Inspecs Group Regulatory News (SPEC)

18 August 2022

INSPECS Group plc

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

Interim Results

INSPECS Group plc, a global eyewear and lens design house and manufacturer, presents its unaudited interim results for the six months ended 30 June 2022.

Financial highlights:

· Revenue increased to $138.4m (H1 2021: $125.7m)

· Revenue increased to $145.5m (H1 2021: $125.7m), an increase of 15.8% at constant exchange rates 1

· Operating profit increased to $5.8m (H1 2021: $2.5m 2)

· Gross profit margin 50.5% (H1 2021: 44.2% 2, underlying 49.1% 3)

· Underlying EBITDA $15.1m (H1 2021: $16.8m 2)

· Underlying basic Earnings Per Share (EPS) of $0.15 (H1 2021: $0.17), with underlying diluted EPS of $0.14 (H1 2020: $0.16)

· Reported profit before tax of $0.8m (H1 2021: $3.5m loss 2)

· Reported loss after tax of $2.8m (H1 2021: $3.8m 2)

· Reported basic EPS of $(0.03) (H1 2021: $(0.04)), with diluted EPS of $(0.03) (H1 2021: $(0.04))

· Strong balance sheet with cash at 30 June 2022 of $30.6m (30 June 2021: $33.8m)

· Cash generated from operations $10.1m (H1 2021: $18.8m)

· Net debt excluding leasing $26.2m (31 December 2021: $32.8m)

Operational highlights:

· Norville new factory now fully operational and 'Labpack' distribution of complete frame and lens packages underway

· Planning permission and building design complete and approved on new factory in Vietnam

· Location for new Portugal factory sourced and building designed

· O'Neill, Superdry and Botaniq ranges now distributed by Group entities in the USA and Europe

· First delivery of lenses for Amazon's own eyewear division in Q2 of 2022

· Group companies working together to ensure enhanced distribution rates for our products

· Rationalisation of Hong Kong offices now complete

· The Group has completed the registration of its products as medical devices with the Medicines and Healthcare Regulatory Agency (MHRA), the European Database on Medical Devices (EUDAMED) and the Food and Drug Administration (FDA) in the USA

1 Constant currency exchange rates: figures at constant currency exchange rates have been calculated using the average exchange rates in effect for the corresponding period in the relevant comparative period (H1 2021).

2 The six-month period to 30 June 2021 has been restated following retrospective adjustments (note 11).

3 Underlying gross profit margin for H1 2021 excludes $6.1m purchase price allocation adjustment relating to inventory valuation following the acquisition of Eschenbach on 16 December 2020.

Robin Totterman, CEO of INSPECS, said:

"I am pleased to report an underlying EBITDA of $15.1m for the six months to 30 June 2022 (H1 2021: $16.8m). The Group EBITDA increased by $4.3m from $10.0m in H1 2021 to $14.3m in H1 2022. Our operating profit increased by $3.4m from $2.5m in H1 2021 to $5.8m in H1 2022.

The Group has made good progress against our strategic objectives during the period, specifically with the ongoing integration of the Group's businesses and increasing our distribution reach around the globe.

Our European business performed ahead of internal budget for the first half, however, our reported results were affected by a rapid decline in the Euro against the US Dollar in Q2, which is the current reporting currency of the Group. Given the evolution in Group global earnings since our IPO, the Board will review the reporting currency with our advisors in 2023. Our Norville factory relocation incurred additional downtime and costs but is now fully operational and increasing production.

Later this year we expect to start construction of our new factory in Portugal and increase our Vietnam production capacity through expansion, which will satisfy the increased demand from key accounts. Production is expected to begin towards the end of 2023, with distribution in Q1 of 2024.

Our Group order books are ahead as of 30 June 2022 compared to 30 June 2021, and we enter the second half of the year in a good position. Whilst we remain cautious of the overall economic outlook for the UK and European market, we remain focused on executing a number of strategic priorities that will increase production, enabling us to bring innovative new products to market and continue to deliver shareholder value."

