NBI.L Regulatory News (NBI)

11 April 2019

Northbridge Industrial Services Plc

("Northbridge" or the "Group" or the "Company")

Results for the Year Ended 31 December 2018

Northbridge Industrial Services plc, the industrial services and rental company, today announces its preliminary results for the year ended 31 December 2018, which are in line with market expectations.

Highlights:

· Group revenue up 4.9% to £26.9 million (2017: £25.7 million)

· Gross profit up 20.6% to £11.3 million (2017: £9.3 million)

· EBITDA1 up 44.0% to £4.6 million (2017: £3.2 million)

· Pre-tax losses1 more than halved to £2.0 million (2017: £4.4 million)

· Significantly increased cash generation from operations reaching £4.3 million (2017: £2.6 million)

· Placing of 2 million shares at 125 pence raising £2.4 million after expenses in June 2018

· Acquisition of a complementary hire fleet of drilling tools in South East Asia from a distressed competitor for £3.0 million

· Net debt unchanged at £8.7 million (2017: £8.7 million)

· Steadily improving conditions in the drilling tool market, with rental revenue in our Tasman business up 22.5% year on year

1 Before one-off exceptional cost of £712,000 (2017: nil).

Eric Hook, Chief Executive Officer, commenting on the results said:

"We are pleased to report results which are well ahead of the prior year and are driven by more positive conditions in our end markets. This year marked a turning point for Northbridge, with both divisions of our business starting to show signs of early recovery as the oil and gas market stabilises and the energy market, including in the renewables space, drive revenue growth.

As a result of our operational gearing, we believe that Northbridge is well placed to generate considerable gross profit margin growth as revenue continues to increase and we look forward with confidence to the future and expect further good progress to be achieved in 2019."

For further information

Northbridge Industrial Services plc 01283 531645

Eric Hook, Chief Executive Officer

Iwan Phillips, Finance Director

Stockdale Securities Limited (Nominated Adviser and Broker) 020 7601 6100

Robert Finlay / Antonio Bossi / Henry Willcocks

Buchanan 020 7466 5000

Charles Ryland / Stephanie Watson / Catriona Flint

About Northbridge:

Northbridge Industrial Services plc hires and sells specialist industrial equipment. With offices or agents in the UK, USA, The Middle East, Belgium, Germany, France, Australia, New Zealand, Singapore, China, Brazil and South Korea, Northbridge has a global customer base. This includes utility companies, the oil and gas sector, shipping, banking, mining, construction and the public sector. The product range includes loadbanks, transformers, and oil tools. Northbridge was admitted to AIM in 2006 since when it has grown by providing a high level of service, responsiveness and flexibility to customers. It has grown by the acquisition of companies in the UK, Dubai, Australia, Belgium, New Zealand and Singapore and through investing further in those acquired companies to make them more successful. Northbridge continues to seek suitable businesses for acquisition across the world.

CHIEF EXECUTIVE'S REVIEW

2018 proved to be a watershed year for the Group, with signs of a recovery in both parts of the business, particularly noticeable in Tasman Oil Tools. The impact of operational gearing on trading is now beginning to benefit the Company, as revenues, particularly in our hire operations, begin to improve.

After a period of significant cost reduction, much of our operational costs remain fixed, and in particular establishment costs and depreciation, which are less sensitive to volume. This means that, as revenues improve, gross profit will grow proportionately faster. In addition, the mix between sales and rental also adds to the operational gearing effect, as our higher-margin rental revenue should recover faster than the growth of outright sales of manufactured units.

Overall, the Group's revenue improvement, year on year, in 2018 was 4.9%, but gross margin rose to 41.8% compared with 36.4% in 2017 as the proportion of rental in the mix increased. Gross profits increased by 20.6% to £11.3 million (2017: £9.3 million). Operational gearing also impacts EBITDA (pre-exceptional), and this in turn increased by 44.0% to £4.6 million (2017: £3.2 million). Costs were reduced and remain under control and pre-exceptional operational expenditure was £12.3 million, reducing from £12.9 million in 2017. Cash generated from operations improved substantially to £4.3 million (2017: £2.6 million). The combined effect of all these movements enabled us to substantially reduce pre-exceptional operating losses in 2018 by £2.4 million to £1.4 million (2017: £3.8 million). Pre-exceptional losses before tax were £2.0 million (2017: £4.4 million).

