Pressure Tech Regulatory News (PRES)

25 June 2019

Pressure Technologies plc

("Pressure Technologies" or the "Group")

2019 Interim Results

Pressure Technologies (AIM: PRES), the specialist engineering group, announces its interim results for the 26 weeks to 30 March 2019.

Financial Results*

● Group revenue up 59% to £14.5 million (2018: £9.1 million)

● Gross profit up 73% to £5.0 million (2018: £2.9 million)

● Adjusted operating profit** at £1.3 million (2018: loss £(0.1) million)

● Reported profit before tax of £0.1 million (2018: loss £(1.5) million)

● Reported basic earnings per share of 1.6p (2018: loss (5.5)p)

● Adjusted operating cash inflow*** of £0.7 million (2018: outflow £2.2 million****)

● Net banking facility debt of £7.9 million (£8.4 million at 31 March 2018; £5.7 million at 29 September 2018)

*All results presented are for continuing operations. Prior period income statements have been restated to exclude discontinued operations

**before M&A costs, amortisation and exceptional charges

***before exceptional cash costs

****including cash flow from discontinued operations

Operational Highlights

● Period of transition for the Group, led by Chief Executive, Chris Walters and his team, including operational management changes and progress made with organisational development and culture.

● Alternative Energy division divestment completed post period end, enabling focus on core specialist engineering activities in target markets.

● First delivery by Chesterfield Special Cylinders of customer orders for innovative projects in the emerging hydrogen energy sector.

● Growth continues in Integrity Management services, especially in-situ deployments, and the outlook for this high-margin area remains strong

● Restructuring and new leadership of the Precision Machined Components division will underpin the strategy for organic growth and drive operational efficiencies, cost savings and improved margins.

● Strategy review undertaken in March, confirming strategic focus areas and objectives that will deliver phased growth and create value over the next five years.

● Investment in new equipment of £0.6 million across the two divisions, with a further £2.7 million planned for this calendar year.

Chris Walters, Chief Executive of Pressure Technologies commented:

"I am pleased with the progress we have made over the past six months in what has proved a very busy period, one that signals a return to profitability for the Group.

The sale of our Alternative Energy division, which completed in June 2019, was a key milestone. We now have a clear strategic focus and are making good progress with the management, operational and cultural changes that will help accelerate organic growth and performance improvements in target markets.

Our results for the first half of the year reflect the delivery of major defence contracts and improving conditions in the oil and gas sector. We are pleased with the growth in our order book and the increasing diversity of our customers and products.

I have confidence in the outlook for the Group as we approach the next phase of our strategy."

For further information, please contact:

The information communicated in this announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No. 596/2014

COMPANY DESCRIPTION

Company description - www.pressuretechnologies.com

With its head office in Sheffield, the Pressure Technologies Group was founded on its leading market position as a designer and manufacturer of high-integrity, safety-critical components and systems serving global supply chains in oil and gas, defence, industrial gases and hydrogen energy markets.

The Group has two divisions, Precision Machined Components and Chesterfield Special Cylinders.

Precision Machined Components (PMC) - www.pt-pmc.com

● Precision Machined Components includes the Al-Met, Roota Engineering, Quadscot Precision Engineers and Martract brands.

Chesterfield Special Cylinders (CSC) - www.chesterfieldcylinders.com 

● Chesterfield Special Cylinders, Sheffield, includes CSC Deutschland GmbH and Chesterfield Special Cylinders Inc.

CHAIRMAN'S STATEMENT

I am pleased to present our unaudited interim results for the 26 weeks to 30 March 2019. 

First-half trading reflects the phasing of defence projects in our Chesterfield Special Cylinders (CSC) division and growing momentum in the oil and gas market for our Precision Machined Components (PMC) division, with overall Group revenue from these continuing operations increasing by 59% to £14.5 million (2018: £9.1 million) and delivering a 73% increase in gross profit to £5.0 million (2018: £2.9 million). 

Overall, the Group has delivered an adjusted operating profit for the period of £1.3 million, compared with a loss of £0.1 million in the first half of 2018 and a full year profit for 2018 of £1.0 million.