For further information please contact:

This announcement contains inside information for the purposes of the Market Abuse Regulation (Regulation (EU) No 596/2014) including as it forms part of domestic law in the United Kingdom by virtue of the European Union (Withdrawal) Act 2018. The person responsible for arranging release of this announcement on behalf of Inspecs is Chris Kay, Chief Financial Officer.

About INSPECS Group plc

INSPECS is a Bath-based designer, manufacturer and distributor of eyewear frames and optically advanced spectacle lenses. The Group produces a broad range of frames and lenses, covering optical, sunglasses and safety, which are either "Branded" (either under licence or under the Group's own proprietary brands), or "OEM" (including private label on behalf of retail customers as well as unbranded).

INSPECS aims to be the leader in eyewear solutions through its vertically-integrated business model and has adopted a three-pillar growth strategy to achieve this: (i) continue to grow organically; (ii) undertake further acquisitions (and drive value through leveraging the Group's internal capabilities); and (iii) extend the Group's manufacturing capacity.

The Group has completed several significant acquisitions since its IPO in February 2020. In December 2020, INSPECS acquired Eschenbach, a leading global eyewear supplier, headquartered in Nuremberg, Germany, which includes the American company Tura. This followed the acquisition of lens maker Norville in July 2020, whereby INSPECS combined two British heritage brands, Savile Row frame maker, and Norville lens maker, further enhancing its vertically-integrated business model. In December 2021 the Group acquired Ego Eyewear, a design and licensing company which uses third party eyewear manufacturers to produce premium fashion brands, and BoDe, a distributor of optical frames and sunglasses principally to the German and neighbouring markets. 

INSPECS customers include global optical and non-optical retailers, global distributors and independent opticians, with its distribution network covering over 80 countries and reaching approximately 75,000 points of sale.

INSPECS has operations across the globe: with offices and subsidiaries in the UK, Germany, Portugal, Scandinavia, the US and China (including Hong Kong, Macau and Shenzhen), and manufacturing facilities in Vietnam, China, the UK and Italy. With the acquisition of Eschenbach, the Group's international reach further extends across Europe and the American markets.

More information is available at: https://inspecs.com

CHIEF EXECUTIVE REVIEW

I am pleased to present our results for the six months ended 30 June 2022. The Group has performed well during the period, achieving sales of $138.4m (H1 2021: $125.7m) an increase of $12.7m or 10.1%. The Group made an underlying EBITDA of $15.1m compared to an adjusted $16.8m for the same period in 2021.

On a constant exchange basis1, the Group revenues rose from $125.7m to $145.5m, an increase of $19.8m or 15.8%.

Two factors led to the Group not exceeding H1 2021 performance at the underlying EBITDA level. Firstly, our lens manufacturing site took longer than expected to reach optimal production following the move and as a result, we were not able to engage fully with our optical customers as delays were caused by infrastructure issues and the recalibration of machinery following the move. We are now starting to see steady progress at Norville and expect it to contribute to the Group profits in 2023.

Secondly, whilst our European business performed ahead of internal budget for the first half, our reported results were affected by a rapid decline in the Euro against the US Dollar. The Euro: US Dollar rate was 1.14 at the start of the year with a relatively small movement in Q1 closing at 1.11 to the Dollar. In Q2 the US Dollar sharply appreciated against the Euro, moving to parity in the quarter and closing in June 2022 at rate of 1.04. Our reporting currency at present is US Dollar and as such our European business and profits reflect this movement in currency. Given the evolution in Group global earnings since our IPO, the Board will review the reporting currency with its advisors and will assess the effect on our reporting in 2023.

In Vietnam, I am pleased to report that plans for our new factory have been submitted and we expect construction to commence later this year, with production expected to begin towards the end of 2023, with distribution in Q1 of 2024.

We have also reached agreement on the new production facility in Portugal based in Setubal near our Lisbon office. Construction is expected to start later this year and I expect the factory will go into production at the end of 2023.

 Our Italian small scale rolled gold eyewear facility will commence shipments of the premium product in Q4 of this year.

In Europe we have seen a solid market in Q2 rather than the rapid growth we saw in Q1 of 2021. I remain cautious of the overall economic outlook for the European market with continual issues arising from the Ukrainian situation and the global inflation currently prevalent in the marketplace.

