PTD.L Regulatory News (PTD)

24 March 2020

Pittards plc

("Pittards" or "the Group")

Full year results for the year ended 31 December 2019

Pittards plc, the specialist producer of technically advanced leather and luxury leather goods for retailers, manufacturers and distributors today announces its results for the year ended 31 December 2019.

Highlights - Year ended 31st December 2019:

· Revenue £22.3m (2018: £28.5m)

· Gross margin increased to 30.9% (2018: 25.1%)

· PBT increased to £0.6 m (2018: £0.4m)

· EBITDA increased to £2.0 m (2018: £1.8m)

· Net assets £17.5 m (2018: £17.8m*restated for deferred tax)

· Repeat orders from both interiors and big shoe markets

· Further establishment of Ethiopia as a shoe manufacturer

Stephen Yapp, Chairman, commented: "We have come a long way this year; achieving expectations despite weaker global demand and, in entering the strategically important interiors and large shoe markets, changing the shape of our business.

We are committed to optimising and growing our business with all our customers and accordingly continually strive to create innovative and high-quality products across all the markets we operate in. Aligned with our strategic priorities, we are delivering predominantly hide-related new products to a wider range of customers, creating a more balanced portfolio.

We entered 2020 as a more diverse business, with improved margins and increased flexible manufacturing facilities, which is set to take full advantage of its markets. However, the outlook for the current year is uncertain due to the impact of Coronavirus (COVID-19) and has started with reduced demand whilst we the board are acitvely monitoring the situation on a frequent and regular basis, and have contingencies in place to address the evolving situation.

Looking forward, the Board has actively been considering the payment of dividends and commencement of a share buyback program. This will be revisited once the current global uncertainties connected to Coronavirus (COVID-19) are resolved sufficiently".

For further information, please contact:

Pittards PLC - www.pittards.com

Stephen Yapp, Chairman +44 (0) 1935 474 321

Reg Hankey, CEO

Richard Briere, CFO

WH Ireland Limited - www.whirelandcb.com

Mike Coe, Chris Savidge - +44 (0) 117 945 3472

This announcement includes inside information as defined in Article 7 of the Market Abuse Regulation No. 596/2014 and is disclosed in accordance with the Company's obligations under Article 17 of those regulations

Chief Executive's statement

During the year we achieved several milestones including delivering new products to our existing customer base, entering new markets and extending our manufacturing capabilities in Ethiopia.

Highlights - Year ended 31 December 2019:

· Revenue £22.3m (2018: £28.5m)

· Gross margin increased to 30.9% (2018: 25.1%)

· PBT increased to £0.6 m (2018: £0.4m)

· EBITDA increased to £2.0 m (2018: £1.8m)

· Net assets £17.5 m (2018: £17.8m *restated for deferred tax)

· Repeat orders from both interiors and big shoe markets

· Further establishment of Ethiopia as a shoe manufacturer

As a result of continued weak global demand for leather and related goods, revenue reduced to £22.3m. The ratio of hides and finished product to our core skins business changed significantly from 48% to 60%. The change in shape of business, is aligned with the strategic priorities of the business to achieve a more balanced portfolio, specifically the inroads made in Ethiopia in shoe production and sales, along with UK sales into automotive and aviation.

Cost management was a key focus of the year in which extra disciplines were introduced and there was a targeted headcount reduction of over 400 employees. In addition, we benefited from favourable raw material pricing and changed our buying protocols. This has left us in a leaner but scalable position with a change of focus and the appropriate expertise to meet specific clients' requests. Consequently, the gross margin improved for the second consecutive year to 30.9% (2018: 25.1%) and EBITDA increased to £2.0m (2018: £1.8m) and PBT to £0.6m (2018: £0.4m).

Inventory increased to £17.3m, largely reflecting stock of lower quality skins which amounted to £3.2m (2018: £2.8m) of inventory. There was further pressure due to faster than expected global weakening in demand for core business, bulk sampling, growth in orders for new products, particularly shoe production in Ethiopia and developing automotive channels. Our counter measures included a substantial reduction in capacity by decreasing average headcount to 1,224 (2018: 1,692). We are experiencing some low material prices and have recalibrated our procurement. Finally, we have access to opportunities to reduce partially processed stock from Ethiopia and also reprocessing of existing leather inventory.