On 4 June 2019, we were pleased to complete the sale of our Alternative Energy division to Vancouver-based Creation Capital Corporation LLC, now renamed and listed as Greenlane Renewables Inc. ("Greenlane"). This strategic divestment now gives the Group a clear focus on the growth and development of its core specialist engineering activities. We remain a supportive shareholder in Greenlane and look forward to realising value from delivery of their vision for the business in the medium term.

Balance Sheet and Cash Flow

Net banking facility debt at 30 March 2019 was £7.9 million, up from £5.7 million at 29 September 2018. This increase reflects the delayed disposal of the Alternative Energy division, which completed post period end, the phasing of large defence projects in CSC and a net investment in PMC working capital. 

Finance leases at 30 March 2019 totalled £1.4 million, up from £1.1 million at 29 September 2018 the increase supporting capital investment in the PMC division in the first half.

Leadership and Strategy

This has been a period of transition for the Group, led by Chief Executive, Chris Walters and his team. A strategy review was undertaken during the first half of the year which confirmed the areas of strategic focus for the continuing divisions that will deliver growth and create value in three phases over the next five years. Priorities for the first phase have been to complete the divestment of non-core divisions, to return the Group to profitable trading and to establish plans, leadership and resources for organic growth in the second phase.

Key initiatives covering sales effectiveness, production planning and efficiency, engineering processes and supply chain management will drive the delivery of organic revenue growth and margin improvement in the second phase from Autumn this year. The initial priority is to demonstrate the organic growth potential of the refocused Group, but we will continue to appraise growth and development through acquisition, where we see opportunities to advance our scale, technical capability and reach into new sectors and regions, as part of a third strategic phase. 

Central Group support in Finance, Human Resources, IT and QHSE remain fundamental to delivering the Group strategy and maintaining sustainable growth. We expect to realise the benefits of this investment in professional support over a greater scale in our core specialist engineering divisions as they grow.

There is a positive dynamic to the leadership team that is facilitating organisational development and cultural change, driving collaboration between operational teams across the Group and supporting overall performance improvement.

Board Change

On 6 June 2019, we announced the resignation of Alan Wilson as Non-Executive Chairman. The Directors will be undertaking a process to make new Non-Executive Director appointments to the Board in due course.

Precision Machined Components

Total external revenue increased by 29% to £6.8 million (2018: £5.3 million), operating profit increased by 24% to £0.8 million (2018: £0.6 million), but return on sales decreased by 0.5 percentage points to 11.3% (2018: 11.8%). 

Throughout the first half of this year, we have seen improving activity and sentiment in the oil and gas market, evidenced by increasing enquiry levels and order intake. Demand for highly specialised drilling, production and valve components from new and existing OEM customers has increased sharply in this period, driven by the continuing recovery in global exploration and production capex, notably for engineering projects in South America, West Africa and the North Sea regions. Oil field developments in the Middle East are also showing positive signs of growth in opex and demand for wear-resistant flow control parts.

Order intake reached record levels during this half-year, with the order book being 83% higher at the end of March 2019 than it was a year ago. Lead times have increased in the supply chain for materials and subcontracted services due to capacity constraints. The sharp upturn in order intake and customer demand for shorter lead times have strained the PMC subsidiary companies in this period and adversely impacted operating performance and margins, most notably in the Al-Met and Quadscot subsidiaries.

To address this, management changes and a new divisional operating model have been implemented, replacing the acquired subsidiary structure and local Managing Director roles with centralised leadership and control of production and engineering, sales and customer management, quality and purchasing functions. These changes have been made to take full advantage of scale and diversity in the division and they underpin our strategy for organic growth, helping to drive operational efficiencies, cost savings and margin improvements.

The recent introduction of advanced machining centres, specialist production engineers and centralised material purchasing will help reduce lead times and improve margin performance in the medium-term. Investment in the sales team and key account management will help drive sales and new customer acquisition and ensure that we maintain good visibility of customer project pipelines to facilitate production planning and resourcing.

Over the short term, strategic diversification of customers and manufactured products will result in reduced return on sales as a result of the changing mix of revenues, new customer onboarding and time invested in design development.

Investment in new equipment was £0.3 million in the first half of this year and a further £1.7 million is planned for this calendar year, along with investment in IT infrastructure and an upgraded manufacturing resource planning system.