We are seeing a similar picture in the USA but Tura continues to win market share.

In the UK, the business environment is similar to those we are experiencing in Europe but again our team is continuing to win market share and our design teams are working hard to ensure our products are on message.

Our team at Skunk Works has been expanded in H1 with two additional employees. We are now starting to see the first commercial benefits of our investment with orders starting to flow from Amazon and we continue to work with Bosch Sensonics on the further development of smart eyewear.

We also continue our work on the development of biodegradable eyewear and packaging to reduce the environmental effect of eyewear. Our recyclable and sustainable products are now in the marketplace, and there has been a good reaction from the market for these products.

We are complementing our finance team with the recruitment of key additional employees to provide greater bandwidth across the Group.

Overall, this was a good H1 despite adverse foreign exchange movements and a delay in achieving optimal production levels following the Norville factory move. Our order books continue to grow and are ahead at 30 June 2022 compared to 30 June 2021, and the Group is working hard on delivering sustained, profitable growth for all our stakeholders.

I would like to thank all our employees on what has been a busy six months and look forward to the second half of 2022 and the medium term with confidence.

Robin Totterman

18 August 2022

FINANCIAL REVIEW

Revenue

Revenue increased to $138.4m from $125.7m in H1 FY21, an increase of 10.1%. This was driven by the continuing integration of Eschenbach and volume growth across the diversity of markets that we now operate in. On a constant exchange rate1 revenues rose from $125.7m (H1 2021) to $145.5m, an increase of $19.8m or 15.8%.

Underlying Gross Margin

The Group's underlying gross margin increased from 49.1% to 50.5%. The Group continues to actively manage its gross profit margin despite cost inflation.

Operating Profit

The Group operating profit increased 132% to $5.8m (H1 2021: $2.5m).

Underlying EBITDA

The Group underlying EBITDA decreased from $16.8m in H1 2021 to $15.1m in H1 2022.

Finance Expenses

Our net finance costs increased from $1.1m to $1.8m reflecting the rise in interest rates and drawdown in late 2021 of the RCF facility to fund the acquisitions of EGO Eyewear and BoDe Design. Net finance costs include $0.5m (H1 2021: $0.2m) relating to the amortisation of capitalised loan arrangement fees.

Depreciation and amortisation

The increase in depreciation and amortisation is driven by the expansion and the assets owned by the Group.

Profit/(Loss) Before Tax

Profit before tax for the period of $0.8m is after charging $1.2m of non-underlying costs and a foreign exchange loss on borrowings of $2.1m, being a non-cash item.

Cash Generation

The Group generated a net cash inflow from operating activities of $10.1m in H1 2022 compared to S18.8m (H1 2021).

Cash Position

The Group's cash at 30 June 2022 was $30.6m compared to $33.8m at 30 June 2021.

Net Debt

The Group's net debt excluding leasing has decreased from $32.8m at 31 December 2021 to $26.2m as at 30 June 2022.

Leverage

The Group's leverage including leasing reduced by 5% from 1.9 at 31 December 2021 to 1.8 at 30 June 2022.

The Group's leasing increased in the first half due to a new lease on the offices in New York and the renewal of new leases for motor vehicles for the Group's sales staff. This increased our leasing liability under IFRS 16 from $22.4m as at 31 December 2021 to $24.5m as at 30 June 2022. Despite this, net debt including leasing reduced by $4.4m over the last 6 months.

Inventory

Our sales to inventory ratio has remained flat compared to 30 June 2021.

Current asset ratio

The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations, or those due within one year.

The Groups current asset ratio has decreased from 1.8 to 1.6 which reflects the additional borrowing taken out to acquire EGO Eyewear and BoDe Designs in late 2021.

Quick ratio

The quick ratio is an indicator of a company's short-term liquidity position and measures a company's ability to meet its short-term obligations with its most liquid assets.

The quick ratio has decreased in line with the current asset ratio, as they are driven by the same factor of additional borrowing to fund the acquisitions at the end of 2021.

Earnings per Share

The Group's underlying basic earnings per share of the 6 months to 30 June 2022 was $0.15 compared to $0.17 for the 6 months to 30 June 2021.

