Midwich Group Regulatory News (MIDW)

21 July 2020

Midwich Group PLC

("Midwich" or "the Group")

Pre-close Trading Statement

Midwich Group (AIM: MIDW), a specialist audio visual distributor to the trade market with operations across the UK and Ireland, Continental Europe, Asia Pacific and North America, is today providing a trading update for the six months ended 30 June 2020 ("H1 2020").

Trading in much of the period was impacted significantly by the coronavirus pandemic. As a result, Group revenue for H1 2020 is expected to be around 4% below the same period last year, with a decline in underlying sales of around 22%. Due to product mix, gross margins are also expected to be up to 2.5 percentage points lower. Actions taken to reduce operating expenditure mean the Board expects the Group to be profitable in H1 2020, but at a level significantly below the same period last year.

Board priorities

In view of the pandemic, during the last four months the Board's priorities have been:

· Protection of our people;

· Protection of the business over the short term; and

· Refining the Group's strategy for the future where necessary.

In our announcement on 30 March 2020, we explained the actions taken to protect our people and the business in the short term. Initially, the vast majority of our people worked from home, successfully using technology to undertake their roles. More recently, a number of staff have returned to our offices, where it is considered sufficiently safe and effective for them to do so.

Due to reduced customer demand during the period, our staff have shown great flexibility in their work patterns, including voluntary short time working and reduced remuneration. We have also used the support offered by governments as necessary, such as furloughing in the UK. The Board would like to thank the team for their understanding during this period.

Protection of the business over the short term has meant a significant and ongoing focus on the management of working capital. Whilst seeking to ensure strong short-term liquidity, management has been careful not to disrupt long term customer and supplier relationships. Cash receipts from customers have generally remained at normal levels and we have been pleased that, overall, suppliers have shown flexibility where necessary. Inventory management has been a high priority, and as a result the overall value of inventory (excluding acquisitions) has reduced since 31 December 2019.

The overall impact of actions taken to manage cashflow is that adjusted net debt has reduced by £13 million since 31 December 2019 to £40.5 million. Approximately half the reduction is accounted for by the fund raise undertaken in February, less the cost of the US (Starin) acquisition. The balance is a result of our strong working capital management.

Trading performance

As a specialist audio visual ("AV") distributor, a significant proportion of the products sold by the Group are installed into buildings. As countries entered lockdown, the ability of the Group's customers, primarily system integrators, to access sites became significantly curtailed, and many projects were delayed. While some of these projects have since been undertaken, and certain others are anticipated in the short to medium term, a small number are now considered unlikely to be carried out. This led to a reduction in revenue, which was felt in March and more significantly in the month of April, when revenue was less than 50% of the expectation set out by the Board at the start of the year. Revenue improved in May and further in June. The Board is encouraged by the speed of recovery but notes that revenue continues to be below its initial expectations set at the start of the year and that further improvement will be, in part, linked to the development of the pandemic.

Revenue performance has varied by territory, product set, customer type and end user market.

Territories

The Group operates in eighteen different territories across the world. This geographical diversity has been an advantage as the impact of the crisis has varied by territory, however every country has been significantly impacted. In general, countries that experienced the most comprehensive initial lockdowns (such as France, Spain, Italy, Ireland and New Zealand) saw the most dramatic reduction in revenue initially, but the sharpest subsequent recovery as the lockdowns eased.

The Group's businesses in Germany and Australia have been so far a little less impacted than in other territories.

The impact on the US business has been similar to the rest of the Group overall.

The UK is the Group's single largest territory by revenue, profit and headcount, and addresses multiple markets with many different product sets. As such, general economic conditions tend to have a more significant impact on the UK business than in other countries where the Group has a relatively smaller market share. Similar to other regions, the impact on the UK business has been significant but has improved month on month since April. Importantly, the Board is confident that overall the Group has not lost share to its competition in the UK or other territories.

Products

Certain product sets have been impacted in different ways depending on their use. Relatively strong performance was achieved initially from technologies used to facilitate working from home. Such products include desk top monitors, printers and various associated accessories. Certain broadcast products have also performed well throughout the period, as organisations invest in technologies which enable better remote communication. Unified communications solutions have performed well, and the Group has sought to maximise the skills and relationships it acquired through the acquisition of Starin in the US in February of this year. The integration of this business has gone well, which is particularly pleasing in the circumstances, and the Board remains encouraged by the opportunity that Starin represents.

The Board believes that current market conditions highlight more than ever the need for manufacturers to use a high-quality specialist distributor such as Midwich. So far in 2020, the Group has launched a number of new vendor relationships, such as with Sonos, Netgear, Poly and Huddly and rolled out existing relationships with Barco, Biamp, Shure, DTEN and Absen into new technology areas (such as the Barco Clickshare range in the UK & Ireland and France) or geographical markets (such as launching Shure in France). The launch of new vendors has continued during the lockdown period as the Group continues to position its portfolio for the future.

Customers

While the Group's system integrator customers initially struggled to undertake typically complex projects, sales to customers selling on-line have been comparatively strong during the last four months particularly, albeit that the margins on such sales tend to be lower than the Group's average.

End-use markets

The Board has noted the impact of the crisis on different end user markets. Markets which are largely government funded (such as education, healthcare and defence) have remained relatively strong - impacted mostly by the ability of customers to access sites. The corporate market has been more muted with end users mostly working from home and investment plans largely placed on hold.

Outlook

Market conditions for the Group's products and services are likely to remain significantly impacted by the development of the pandemic for the remainder of 2020. Should the positive trading momentum seen in May and June continue for the rest of this year, trading performance in the second half of the year should be better than in the first half. It is likely that the growth in profitability will be slowed as certain government support measures for employment, particularly in the UK, is scaled back later in 2020.

Whilst continuing to ensure the ongoing financial strength of the business, the Board is now putting increasing focus on ensuring the Group is best able to capitalise on trading conditions in 2021 and thereby continue the long-term momentum that was generated up to 2019.

To this end, a number of key focus areas have been developed, including:

· Continuing to launch new vendors and technologies;

· Ensuring the profile of inventory is appropriate at 31 December 2020;

· Continuing the roll out of the Group's new ERP system;

· Building expertise and reach in the unified communications market; and

· Resuming conversations with key strategic acquisition targets.

The Board believes that the Group's high value add specialist distribution model remains fundamentally valid, and that Midwich's strong technical skills combined with product breadth and geographical spread means that the business is well placed for future growth.

Midwich will announce its half year results for the six months ended 30 June 2020 on 8 September 2020.

For further information:

About Midwich Group

Midwich is a specialist AV distributor to the trade market, with operations in the UK and Ireland, Continental Europe, Asia Pacific and North America. The Group's long-standing relationships with over 500 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 1,000 employees across the UK and Ireland, Continental Europe, 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