The exceptional cost of £712,000 (2017: nil) arose from a post balance sheet event and relates to a full provision against a debt in Dubai from 2013 and 2014 and is explained further in note 4. Statutory losses before tax were £2.7 million (2017: £4.4 million).

During the year a convertible loan note for £4.0 million was issued at a fixed interest rate of 8%. This, in conjunction with the early renewal of its banking facilities with its senior lender, Royal Bank of Scotland ("RBS"), enabled the Group to consolidate its future bank funding solely with the RBS Group. It also enabled the Group to fully repay KBC Bank and reduce capital repayments, which in turn, allows for further investment into a recovering market. The loan notes are convertible into ordinary shares in Northbridge, at the discretion of the holders, at a conversion price of 125p.

Additionally, in June 2018, the Company placed a further 2 million ordinary shares to raise £2.5 million in new equity. Approximately £1.05 million of the proceeds from the placing was used to pay the outstanding deferred consideration due to the vendor of the Tasman Oil Tools companies in New Zealand. This payment was originally due on 7 January 2016 but had been deferred until 7 July 2018. Some of these funds, plus some additional borrowing, were also used to acquire a complementary hire fleet which became available as a result of the liquidation of a drilling tool rental competitor in South East Asia, for £3.0 million in December 2018.

The much-improved cash flow together with the placing of new equity has enabled gearing to be reduced to 23.8% (2017: 24.5%), despite the acquisition of the drilling tool hire fleet.

Crestchic Loadbanks and Transformers

The electrical equipment business of Northbridge manufactures, sells and rents loadbanks and transformers, and supplies two main markets. Firstly, the developed world, where it is focused on supporting the power reliability, renewables, and power security markets and secondly, emerging markets ("EM"), where it is mostly focused on resources, typically shipyards, oil and gas facilities and mines.

Total turnover during the period was £20.4 million (2017: £20.2 million), but a change in mix towards higher-margin rental saw gross profits rise by 5.9% to £9.5 million (2017: £9.0 million). Sales of manufactured units and service revenue were slightly down on the previous year at £8.4 million (2017: £9.0 million) but the underlying trend of enquiries and orders showed signs of improvement, and the year ended with the largest ever order book for the sale of manufactured equipment. This represents a sure sign of improvement from Crestchic's emerging overseas markets as well as a continued growth in its traditional power reliability market.

The business in the UK and Western Europe continues to perform well and the contract to supply the FIFA World Cup stadiums helped the rental revenue during the year.

Our business in the USA continued its good progress and is expected to provide a long-term growth opportunity for Crestchic. The relocation of underutilised equipment from the Asia-Pacific region has doubled our fleet size at minimal cost. Revenue from both sales and rental rose to £2.0 million (2017: £0.8 million). We continue to look for suitable trading partners for our rental operation in order to expand our footprint whilst minimising the overhead cost of operating in North America.

The continuing growth in data centres throughout Western Europe has given Northbridge two additional opportunities, firstly, in heat load management, by using loadbanks to simulate the heat from computer servers, and then secondly in managing and proving backup power sources. Global investment in this type of "big data" is likely to grow for many years to come.

The more recent growth in renewable power generation in advanced economies is continuing to gather pace and has created new markets for our equipment and services. This also represents another longer-term growth opportunity for the Company, and we are currently supporting this growth through the further technical development of our products.

Tasman Oil Tools

Our oil tool rental operations in Australia, New Zealand, Malaysia and the Middle East, which suffered badly during the downturn in the oil market over the last three years, have shown some good signs of an early recovery. Total revenue in the year was £6.6 million (2017: £5.4 million). Rental during the period increased 22.5% to £5.4 million (2017: £4.4 million). The strongest performance in this business segment was Australia, which showed an increase of overall revenue of 61.4% to £2.9 million (2017: £1.8 million) and we have continued to support this growth with further capital expenditure for specific contracts.