Underlying EBITDA

The below table shows how Underlying EBITDA is calculated:

INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2022

INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the period ended 30 June 2022

1. GENERAL INFORMATION

INSPECS Group plc is a public company limited by shares and is incorporated in England and Wales. The address of the Company's principal place of business is Kelso Place, Upper Bristol Road, Bath BA1 3AU.

The principal activity of the Group in the period was that of design, production, sale, marketing and distribution of high fashion eyewear and OEM products worldwide.

2. ACCOUNTING POLICIES

Going concern

Based on the Group's forecasts considered in the light of the COVID-19 situation and current economic climate the Directors have adopted the going concern basis in preparing the interim financial statements.

The assessment has considered the Group's current financial position as follows:

• The Group improved its cash position during the period with net debt including leasing dropping from $(55.2)m at 31 December 2021 to $(50.8)m at 30 June 2022.

• Cash generated from operations in the period amounted to $10.1m (2021 H1: $18.8m).

• The Group has a strong balance sheet, with net assets of $134.0m and net current assets of $46.6m.

The assessment has considered the current measures being put in place by the Group to preserve cash and ensure continuity of operations through:

• Ensuring continuation of its supply chain buildings on the benefit of having its own manufacturing sites and by securing alternative third-party supply lines.

• Maintaining geographical sales diversification, focusing sales to online customers and seeking new revenue streams around the globe.

• Ability to service both the major global retail chains and significant distribution to the independent eyewear market following the acquisitions completed over the last two years.

Basis of preparation

The interim consolidated financial statements for the six months ended 30 June 2022 have been prepared in accordance with IAS 34 Interim Financial Reporting and with accounting policies that are consistent with the Group's Annual Report and Financial Statements for the period ended 31 December 2021.

The comparative financial information for the period ended 30 June 2021 in this interim report does not constitute statutory accounts for that period under 434 of the Companies Act 2006 and is unaudited.

Accounting policies are included in detail within the latest Annual Report.

3. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

The preparation of the Group's historical information requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and their accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amounts of the assets or liabilities in the future.

Estimation uncertainty

In addition to the impact of COVID-19 discussed within the going concern section of note 2, the key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period, are described below.

Uncertain tax positions

Tax authorities could challenge and investigate the Group's transfer pricing or tax domicile arrangements. As a growing, international business, there is an inherent risk that local tax authorities around the world could challenge either historical transfer pricing arrangements between other entities within the Group and subsidiaries or branches in those local jurisdictions, or the tax domicile of subsidiaries or branches that operate in those local jurisdictions.

As a result, the Group has identified it is exposed to uncertain tax positions, which it has measured using an expected value methodology. Such methodologies require estimates to be made by management including the relative likelihood of each of the possible outcomes occurring, the periods over which the tax authorities may raise a challenge to the Group's transfer pricing or tax domicile arrangements; and the quantum of interest and penalties payable in addition to the underlying tax liability. As a result, the Group has made a provision of $672,000 as at 30 June 2022 ($3,067,000 as at 30 June 2021), in line with the accounting methodology used as at 31 December 2021.

4. SEGMENT INFORMATION

The Group operates in three operating segments, which upon application of the aggregation criteria set out in IFRS 8 Operating Segments results in three reporting segments:

• Frames and Optics (previously Branded) product distribution.

• Wholesale - being OEM and manufacturing distribution.

• Lenses - being manufacturing and distribution of lenses.

The criteria applied to identify the operating segments are consistent with the way the Group is managed. In particular, the disclosures are consistent with the information regularly reviewed by the CEO and the CFO in their role as Chief Operating Decision Makers, to make decisions about resources to be allocated to the segments and to assess their performance.

The reportable segments subject to disclosure are consistent with the organisation model adopted by the Group during the six months ended 30 June 2022 are as below:

Reported segments relating to the balance sheet as at 30 June 2022 are as follows:

Total assets are the Group's gross assets excluding deferred tax asset. Total liabilities are the Group's gross liabilities excluding loans and borrowings, and deferred tax liability.

The reportable segments subject to disclosure are consistent with the organisation model adopted by the Group during the six months ended 30 June 2021 are as below: