas. Founded in 2003, Pulse Cinemas is a home cinema distributor with an established reputation for delivering beautiful cinema spaces with class-leading luxury brands. Pulse Cinemas enhances the UK&I business' custom installation offering and also brings state-of-the-art home cinema demonstration facilities.

In Spain, Midwich Iberia acquired Video Digital Soluciones S.L. trading as Video Digital. Video Digital is a Barcelona-based distributor of pro AV equipment in Spain and Portugal with a strong position in the broadcast market, working with a range of leading manufacturers, including Blackmagic Design.

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

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

Outlook

Despite some softness in the AV market so far in 2023, according to research published by industry trade body AVIXA in July 2023, the global AV market is expected to grow at an annualised rate of 5.8% in the five years to 2028.

The Board concurs that the wider AV industry is well positioned for long-term growth and believes that the Group is very well placed to take advantage of growth opportunities. In particular, the Group's ongoing focus on more specialist areas of the market should help to sustain higher gross margins and drive incremental profit opportunities.

The Board believes that the Group's major markets will remain challenging across the remainder of 2023. However, order books remain steady 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 expectations for the full year.

Regional highlights

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

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

UK & Ireland

After an exceptionally strong H1 2022, which saw some post Covid-19 expenditure catch up and associated revenue growth of 86.3%, revenue in the UK & Ireland (UK&I) was marginally below the prior year. This reflected a slower market for mainstream products, which is attributed to delayed expenditure by corporate and education end users. Both have been affected by additional cost pressures, whilst the education sector has also been impacted by labour disputes and uncertainty over future wage bills. There was small contribution from the full year effect of acquisitions completed at the start of 2022.

Based on industry data, combined with our own analysis of customer and vendor activity, we believe that we have increased or maintained market share in the UK&I and we remain confident that the pro AV market will continue to grow faster than GDP in the medium term.

The UK&I achieved an exceptional increase in gross profit margin percentage to 17.7% (H1 2022: 15.7%) reflecting positive product mix with further growth in technical products and the continued recovery in higher margin markets such as live events, entertainment and hospitality.

Adjusted operating profit increased by 28.6% (H1 2022: 119.7%) in the UK&I to £13.9m (H1 2022: £10.8m).

EMEA

EMEA achieved further market share gains in the period with growth of 9.5% (H1 2022: 20.4%) to £281.3m (H1 2022: £247.9m). Whilst Germany, EMEA's largest market, experienced similar market softness to that seen in the UK, there was good growth in all other territories with very strong demand for technical solutions, including pro audio and live event solutions, resulting in exceptional growth in Southern Europe and the Middle East.

Gross profit margins improved to 15.5% (H1 2022: 14.1%) as a result of favourable product mix and the benefit of product supply issues now being largely overcome.

Adjusted operating profit in EMEA at £12.5m (H1 2022: £8.7m) was up 39.0% on the prior year due to the combined benefit of revenue growth, the increase in gross margin and operating leverage in our technical businesses.

Asia Pacific

Revenue in Asia Pacific was up 2.3% on the prior year (H1 2022: 12.2%). There was good growth in mainstream product demand, whilst broadcast sales returned to normal after a period of strong demand during the pandemic. Whilst we continue to see a higher level of enquiries for larger projects, this part of the market has yet to return to pre-pandemic levels.

The Asia Pacific gross profit margin of 17.5% was 1.8 percentage points above H1 2022, reflecting increased technical product mix.

Adjusted operating profit in Asia Pacific was £0.1m (H1 2022: £0.2m).

North America

Organic revenue at Starin increased by 5.4% reflecting continue demand for unified communications solutions. Starin continues to deliver gross margins which we understand are ahead of the wider North American market at 14.5% (H1 2022: 14.7%).

Total revenue growth in US dollars was 18.7% (H1 2022: 81.5%) reflecting the initial contribution from the SFM acquisition at the beginning of June 2023, whilst exchange rate benefits increased reported growth to 23.9% (H1 2022: 94.0%). This currency trend is expected to reverse in the second half of the year.

Adjusted operating profit in North America was slighly below the prior year at £3.0m (H1 2022: £3.1m) reflecting further investment in sales and business management staff in order to support future growth.

Group costs

Group costs for the half year were £3.1m (H1 2022: £2.6m). The increase reflects investment in Group support staff and inflation.