Net debt remained at a similar level to half year at £9.6m as the shape of the business necessitated increased debtor days and working capital to support new business opportunities. As disclosed in note 3,our banking facilities are to be renewed on similar terms until March 2021, pending receipt of formal paperwork. Headroom on facilites at year end was £2.6m.

Currency was favourable for 2019 although average rates were little changed on 2018. The group has hedged between 50-70% of its exposure to future dollar movements to March 2021, with an average rate of $1.29.

Over the past two years we have invested £1.2m in machinery to improve our efficiency and expand our skill set, particularly in Ethiopia for shoe manufacturing. We are anticipating modest further investment over the next twelve months at much reduced levels to 2019.

Performance measurement of all investments remain key and during the year Return on Capital Employed (ROCE) was 4.2%. This has decreased from 5.2% in 2018 as our closing debt position was higher in 2019. However, we progressed closer to our target to deliver returns ahead of our Weighted Average Cost of Capital of 4.9%.

Market view

Numerous specific global factors continued to impact the demand for leather, principally China/US tarriffs, general economic weakness, and more recently Coronavirus (COVID-19). Brexit fears have also impeded a more orderly market. Overall the trend of global demand over the past few years, for both finished hides and skins, has been downward. Most recent figures covering 2019 show a decline in value of 2.5% and 5% respectively. Over the period 2015 to 2018, finished hide volumes declined 12% and skins declined 26%.

Some of the markets we operate in are also experiencing difficult trading conditions due to specific trends or factors. Most notably the car industry, where global sales are predicted to decrease by 5% compared to 2019. This is likely to be further exacerbated by the slowdown in China caused by the Coronavirus (COVID-19) outbreak. We anticipate demand picking up in the second half of the year. The footwear market is experiencing the continued popularity of athleisure styling which typically uses less leather, with an increasing acceptance of synthetic fossil-fuel derived materials as a substitute. 

Notwithstanding the challenges faced by these industries, interesting opportunities in these markets are presenting themselves for bespoke, innovative and high performance products together with the differentiated service and collaborative relationship approach that we offer.

Operations

During the year we responded to the lower levels of volume in our skin products and the need to increase our skill set in the production of whole hides. A Chief Technical Officer was appointed, the central team restructured and headcount in certain areas reduced. Alongside better financial discipline across the business, this has had the overall effect of lowering the Group's operating costs whilst providing a better fit to support operations and strengthen the divisional leadership.

Since its inception, the operations in Ethiopia have focused on the production of work and dress gloves. This year was especially challenging as volumes for work gloves signifcantly reduced and an important customer changed a product to include more synthetic material rather than leather. Alongside the production of shoe leather for Vivobarefoot and Soul of Africa, we have demonstrated our broader manufacturing capability in finished product. This has been followed by increasingly sizeable orders and whilst a lower margin market, the volumes in question are starting to compensate for the reduction in gloves and will be aggressively pursued as part of our growth strategy.

As previously mentioned, skin volumes were down in the UK, however whole hides production rose during 2019. This was largely as a result of our first meaningful sales into the automotive market. We remain convinced of the growth opportunities of the interiors markets and are actively in dialogue with other automotive and aviation manufacturers. A large shoe brand also placed initial orders for delivery in the first quarter of 2020. A number of further opportunities in both of these markets are progressing.

As part of our strategy the business has been restructured to two divisions in Ethiopia and the UK and the role of CTO formalised. Following the diversification of the business and our subsequent expansion of manufacturing capabilities, the Board have decided that in recognition of their importance to the business, Jon Loxston (CTO) and Tsedenia Mekbib (MD Ethiopia) will be appointed Associate Directors of the PLC Board.

Sustainable business

With our manufacturing operations and global footprint, it is important that we continue to run our business responsibly and manage our environmental, social and governance responsibilities. We take pride in the positive contribution we make for some of our customers, staff and wider stakeholders. As an example of our commitment to sustainable manufacturing, the Ethiopian tannery has a sophisticated water treatment facility at the forefront of managing waste responsibly. Furthermore, as part of a nationwide reforestation initiative in Ethiopia, Pittards employees planted 7,000 trees in 2019.