Chesterfield Special Cylinders

Total revenue in the first half almost doubled to £7.7 million (2018: £3.9 million) and operating profit recovered to £1.4 million from a break-even position in H1 2018. Return on sales was 17.9% (2018: break-even).

As the leading global supplier of specialist cylinders to the world's NATO-friendly navies, revenue from this market is driven by global defence programmes and this half-year performance reflects the phasing of programmes which ramped up during the second half of 2018. Our primary focus is on increasing project margins through stronger commercial and project management and through improved productivity and supply chain efficiencies.

Major defence programmes are often subject to changing schedules and technical variations outside our control. The volume of defence work in the second half is expected to be lower than in the first, with revenue weighted to other sectors that attract lower gross margins. As a result, return on sales in the second half is expected to be lower than for the first.

In the offshore oil and gas sector, air pressure vessel demand for drillship and semi-submersible projects is expected to start a recovery as late as 2021, due to meaningful over-supply of these offshore units. Despite this, we recently secured two major orders for delivery in 2020 and delivered one project in the first half of 2019.

Growth in the emerging hydrogen energy supply chain is a key area of focus, with two orders for large high-pressure ground storage cylinders secured over the past year for projects in the UK and overseas. With a dedicated hydrogen solutions team and extensive sales pipeline, we are well positioned to secure a strong share of this market as it expands further in the UK and globally. 

Integrity Management services has seen another period of growth, principally driven by increased demand for in-situ inspection, maintenance and recertification projects from naval and oil and gas customers. This has driven further recruitment and specialist training in this strategic growth area.

Investment in new equipment was £0.3 million in the first half and a further £1.0 million is planned, along with investment in IT infrastructure and an enterprise resource planning system.

On 6 March 2019 we announced that Chesterfield Special Cylinders submitted a plea of not guilty to a charge brought by HSE pursuant to the Health and Safety at Work Act 1974. The Company emphatically denies the charge brought by HSE and will deliver a strong defence. The case was referred to Sheffield Crown Court and has been listed for trial.

Outlook

Favourable trading conditions in global oil and gas markets that PMC serves are expected to remain throughout the rest of this calendar year and continue through 2020. We are pleased with the progress being made to expand and diversify our customer base, product range and regional coverage in this sector, underpinning optimism for further organic growth in the division. We expect the impact of management changes and the transition to a divisional operating structure in PMC to take the remainder of the financial year to complete. We expect a lower return on sales from higher revenue through this transitional period.

For the CSC division, lower revenues from defence contracts over the short term will reduce margins in the second half of the year. Air pressure vessel demand for offshore oil and gas projects remains uncertain over the medium term and contracts are likely to be sporadic ahead of an anticipated recovery from 2021. Growth continues in Integrity Management services, especially in-situ deployments, and the outlook for this high-margin area is strong over the next couple of years. Recent successes in the hydrogen energy market have positioned us well to secure further potentially significant projects in this exciting growth sector.

The Board is confident that the performance for the full year will be in line with management expectations. Operational management changes, clear strategic focus for the remaining divisions and improving market conditions all underpin the Board's confidence in the outlook for the Group. 

Condensed Consolidated Statement of Comprehensive Income

For the 26 weeks ended 30 March 2019

Condensed Consolidated Balance Sheet

As at 30 March 2019

Condensed Consolidated Statement of Changes in Equity

For the 26 weeks ended 30 March 2019 

For the 26 weeks ended 31 March 2018

Condensed Consolidated Statement of Changes in Equity (continued)

For the 52 weeks ended 29 September 2018

Condensed Consolidated Cash Flow Statement

For the 26 weeks ended 30 March 2019

Notes to the Condensed Consolidated Interim Financial Statements

1. Basis of preparation

The Group's interim results for the 26 weeks ended 30 March 2019 are prepared in accordance with the Group's accounting policies which are based on the recognition and measurement principles of International Financial Reporting Standards ("IFRS") as adopted by the EU and effective from 29 September 2018. As permitted, this interim report has been prepared in accordance with the AIM rules and not in accordance with IAS34 "Interim financial reporting" and therefore the interim information is not in full compliance with IFRS. The principal accounting policies of the Group have remained unchanged from those set out in the Group's 2018 annual report and financial statements, with the exception of the adoption of IFRS 15 'Revenue from Contracts with Customers' and IFRS 9 'Financial Instruments' as detailed below.