Operating profit

Adjusted operating profit for the period at £26.4m (H1 2022 £20.2m) is stated before the impact of acquisition related expenses of £0.3m (H1 2022: £0.4m), share based payments and associated employer taxes of £2.8m (H1 2022: £2.8m) and amortisation of acquired intangibles of £4.8m (H1 2022: £4.3m). The reported operating profit for the period was £18.6m (H1 2022: £12.7m).

Movement in foreign exchange

Compared to the prior year, Sterling weakened against the Euro and the US Dollar. These movements increased our reported revenue and adjusted operating profit in H1 by 2.3% and 3.1% respectively. Following a significant devaluation in Sterling in H2 2022 market expectations are for GBP to be stronger in the second half, when compared to the prior year. Based on these expectations the reported current gains in the first half are expected to fully reverse in H2 2023. 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 £4.6m (H1 2022: £1.0m) with the increase reflecting the higher interest rate environment whilst the prior year benefitted from a credit of £0.6m for fair value movements on foreign exchange derivatives.

Reported finance costs were £3.0m (H1 2022: £2.3m). The adjustments to finance costs include fair value movements in derivatives and foreign exchange movement on borrowings for acquisitions of (£1.5m) (H1 2022: (£0.2m)), valuation changes in deferred and contingent considerations of £0.3m (H1 2022: £0.4m), and movements in put option liabilities over non-controlling interests of (£0.4m) (H1 2022: £1.1m).

Taxation

The reported tax charge for the period was £4.0m (H1 2022: £2.8m). The adjusted effective tax rate was 26.1%; (H1 2022: 24.9%) calculated based on the adjusted tax charge divided by adjusted profit before tax. The increase in effective tax rate is attributable to higher tax rates in the UK and the change in geographic mix.

Cash flows and net debt

The Group had an adjusted net cash inflow from operations before tax of £8.2m for the period (H1 2022: £7.6m outflow). 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 consistent with the same period in the prior year. The Board is comfortable that the Group's long-term average annual cash conversion rate (70-80%) remains sustainable.

Gross capital spend on tangible assets was £2.4m (H1 2022: £3.4m) and included investment in rental assets in UK&I. An investment of £5.9m in intangible fixed assets (H1 2022: £2.0m) was predominantly in relation to the Group's new ERP solution.

Adjusted net debt (excluding leases liabilities), was £102.1m at 30 June 2023 (£112.5m at 30 June 2022), equivalent to 1.5x 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 £22.8m at 30 June 2023 (£23.0m 30 June 2022). Total net debt was £124.9m at 30 June 2023 (£135.5m at 30 June 2022).

On the 8th June 2023 the Group successfully completed an equity placing of 11,764,705 shares, together with the completion of a retail offer of 294,233 shares, at a price per share of 425p. The total net proceeds of £50m were used to finance the acquisition of SF Marketing and to repay Group borrowings to provide further headroom to fund other pipeline acquisitions. In the first half, adjusted net debt was impacted by net payments totalling £29.5m (H1 2022: £23.5m) in respect of acquisitions, deferred consideration and the purchase of minority shareholdings in the period.

In January 2023, the Group increased its revolving credit facility to £175m (£80m at 31 December 2022) to finance future acquisitions. This facility is supported by six banks, is for a 4½ year term, and has an adjusted net debt to adjusted EBITDA covenant ratio of 3 times and an adjusted interest cover covenant of 4 times adjusted EBITDA. The EBITDA covenant is calculated on a historical twelve-month basis and includes the full benefit of the prior year's earnings of any businesses acquired. Other borrowing facilities are to provide working capital financing. The Group has access to total facilities of c.£300m.

The Group has various instruments to hedge certain exchange rate and interest rate exposures. These include borrowing in local currency to finance 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 5.5 pence per share (H1 2022: 4.5p), an increase of 22%. This will be paid on 27th October 2023 to those shareholders on the Company's register as at 22nd September 2023. The last day to elect for dividend reinvestment ("DRIP") is 6th October 2023.

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.

Stephen Fenby

Managing Director

Unaudited consolidated income statement for the 6 months ended 30 June 2023

Unaudited consolidated statement of comprehensive income for 6 months ended 30 June 2023

Unaudited consolidated statement of financial position as at 30 June 2023

Unaudited consolidated statement of changes in equity for 6 months ended 30 June 2023

For the period ended 30 June 2023

For the period ended 30 June 2022

For the year ended 31 December 2022 (audited)

Unaudited consolidated cashflow statement for 6 months ended 30 June 2023

Notes to the interim consolidated financial information

1. General information

The interim financial information for the period to 30 June 2023 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 2022.

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 2022. The audited financial statements for the year ended 31 December 2022 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 2022, 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