Summary outlook

This was a year of delivery against clear strategic priorities. As we strive to stay at the forefront of our industry for innovation and quality, we have embraced the need to adapt our business model and broadened our capabilities whilst evolving our product offering.

Our competence in performance leather for gloving and footwear markets continues to be important and presents opportunities. This has been complemented by becoming proficient in finished shoe manufacturing in Ethiopia and making inroads into the interiors markets by increasing the use of whole hides across the business.

Clearly, the global Coronavirus (COVID-19) pandemic will have an effect on business volumes during 2020. The Group has substantial inventories that can be utilised to support customers who may need more flexible supplies if their logistics become strained.

Whilst recognising these external macro-economic factors, we are starting to achieve a more stable portfolio across a broader range of customers, together with opportunities that enable us to look ahead positively when market conditions stabilise.

Reg Hankey

Chief Executive Officer

24 March 2020

Consolidated Balance sheets as at 31 December 2019

Statement of cashflows for the year ended 31 December 2019

Statement of changes in equity for the year ended 31 December 2019

This preliminary announcement, with extracts from our full report was approved by the board of directors and authorised for issue on 24th March with extracts of notes to the accounts below.

1. Basis of preparation

The consolidated financial statements have been prepared on a going concern basis and in accordance with International Financial Reporting Standards ("IFRS") including International Accounting Standards ("IAS") and IFRS Interpretations Committee ("IFRS IC") interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under accounting standards as adopted for use in the EU.

The information in this preliminary statement has been extracted from the audited financial statements for the years ended 31 December 2019 and 2018 and as such, does not constitute statutory accounts within the meaning of s434 of the Companies Act 2006. A full annual report for the year ended 31 December 2018 on which the auditor has issued an unqualified audit report, has been delivered to the Registrar of Companies. The Group's annual report for 2019, on which the auditors have issued an unqualified audit report, will be delivered to the Registrar of Companies in due course. No statement has been made by the auditor under Section 498(2) or (3) of the Companies Act 2006 in respect of either of these sets of accounts.

2. Earnings per ordinary share

3. Taxation

In accordance with the requirements of IAS12, the directors considered the potential utilisation of the deferred tax asset and have taken a prudent view to recognise a £0.1m asset (2018: de-recognised £1.9m). This has no effect on the Group's operating performance, cash, debt or the Group's outlook, which remains unchanged.

4. Going concern

The Group and Company meet their day to day working capital requirements through their bank facilities. The banking relationship with Lloyds Bank remains strong. Since the year end our expiring banking facilities have been subject to discussions on their revision and renewal; agreement has been reached and formal paperwork is in the process of being prepared for the period ended 31 March 2021. In the light of the ongoing COVID-19 challenges the Board has sensitised its forecasts and projections for the next 12 months to take account of possible changes in trading performance in order to determine when and to what extent additional measures may be necessary. Sensitivity analysis has been performed to reflect a reduction in demand of up to 40% to August, with an ongoing reduction of 10% for the following seven months to March 2021. The model also takes into account accessible savings.

Notwithstanding the recovery of our order book in March 2020, if the current crisis is more severe or prolonged than in our model, there could be a material uncertainty about the ability of the business to continue as a going concern and, therefore, the Board will maintain a close eye on performance to identify whether any further action becomes necessary to protect the business. Based on the above and information available to the Board at the date of approval, the Group and Company continue to adopt the going concern basis in preparing these financial statements.

5. Prior year restatement

Deferred tax, amounting to £0.648m, in relation to the temporary timing difference caused by the revaluation of buildings in Ethiopia, was incorrectly omitted from the net assets of the group at 1 January 2018. As a result the opening reserves at 1 January 2018 have been restated along with the deferred tax provision. There has been no impact on the previously reported consolidated income statement.

6. Cash generated from operations

Additional information

Copies of the full 2019 Annual Report will be available on the company's website within 5 working days at www.pittards.com. 

Further copies may be obtained by contacting the Company Secretary at Pittards plc, Sherborne Road, Yeovil, Somerset, BA21 5BA.

The annual general meeting is to be held at the registered office on 14 May 2020 at 12pm.