The Group's 2018 financial statements for the 52 weeks ended 29 September 2018 were prepared under IFRS. The auditor's report on these financial statements was unmodified and did not contain statements under Sections 498(2) or (3) of the Companies Act 2006 and they have been filed with the Registrar of Companies.

The consolidated financial statements are prepared under the historical cost convention as modified to include the revaluation of financial instruments.

The financial information for the 26 weeks ended 30 March 2019 and 31 March 2018 has not been audited or reviewed and does not constitute full financial statements within the meaning of Section 434 of the Companies Act 2006. The unaudited interim financial statements were approved by the Board of Directors on 24 June 2019.

2. New Standards adopted as at 30 September 2018

· IFRS 15 'Revenue from Contracts with Customers'

IFRS 15 replaces IAS 18 'Revenue', IAS 11 'Construction Contracts' and several revenue-related interpretations. The new standard has been applied retrospectively without restatement as it had no material impact to retained earnings.

Continuing revenue arises mainly from the manufacture of pressure containment products and components and related services in the Group's core sectors which are Oil and Gas, Defence, Industrial Gases and Hydrogen energy.

To determine whether to recognise revenue, the Group follows a 5-step process:

· Identifying the contract with a customer

· Identifying the performance obligations

· Determining a transaction price

· Allocating the transaction price to the performance obligations

· Recognising revenue when/as performance obligation(s) are satisfied

Revenue is recognised either at a point in time or over time, when or as the Group satisfies performance obligations by transferring promised goods or services to its customers.

The Group recognises contract liabilities for consideration received in respect of unsatisfied performance obligations and reports these amounts as other liabilities in the statement of financial position. Similarly if the Group satisfies a performance obligation before it receives the consideration, then it will recognise either a contract asset or a receivable in its statement of financial position.

IFRS 15 does not include any guidance on how to account for loss-making contracts. Accordingly, such contracts are accounted for using the guidance in IAS 37 'Provisions, Contingent Liabilities and Contingent Assets'.

Under IAS 37, the assessment of whether a provision needs to be recognised takes place at the contract level and there are no segmentation criteria to apply. As a result, there are some instances where loss provisions recognised in the past have not been recognised under IFRS 15 because the contract as a whole is profitable. In addition, when two or more contracts entered into at or near the same time are required to be combined for accounting purposes, IFRS 15 requires the Group to perform the assessment of whether the contract is onerous at the level of the combined contracts. The Group also notes that the amount of loss accrued in respect of a loss-making contract under IAS 11 takes into account an appropriate allocation of construction overheads. This contrasts with IAS 37 where loss accruals may be lower as they are based on the identification of 'unavoidable costs'.

2. New Standards adopted as at 30 September 2018 (continued)

The Group also generates additional revenues from service and maintenance contracts. Revenue on these maintenance and service agreements is recognised in accordance with IFRS 15. Revenue is recognised on a straight-line basis in accordance with the stage of completion of the maintenance or service agreement.

· IFRS 9 'Financial Instruments'

IFRS 9 replaces IAS 39 'Financial Instruments: Recognition and Measurement'. It makes major changes to the previous guidance on the classification and measurement of financial assets and introduces an 'expected credit loss' model for impairment of financial assets.

When adopting IFRS 9, the Group has applied transitional relief and opted not to restate prior periods.

The adoption of IFRS 9 has impacted the following:-

· the impairment of financial assets applying the expected credit loss model. This affects the Group's trade receivables. For contract assets arising from IFRS 15 and trade receivables, the Group applies a simplified model of recognising lifetime expected credit losses as these items do not have a significant financing component.

The financial assets are initially measured at fair value and subsequently measured at amortised cost.

As the accounting for financial liabilities remains largely the same under IFRS 9 compared to IAS 39, the Group's financial liabilities were not impacted by the adoption of IFRS 9. The Group's financial liabilities include borrowings and trade and other payables.

