Titon Regulatory News (TON)

12 December 2019 LEI: 213800ZHXS8G27RM1DD7

Titon Holdings Plc

Preliminary results for the year to 30 September 2019

Titon Holdings Plc ("Titon", the "Group" or the "Company"), a leading international manufacturer and supplier of ventilation systems, and window and door hardware, announces its preliminary results for the year ended 30 September 2019.

Summary Financial Results

Financial Highlights

·; Net revenue declined 9% to £27.2 million (2018: £29.8 million) as a result of the previously announced slowdown in South Korea

·; Gross profit margin increased from 28.9% to 30.2%

·; Underlying EBITDA1 fell by 3% to £2.58 million

·; Underlying profit before tax of £2.15 million (2018: £2.77 million)

·; Proposed final dividend of 3.0 pence per share, (2018: 3.0 pence), which maintains the dividend for the full year at 4.75 pence per share

·; Net cash at 30 September 2019 increased 34% to £4.59 million (2018: £3.42 million)

·; £480,000 paid in dividends by Titon Korea to the Company during the period

·; Underlying return on capital employed (ROCE)2 14.6% (2018: 15.5%)

Operational highlights

·; The Group's UK and European based businesses saw revenue rise 1% in the year:

§ mechanical ventilation systems again performed well, with growth in the UK of 7% and overall growth of 4%;

§ revenue from the UK window & door hardware business was slightly lower than in 2018 overall whilst Titon branded door and window products recorded further growth of 20% in revenue;

§ Export sales of mechanical and hardware products fell by 5.7% as European markets weakened.

·; Titon Korea's revenue fell 27% and its net profit after tax fell by 23% as a result of the slowdown in residential construction activity and the market shift towards mechanical ventilation. However, South Korea in total (Titon Korea and Browntech Sales Co.), contributed 54% of underlying profit before tax1 (2018: 68%);

·; Sales in the USA grew by 51% to £983,000 in the year;

·; The Group has continued to promote the benefits of good indoor air quality in the UK, working closely with the relevant trade associations;

·; Continuing focus on product development where new products are to be introduced in UK and European Ventilation Systems and Window & Door Hardware divisions in 2020, together with the launch of new products to meet changing demand in South Korea.

Executive Chairman, Keith Ritchie, said: 

"It has been a more challenging year for Titon with revenue lower by 9% at £27.2 million, year-on-year and, whilst the gross margin rose and underlying EBITDA was just 3% lower, underlying profit before tax declined by 22% to £2.15 million. The prime factor in this performance was the slow-down in South Korea, which I reported on earlier in the year. During the year, too, Titon was profitable and cash generative; and the dividend for the year is maintained.

The UK economy continues to grow at between 1% and 2% which is below trend. However, it continues to be positive during what has been a prolonged period of political and economic uncertainty. In South Korea, the Group's largest net profit contributor, 2019 saw growth in GDP of about 2.0%, which is also below trend. In 2020 and 2021, GDP is forecast to grow by 2.2% and 2.3% respectively3 as the Government continues its expansionary fiscal stance together with two interest rate cuts by the Bank of Korea. For Titon, it will be a year of transition for its natural ventilation products in South Korea as economic growth recovers and new products are launched. Revenue at Titon Korea in fiscal 2020 will be lower than in 2019.

Our business model is robust but we continue to face political and economic uncertainties which have contributed to a challenging first two months of the fiscal year. Titon builds and delivers popular products across a unique geographical spread and a number of core market positions. We have good people, a strong balance sheet and continue to seek new growth opportunities in our target markets".

