Synectics Regulatory News (SNX)

5 Nov 2009 07:00



Quadnetics Group plc

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

Trading Update

Quadnetics Group plc, a leader in advanced surveillance technology and security networks, provides the following update on operational restructuring, trading and the outlook for the current financial year.

Group Operational Structure

As previously reported, Quadnetics put in place a new operational structure on 1st June 2009. As a consequence, major changes are being implemented across the current financial year. 

In October, the Company confirmed that the operational activities of the security integration business based in Nottingham and Watford, which employs approximately 160 people, will be consolidated. Opportunities have been identified for further structural cost reductions, and these have been incorporated into the implementation plan. The consolidation is underway and proceeding in accordance with the original timetable.

The manufacturing activities of Synectics' Defence business, based in Tewkesbury, have been successfully consolidated within the Group's main manufacturing site at Brigg in North Lincolnshire. This process has been implemented ahead of plan with minimum disruption. Early indications are that benefits from reduced costs and improved efficiencies are in line with expectations.

Operational control of the Group's activities in the Middle East is being consolidated under Synectics Network Systems, with more focus on selling higher margin proprietary systems rather than third party integration services. The combination of additional Synectics sales resource, continuing costs needed to complete existing integration projects, and a short-term hiatus in new business as the re-focused sales model is implemented, mean that there will be a negative impact in the current financial year. The Group has, however, a long-established presence and reputation in this region, which is becoming an increasingly attractive market for the type of critical security systems Synectics offers. 

The newly created Synectics Mobile Systems Division now incorporates the on-bus systems of Look CCTV and the mobile rail activities of Synectics. The division is benefiting from the availability of volume production units of Synectics' sophisticated ruggedised digital video recorder, which has this year won significant contracts for surveillance applications on bus and light rail fleets across the UK, including on London Underground. This product is now being used as a springboard to lead the expansion of the Group's leading position in UK mobile video security systems into global markets. Early success has been achieved with a substantial sale of 500 units for use in cash-in-transit vehicles in the Middle East. 

As a result of the restructuring, the annualised run rate of cost base reductions to be realised by May 2010 is now estimated to be £2.2 million (previously estimated at £1.8m). Related exceptional costs of approximately £0.5 million will be incurred in this financial year.

Overall, implementation of the restructuring, and the results so far, are consistent with the Board's expectations.

Current Trading 

At the time of its preliminary results announcement in September, the Company said that it expected relatively weak trading in the first half of this financial year, followed by a much stronger second half. This was based on regular seasonal patterns, a slow recovery of markets from the recession and the short-term effects of the restructuring referred to above. With the exception of the North American gaming surveillance market, trading so far this year has been in line with these expectations. 

Core UK markets are showing some early signs of increased activity in areas where capital spending during the economic downturn had been significantly reduced. Of particular note, the Integration and Managed Services Division has won selection as one of a small group of preferred suppliers for prison surveillance and security systems under a framework agreement with the Ministry of Justice. It is anticipated that over the next four years a substantial value of contracts will be let under this framework agreement. This and other business won in the past few months underpin the expected improvement in the second half. The divisions serving the mobile systems, high security and oil & gas/marine markets are also experiencing firmer trading conditions, and there is increased confidence that they will meet or exceed their budgets for the financial year.

As noted above, the restructured activities in the Middle East are unlikely to make a positive contribution until late in the financial year, but the impact of this is expected to be offset by savings and improvements elsewhere.

Within the North American gaming market, Synectics continues to experience delays from casino customers who have either informed the Company that its bid has been successful, or have specified Synectics as a sole source provider, but in each case have delayed the timing of the firm order. This appears to be a function of continuing difficult trading conditions in the US casino market in general. In particular, a number of relatively large contracts anticipated for delivery by Synectics across this financial year have now been extended until later in the year, and there is an increased risk that they may ultimately not happen in time for delivery within the financial year. These contracts are for standard products on short lead times, so the uncertainty may conceivably persist until quite close to the financial year end. The aggregate marginal profit contribution from the contracts subject to potential further delay is anticipated to be in the order of £1.2 million (at current exchange rates).

Outlook

As a result of the increased uncertainties in timing of the North American gaming contracts, the Board has adjusted its baseline expectation for underlying profits* for the 12 months to 31 May 2010 downwards by approximately the amount of the contribution potentially at risk noted above, on the assumption that further delays to these contracts could push them beyond the year end. It is expected that any of these orders that do not eventuate in time for Quadnetics' current financial year would fall into the following period.

Against this, the indications of strong market acceptance of the new Synectics product suite, and the increased capability, scalability and cost-effectiveness of the new organisation structure, give the Board confidence that the Group will deliver the expected growth in both revenue and margins in the second half of this year and beyond.

Year End

For some time the Board has been concerned that Quadnetics' current year-end date of 31 May is ill-suited to its current public reporting schedule and seasonal business patterns. In particular, the objectives of improving forecasting by lessening the dependence on profits generated in the last quarter of the year, and of reporting year-end results more quickly, would be aided by a different financial reporting calendar.

The Board has therefore decided to change the Company's year end to 30 November (Quadnetics' current half-year end date), by extending its current financial year to 30 November 2010. Following its normal interim report to 30 November 2009, the Company will be providing a second interim report for the period to 31 May 2010, ensuring transparency and comparability with prior financial years. A full annual report and audited accounts will be provided for the 18 months to 30 November 2010.

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* That is, profits before tax, exceptional items and share-based payments