Current volumes, whilst low historically, have begun to make a significant difference to the Group's overall profitability, and particularly to our cash flows, with the Tasman businesses now close to break-even at an EBITDA level. Rental rates still remain depressed and are not expected to recover until 2020 at the earliest. The relative stability in crude oil prices currently being experienced by the industry will, in the longer term, encourage further exploration and production. By maintaining our infrastructure and hire fleet whilst cutting costs, the Company is strongly positioned for when market demand begins to recover more significantly.

The joint venture in Malaysia with our local partner, Olio Resources SDN BHD, started trading in earnest in 2018. Early results are encouraging, and the proportion of revenue generated by hiring Tasman tools into the joint venture is beginning to increase. Because of our improved trading position, and the re-financing earlier in the year, Tasman was able to purchase an entire and complementary hire fleet, at a significant discount to its new replacement value, from a distressed competitor and this, together with further modest capital expenditure, has enabled this momentum to continue.

The drilling tools acquired have also been deployed in the Tasman operations in New Zealand and Australia and we have been able to establish a further Tasman location in Singapore which will service the new customers that were acquired in Singapore, Thailand and Vietnam. It is hoped that this location will begin to trade profitably during 2019.

The joint venture's total revenue for 2018 was £2.1 million (2017: £0.4 million) and the cross-hire revenue attributed to Tasman SEA from the JV was £0.4 million (2017: £0.0m) and the after-tax loss included in these accounts is £0.4 million.

In the overall oil and gas market, supply and demand have appeared to reach an equilibrium following a sharp fall in crude prices in Q4 2018. This fall does not appear to have affected market activity significantly, as most of our customers' final investment decisions had been made earlier in the year, and the oil price has since recovered. In our particular area of the market, Southeast Asia and Australasia, gas and geothermal fluids play an important and growing part in the mix for businesses we supply. The outlook for both, over the short and medium term, is positive.

The need for further capital expenditure as the recovery takes hold has been much reduced by the opportunistic acquisition of a competitor's hire fleet in the year. This in turn has also reduced the average age of our combined rental assets and has enabled us to expand our footprint and services in Southeast Asia.

Outlook

The ongoing recovery in the oil market, coupled with a more stable crude oil price over the last 18 months, has improved confidence amongst the majority of Exploration and Production ("E&P") companies, which form an important part of our customer base.

The additional cashflow as a result of higher crude prices has enabled the oil majors and national oil companies to pay down debt and to start a return to modest levels of capital expenditure. In the deepwater sector of the Asia Pacific region alone, where we have a strong presence, the energy analysts, Wood MacKenzie, expect capital expenditure to rise from a low of US$3 billion per annum in 2017/18 to reach US$9 billion per annum by 2020/21. Other oil and gas analysts expect drilling rates to double in the same time scale. Whilst it is difficult to be precise, this impact is likely to be felt in the sectors that both Crestchic and Tasman supply, although the timing may be different in each industry.

We have seen some improvement in the important rental revenue of Tasman Oil Tools, albeit from a low base, and we expect this to continue in 2019 and beyond. The longer-term opportunities in the activities we supply in New Zealand, Australia and other countries in Southeast Asia are likely to continue to grow. We are very active in the LNG, natural gas and geothermal fluids E&P sectors which are expecting a demand boost as the nearby economies, including China, switch from a coal and oil energy base, to the more environmentally sustainable gas and renewables.

For the wider Group, the short-term opportunity is mostly focused towards a recovery in the activity and revenue levels of Tasman Oil Tools. However, we are not ignoring the longer-term growth of the power reliability market and the opportunities there are equally important, particularly in the USA.

For Crestchic, a return to activity in the oil market will also, in time, benefit the marine sector. The reducing levels of overcapacity in the oil and gas rig market, with substantial amounts of equipment retired or scrapped, has led to further investment planned in new rigs, tankers and LNG carriers. This is a key market for our products, and we should see some improvements over the next few years. Our services are generally engaged during the last element of power commissioning projects before the vessels are launched. The other part of Crestchic's business, which has been unaffected by the oil and gas downturn, is involved in power commissioning and reliability testing in Western economies.