For further information please contact:

*Prior period figures for the year to 30 September 2018 have been restated pursuant to the announcement made by the Company on 19 March 2019, further details of which are included in note 6 of the Preliminary Announcement

Notes:

1 Underlying EBITDA, underlying profit before tax and underlying EPS in the period are calculated by adding back an exceptional item of £181,000 which relates to transaction related costs in respect of a potential acquisition which did not proceed

2 Underlying ROCE is calculated by dividing Underlying EBIT by capital employed (capital employed being the sum of shareholders' funds, non-controlling interests and all debt less intangible assets and cash)

3 Focus Economics forecasts

Chairman's Statement

As announced in early 2019, a slow-down in trading coupled with changing product preferences towards mechanical ventilation units in South Korea has resulted in a reduction in the Group's underlying profit before tax of 22%. Our UK, European and US operations have, however, traded satisfactorily and the total dividend for the year has been maintained. At the same time, our balance sheet has continued to strengthen as net cash increased significantly to £4.6 million.

Profit and loss

As noted below, all 2018 amounts, where relevant, have been restated. In the year ended 30 September 2019, the Group's net revenue (which excludes inter-segment activity) reduced by 9% to £27.2 million (2018: £29.8 million). On a constant currency basis, there was no material change to the 2019 net revenue (2018: an increase of 8%).

The Group's gross margin increased from 28.9% to 30.2% as a result of changes in the geographical mix of sales. Underlying operating profit1 fell 10.2% to £1.8 million (2018: £2.0 million) and the Group realised an underlying operating profit margin1 of 6.7% (2018: 6.8%).

Net interest contributed £12,000 (2018: £13,000) while the share of profits from the Group's South Korean associate fell from £741,000 to £329,000 resulting in underlying profit before tax1 of £2.15 million (2018: £2.77 million). On a constant currency basis there was no material change to the 2019 or the 2018 profit before tax.

Underlying EBITDA1 was 3.4% lower at £2.58 million (2018: £2.67 million) and underlying earnings per share1 for the year was 14.5 pence (2018: 18.2 pence). The underlying effective rate of taxation1 of the Group fell to 10.2% (2018: 15.5%).

The Directors are proposing a final dividend of 3.0 pence per share (2018: 3.0 pence). When added to the interim dividend of 1.75 pence, paid on 21 June 2019 (2018: 1.75 pence), this represents a total dividend for the year of 4.75 pence (2018: 4.75 pence). If approved by shareholders at the forthcoming Annual General Meeting on 18 February 2020, the dividend will be payable on 21 February 2020 to shareholders on the register at 16 January 2020. The ex-dividend date is 17 January 2020.

Statements of financial position and cash flows

The Group benefits from a robust and liquid balance sheet. Net assets, including non-controlling interests, rose by £0.63 million to £17.7 million in the year to 30 September 2019, at which point net cash stood at £4.59 million (2018: £3.41 million), which is equivalent to 25.9% of net assets (2018: 20.0%). Inventory levels at the year-end fell by £783,000 on 2018 due to a reduction in stock levels in South Korea. This, along with a reduction in the level of other working capital required in South Korea, has contributed to cash generated from operations increasing to £3.28 million (2018: £1.94 million). Capital expenditure increased slightly to £902,000 (2018: £893,000) and the Group paid dividends to the shareholders of Titon Holdings Plc of £526,000 (2018: £489,000). During the course of the year Titon Korea paid a further dividend to Titon Holdings Plc and non-controlling shareholders, resulting in £480,000 of cash being paid to Titon Holdings Plc and a cash outflow from the Group to Non-Controlling Interests of Titon Korea of £488,000 (2018: £416,000). The overall effect has been a net increase in the Group's cash reserves in the period of £1.17 million (2018: £146,000). Net current assets at 30 September 2019 were £10.1 million (2018: £9.8 million) with a Quick Ratio2 of 2.1 (2018: 1.6). Underlying ROCE3 was 14.6% (2018: 15.5%).

Segment analysis

The Directors look initially at geographical areas to evaluate the Group's performance and then consider product splits at the secondary level. 

UK and Europe

Overall, revenue from the UK and Europe increased by 1% in fiscal 2019.