2.1 Standards and interpretations not yet applied

The following standard will be effective in future periods:

· IFRS 16 Leases (effective date 1 January 2019)

IFRS 16 will not come into effect until the 2020 year end, therefore the impact assessment will be done nearer the time. However, it will result in current operating leases being recognised on the balance sheet.

3. Discontinued operations

A discontinued operation is a component of the Group that has either been disposed of or meets the criteria to be classified as held for sale and represents a separate major line of business or geographical area of operations or is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations.

The results of discontinued operations are analysed separately from continuing operations on the face of the Statement of Comprehensive Income and the related notes. Where there is a newly identified discontinued operation in the year, the prior year Statement of Comprehensive Income and the related notes are restated as if the operation was classified as discontinued at that time.

The results of discontinued operations include the post-tax profit or loss of the discontinued operation along with the post-tax gain or loss recognised on the re-measurement of the non-current assets of the discontinued operation to fair value less costs to sell, and the subsequent gain or loss on disposal of the discontinued operation.

4. Segmental analysis and Earnings before Interest, Taxation, Depreciation and Amortisation (EBITDA)

Revenue by destination - continuing operations

Revenue by sector - continuing operations

4. Segmental analysis and Earnings before Interest, Taxation, Depreciation and Amortisation (EBITDA) (continued)

Revenue by activity - continuing operations

The Operating profit/(loss) by activity is stated before the allocation of Group management charges which are included within 'Unallocated central costs'.

4. Segmental analysis and Earnings before Interest, Taxation, Depreciation and Amortisation (EBITDA) (continued)

Earnings before interest, taxation, depreciation, and amortisation (EBITDA) - continuing operations

Amortisation on acquired businesses as set out above consists of the amortisation charged on intangible assets acquired as a result of business combinations in previous periods.

5. Amortisation and M&A related exceptional items

M&A related exceptional items and amortisation of intangible assets are shown separately in the Condensed Consolidated Statement of Comprehensive Income. A breakdown of those costs can be seen below.

6. Other exceptional charges

Items that are material either because of their size or their nature, or that are non-recurring are considered as exceptional items and are disclosed separately on the face of the Condensed Consolidated Statement of Comprehensive Income.

An analysis of the amounts presented as exceptional items in these financial statements is given below:

The reorganisation costs relate to costs of restructuring across the Group. They are recognised in accordance with IAS 19.

Given the non-trading nature of these costs, the Directors consider it appropriate to disclose these as exceptional items. 

7. Taxation

8. Results of discontinued operations

Engineered Products Division

On 7 June 2018, and as separately communicated to Shareholders on that date, the Group completed the disposal ofthe entire issued share capital of its subsidiary, Hydratron Limited, to Pryme Group Limited, majority owned by Simmons Private Equity LP. This business was reported by the Group as the Engineered Products segment.

The loss for the period ended 30 March 2019 relating to this division was £nil (period ended 31 March 2018: £1.9m, period ended 28 September 2018: £2.1m)

Alternative Energy Division

In the 12 June 2018 interim statement, the Board communicated they were considering a number of strategic options for the Alternative Energy Division and on 10 December 2018 confirmed that a binding letter of intent with Creation Capital Corp LLC to sell its wholly owned subsidiary, PT Biogas Holdings Limited, the holding company for its Alternative Energy Division.

On 4 June 2019, and as separately communicated to Shareholders on that date, the Group completed the disposal ofthe entire issued share capital of its subsidiary PT Biogas Holdings Limited.

The Alternative Energy Division assets at 30 March 2019 have been classified for sale in accordance with IFRS 5 'Disposal of subsidiaries, businesses and non-current assets'. These assets comprise:

8. Results of discontinued operations (continued)

As the fair value of the consideration, less costs to sell, is greater than the carrying value of the assets held for sale there is no indicator of impairment at the balance sheet date.

The loss for the period ended 30 March 2019 relating to this division was £2.3m (period ended 31 March 2018: £1.6m, period ended 28 September 2018: £1.9m)

9. Earnings/(loss) per ordinary share

The calculation of basic earnings per share is based on the earnings attributable to ordinary shareholders divided by the weighted average number of shares in issue during the period.