The traditional use of loadbanks, to test "real-time" power output from standby power generators, has now been supplemented by their increasing use in data centres, distributed generation and frequency management. The growth of renewables will also lead to further fragmentation of the generating base, and will make the systems inherently less reliable, at a time in which uninterruptible power becomes even more important. Overall, the industries we serve are likely to continue to grow for years to come.

We have recently added further equipment and personnel to Crestchic's operation in North America. This market is potentially one of the largest in the world for our services and we are confident in its longer-term profitable future.

Northbridge is very well placed to benefit from the current recovery in all its markets. While remaining cash generative, we have completed our restructuring and now have a much lower cost base throughout the Group. Having retained all our operating bases during the downturn, and maintained relationships with all our customers, we expect to be able to exploit the high operational gearing inherent in our business model, and the expected additional revenue will support bottom line growth. We are now confident of the Group's profitable and growing future in the medium to long term.

FINANCIAL REVIEW

Revenue and profit before tax

The Group's revenues are derived principally from the rental of its hire fleet and also from the sale of manufactured equipment hence IFRS 15 has not impacted the results for the year. Notes 2 and 3 show the Group's revenue split by segment, geography and revenue type.

As many of the Group's costs are largely of a fixed nature in the short to medium term (with significant movements in the cost base being attributable to acquisitions, large capital expenditure and divestments) any revenue movement, however small, will be highlighted at the operating profit level. This operating gearing, along with a movement in sales mix towards rental in the year and tight cost control, enabled a 4.7% increase in sales to lead to reduction in a pre-exceptional operating loss of £2.4 million.

Rental revenue made up 65% of total revenue in 2018 compared to 61% in 2017. Rental revenue within Tasman increased by 23% even taking account of a 41% decrease in revenue in the Middle East where a strategic decision was made to cease low margin cross-hire work.

Pre-exceptional operating costs were £0.3 million lower in 2018 at £12.1 million (2017: £12.4 million). This was mainly due to a full year effect of some cost reductions from H2 2017 and a foreign exchange gain of £0.1 million against a £0.1 million loss in 2017. No new strategic cost reductions were implemented in 2018 as the business began to recover.

An exceptional cost was recognised in the year for £0.7 million (2017: nil). This relates to a full provision against a debt in Dubai from revenue recognised in 2013 and 2014. A more detailed explanation is included in note 4.

Net finance costs were largely unchanged from 2017 at £0.7million (2017: £0.6 million) which included £0.1 million of non-cash finance charges. Pre-exceptional losses before tax were reduced by £2.4 million to £2.0 million (2017: £4.4 million).

Earnings per share

The basic and diluted Loss Per Share ("LPS"), both of 8.9 pence (2017: 17.9 pence) have been arrived at in accordance with the calculations contained in note 6.

Balance sheet and debt

Total net assets at 31 December 2018 were £36.5 million compared to £35.7 million in 2017. The increase in net assets during the year is due to the increases in share capital, share premium and foreign exchange reserves more than offsetting the loss for the year after tax of £2.4 million.

Net assets per share at the year end are 132 pence (2017: 138 pence).

Hire fleet additions have risen to £4.5 million in the year (2017: £0.5 million) with substantial investment in Tasman including the purchase of the entire fleet of a competitor in liquidation in Asia. Property, plant and equipment decreased from £29.3 million to £28.9 million during the year due to net additions of £4.4 million and a positive movement of £0.6 million from the translation of assets held in foreign currency being more than offset by a depreciation charge of £6.4 million.

Inventory levels have increased during the year to £4.3 million (2017: £3.4 million) mainly due to an increase in finished goods of £0.7 million. This is a strategic move to hold inventory of Crestchic's more commonly sold and hired items to take advantage of short-timeframe opportunities, especially in North America.

Trade receivables have decreased from £7.3 million to £5.9 million in the year with reasonable collections and an increase in provisions.