The calculation of diluted earnings per share is based on basic earnings per share, adjusted to allow for the issue of shares on the assumed conversion of all dilutive options.

Adjusted earnings per share shows earnings per share, adjusting for the impact of M&A costs, the amortisation charged on intangible assets acquired as a result of business combinations, any exceptional items, and for the estimated tax impact, if any, of those costs. Adjusted earnings per share is based on the profits as adjusted divided by the weighted average number of shares in issue.

For the 26 week period ended 30 March 2019

The Group adjusted earnings/(loss) per share is calculated as follows:

9. Earnings/(loss) per ordinary share (continued)

For the 26 week period ended 31 March 2018

The Group adjusted earnings/(loss) per share is calculated as follows:

For the 52 week period ended 29 September 2018

9. Earnings/(loss) per ordinary share (continued)

For the 52 week period ended 29 September 2018

The Group adjusted earnings/(loss) per share is calculated as follows:

10. Reconciliation of net borrowings

During the period the bank committed to extend the facility termination date to 30 April 2020. Accordingly, the directors

have concluded that it is appropriate to present the loan as due for repayment after one year.

11. Contingent liabilities

Following the fatal accident at Chesterfield Special Cylinders Limited ("CSC") in June 2015, on 8 February 2019 upon the conclusion of their investigation, the Health and Safety Executive ("HSE") advised CSC that it intended to prosecute CSC in relation to the accident. During the preliminary hearing held on 6 March 2019 at Sheffield Magistrates Court, CSC submitted a plea of not guilty to a charge brought by HSE pursuant to the Health and Safety at Work Act 1974. The Company emphatically denies the charge brought by HSE. The case was referred to Sheffield Crown Court and has been listed for trial. The Company continues to take legal advice on this matter.

On 1 February 2016 the Sentencing Council's new "Health and Safety Offences, Corporate Manslaughter and Food Safety and Hygiene Offences Definitive Guideline" (2016) came into force. The guidelines set a range of fines dependent on the levels of harm and culpability. These levels are assessed by the Judge when sentencing and not at the time of charges being brought. At this time, due to the nature of the sentencing guidelines it is not possible to determine with any degree of certainty what, if any, financial penalties may be levied on CSC or any other group company as a result of this charge. At such time as the quantum and likelihood of any penalty is able to be reliably determined, further disclosure or provision will be made in accordance with IAS 37 "Provisions, Contingent Liabilities and Contingent Assets". 

12. Dividends

No final or interim dividend was paid for either of the 52 week periods ended 30 September 2017 or 29 September 2018. No interim dividend for the 52 week period ending 28 September 2019 is proposed.

A copy of the Interim Report will be sent to shareholders shortly and will be available on the Company's website: www.pressuretechnologies.com.

13. Post Balance Sheet event

On 4 June 2019, and as separately communicated to Shareholders on that date, the Group completed the disposal ofthe entire issued share capital of its subsidiary, PT Biogas Holdings Limited, which was the holding company for the Group's Alternative Energy Division, to Creation Capital Corp LLC, a capital pool company listed on the TSX Venture Exchange. The business was previously reported by the Group as the Alternative Energy Division.

Following the conclusion of the private placement by Creation Capital Corp LLC, now renamed Greenlane Renewables Inc. ("Greenlane"), the final consideration for the sale of £10.1 million comprised:

· £2.0 million cash;

· £2.0 million of Consideration Securities in Greenlane, representing a 21% holding after satisfaction of certain fees and completion incentives; and

· £6.1 million by way of a promissory note. The Promissory Note will (i) be denominated 50 per cent. in pounds sterling and 50 percent in Canadian dollars; (ii) mature 48 months from Completion; (iii) bear interest at the rate of 7% per annum and (iv) be secured by a pledge of all of the issued and outstanding Greenlane Ordinary Shares and all of the assets of Greenlane.

As not all costs of completion have been received as of the date of these statements, the following table shows the estimated consolidated group profit associated with the disposal:

At an entity level in the Company financial statements, after the write off of £12.1 million intercompany debt, the provisional loss on disposal of the investment in PT Biogas Holdings Ltd is £8.4 million.