Year end net debt (cash balances less financial liabilities) stood at £8.7 million (2017: £8.7 million) which includes £3.8 million debt convertible to equity at 125 pence per share. The Group has used cashflow, new debt and new equity to fund investment in the hire fleet as well as paying the final deferred consideration of £1.1 million for the acquisition of Tasman New Zealand.

Notwithstanding the investment seen during the year, the Group's leverage, as calculated by dividing net debt by pre-exceptional EBITDA, has decreased from 2.7 as at 31 December 2017 to 1.9 as at 31 December 2018. Excluding the convertible debt, the leverage is 1.1.

Cash flow

The Group continued to increase the cash generated from operating activities which totalled £4.3 million during the year (2017: £2.6 million).

The Group closely monitors cash management and prioritises the repatriation of cash to the UK from its overseas subsidiaries.

The net cash inflow from financing activities of £3.4 million (2017: outflow of £2.1 million) included the refinancing as well as £2.4 million net proceeds from the share issue in June. The inflow from financing activity was partly used to pay the remaining deferred consideration due on the acquisition of Tasman New Zealand of £1.1 million (2017: nil).

Tax expense

The overall tax credit for the year totalled £0.3 million (2017: charge of £0.2 million). This was made up of a tax charge of £0.4 million (2017: £0.8m) and a deferred tax credit of £0.7 million (2017: £0.6 million).

Losses relating to the Group's Australian entities have prudently not been recognised as a deferred tax asset at this balance sheet date, but the losses are available to be utilised against future profits. Any future recognition of a deferred tax asset will be dependent on these future profits by jurisdiction becoming more certain.

The Group manages taxes such that it pays the correct amount of tax in each country that it operates in, utilising available reliefs and engaging with local tax authorities and advisors as appropriate.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2018

All amounts relate to continuing operations.

CONSOLIDATED BALANCE SHEET

As at 31 December 2018

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2018

For the year ended 31 December 2017

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 31 December 2018

During the period the Group acquired property, plant and hire equipment with an aggregate cost of £4,732,000 (2017: £811,000) of which £20,000 (2017: £146,000) was acquired by means of finance leases. This includes £4,469,000 (2017: £542,000) of hire fleet additions of which £nil (2017: £nil) was acquired by means of finance lease. Cash and cash equivalents includes cash and cash equivalents as disclosed in current assets on the balance sheet and overdraft balances of £nil (2017: £730,000) held within financial liabilities.

1. ACCOUNTING POLICIES

1.1 BASIS OF PREPARATION OF FINANCIAL STATEMENTS

While the financial information included in the annual financial results announcement has been prepared in accordance with the recognition and measurement principles of International Financial Reporting Standards as endorsed for use in the European Union (IFRSs), this announcement does not contain sufficient information to comply with IFRSs.

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2018 or 2017, but is derived from those accounts. Statutory accounts for the year ended 31 December 2017 have been delivered to the Registrar of Companies and those for the year ended 31 December 2018 will be delivered following the company's annual general meeting.

The auditors have reported on those accounts; their reports were unqualified, did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports.

Their reports for the year end 31 December 2018 and 31 December 2017 did not contain statements under s498 (2) or (3) of the Companies Act 2006.

The accounting policies used in the 2018 are identical to 2017 except for the adoption of IFRS 15 and IFRS 9.

1.2 BASIS OF CONSOLIDATION

Where the company has control over an investee, it is classified as a subsidiary. The company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

De-facto control exists in situations where the company has the practical ability to direct the relevant activities of the investee without holding the majority of the voting rights. In determining whether de-facto control exists the company considers all relevant facts and circumstances, including:

- The size of the company's voting rights relative to both the size and dispersion of other parties who hold voting rights substantive potential voting rights held by the company and by other parties.

- Other contractual arrangements

- Historic patterns in voting attendance

The consolidated financial statements present the results of the company and its subsidiaries ("the Group") as if they formed a single entity. Intercompany transactions and balances between group companies are therefore eliminated in full.

The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the statement of financial position, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. They are deconsolidated from the date on which control ceases.

2. REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregation of revenues

The Group has disaggregated revenue into various categories in the following table which is intended to:

· depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic date; and

· enable users to understand the relationship with revenue segment information provided in note 3.

Revenue type and timing of transfer

of goods or service

Contract assets

Contract assets and contract liabilities are included within "trade and other receivables" and "trade and other payables" respectively on the face of the balance sheet. There were no contract liabilities as 31 December 2018 (2017: £nil).

They arise when revenue is recognised in line with IFRS 15 but invoices have not been raised. The majority of invoices are raised when revenue can be recognised in line with IFRS 15.

In 2017 revenue was recognised at a point in time for a sale of goods but it is was agreed to invoice the customer in thirty-six monthly instalments. The contract assets as at 31 December 2018 included £149,000 (2017: £229,000) in respect of this contract.

All other contract assets relate to short term delays in invoicing. Other than the £149,000 noted above, all amounts included within contract assets as at 31 December 2017 were transferred to trade receivables during 2018. Contract assets are not discounted given they are short term in nature.

Effect of the adoption of IFRS 15

There has been no material effect from the adoption of IFRS on the 2017 balances shown in these financial statements. Accrued revenue balances previously included within Prepayments have been reclassified as "contract assets" within "trade and other receivables".

3. SEGMENT INFORMATION

The Group currently has two main reportable segments:

· Crestchic loadbanks and transformers - this segment is involved in the manufacture, hire and sale of loadbanks and transformers. It is the largest proportion of the Group's business and generated 78% (2017: 79%) of the Group's revenue. This includes the Crestchic, NTX, Crestchic France, NME, CME, CAP, USA and China businesses; and

· Tasman oil tools- this segment is involved in the hire and sale of oil tools and loadcells and contributes 22% (2017: 21%) of the Group's revenue. This includes the TOTAU, TOTNZ, TOTAE, TOTSEA and the Group's 49% share of OTOT.

Factors that management used to identify the Group's reportable segments

The Group's reportable segments are strategic business units that offer different products and services.

Measurement of operating segment profit or loss, assets and liabilities

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies.

The Group evaluates performance on the basis of profit or loss before tax.

Segment assets and liabilities include an aggregation of all assets and liabilities relating to businesses included within each segment. Other adjustments relate to the non-reportable head office along with consolidation adjustments which include goodwill and intangible assets. All inter-segment transactions are at arm's length.

4. EXCEPTIONAL COSTS

An exceptional cost was recognised in the year for £712,000 (2017: nil) as a result of a post balance sheet event.

The exceptional cost relates to a full provision against a debt in Dubai from revenue recognised in 2013 and 2014. The contract with the customer stated that payment should be made on a "back-to-back" basis and the customer claimed not to have been paid. The legal advice received stated that "back-to-back" was not time unlimited and legal action commenced in early 2016. As at 31 December 2018 the Group had been successful at two court hearings and the full amount had been secured by the court. In late February 2019 the Court of Cessation ruled that the legal action was premature and the security on the full amount was released.

Although the customer has always acknowledged the debt and there are no signs that cast any doubt on the customer's ability to pay, the latest court judgement casts some doubt as to the enforceability of the debt. Due to this post balance sheet event, in line with IFRS 9, a full provision has been made against the debt. The Directors remain confident that the debt will be paid in full but appreciate enforcement may be difficult and that the timing of any receipts is uncertain. The Directors are still being advised as to the next steps to take to recover the debt.

The Directors believe that it is appropriate to disclose the provision resulting from the court's decision as an exceptional event.

5. INCOME TAX EXPENSE

Factors affecting tax charge for the year

The tax assessed for the year is different to the standard rate of corporation tax in the UK. The differences are explained below:

The standard rate of corporation tax in the UK is 19% since 1 April 2017. The rate will decrease to 17% from 1 April 2020.

6. EARNINGS PER SHARE

At the end of the year, the Company had in issue 1,819,451 (2017: 1,594,451) share options and £4,000,000 of convertible loan notes which can be converted to 3,200,000 (2017: nil) ordinary shares at a price of 125 pence per share which have not been included in the calculation of diluted EPS because their effects are anti-dilutive. These share options and convertible loan notes could be dilutive in the future.