Revenue from the Hardware business, comprising sales of our traditional trickle vents plus window and door hardware, was slightly lower in the year as export sales fell by 19% and sales into the PVCu, Timber and Aluminium sectors of the UK market were flat as markets weakened. Sales of Titon branded door and window hardware products continued to show growth of 20% in the fiscal year.

In our Ventilation Systems business, the revenues from mechanical ventilation products increased by 4%, with sales in the UK up 7% despite a slowdown in our key London and South East markets where delays in projects are being experienced. Mechanical ventilation sales in mainland Europe were slightly down on 2018 as a number of the major European economies slowed and the uncertainty caused by Brexit led to customers' normal purchasing patterns being disrupted.

Titon continues to invest in research and development which, in turn, yields a continuing number of new products for both the Ventilation Systems and Hardware businesses; and this will continue in 2020. A focus on the importance of air quality, both outdoors and indoors, continues to sharpen as the impact of poor-quality air on health is better understood by the medical profession, governments and consumers. For our part, we continue to work with our trade associations to promote ventilation and specifically with Beama (British Electrotechnical & Allied Manufacturers Association), which represents manufacturers of electro-technical products, such as ventilation products, to promote the benefits of good indoor air quality. Beama also continues to sponsor the Healthy Homes and Buildings All Party Parliamentary Group and the Air Pollution All Party Parliamentary Group.

In October 2019 the Ministry of Housing, Communities and Local Government (MHCLG) published "The Future Homes Standard", which includes a consultation on changes to Part L (Conservation of fuel and power) and Part F (Ventilation) of the Building Regulations for new dwellings. Both of these Building Regulations are important to the sale of our ventilation products in the UK. We will be commenting on the proposed changes to both sets of Building Regulations before the closing date in January 2020. MHCLG have indicated that they hope to bring into force the proposed changes by mid/late 2020 although this date will, of course, be subject to the usual parliamentary priorities. Our initial view is that the proposals may alter the mix of ventilation products supplied to the market. We await proposals from MHCLG on the refurbishment sector, non-domestic buildings and over-heating in due course.

The value of UK private and public housebuilding output is forecast to increase in 2019 by 2.3% against calendar 2018 according to Experian's most recent UK Construction forecast, and by a further 2.3% in 2020. At the same time, the expected value of repair, maintenance and improvement (RMI) in the private and public residential sectors is forecast to be down by 1% in 2019 against 2018, although it is then expected to rise by 2.3% in 2020.

South Korea

In South Korea, the Group's subsidiary, Titon Korea (51% owned), manufactures natural window ventilation products and remains the national market leader with an estimated market share in this core sub-sector in excess of 75%. In February 2019 we issued a trading update in respect of our South Korean business identifying a slowdown in the domestic residential development market and the presence of dust-based air pollution, largely from China. The latter impact increased the relative demand for mechanical ventilation products which, in turn, reduced the demand for natural ventilation products. These factors have resulted in a reduction in revenue to £8.3 million (2018: £11.4 million) whilst the contribution to Group profit before tax declined to £0.82 million (2018: £1.1 million).

The Group's associate company (49% owned), Browntech Sales Co. Limited ('BTS'), which principally distributes Titon Korea's natural ventilation products, was accordingly impacted by the downturn experienced by Titon Korea. The profit recognised in respect of associates (which is all BTS) was 56% lower in 2019 at £329,000 (2018: £741,000). In addition to distributing ventilation products in South Korea, BTS invests in and develops schemes in the domestic residential real estate market. There have been no further changes to the status of BTS's investments in the South Korean residential real estate market since the 2019 Interim Results. Despite the reduction in profits from South Korea that we have experienced this year and taking Titon Korea and BTS together, South Korea remains the largest contributor to the Group's profit before tax at £1.15 million for the year (2018: £1.84 million). We have continued to commit resources to designing new products for the South Korean market and a new natural ventilation product with increased filtration has been designed by our Research & Development team in the UK and it is now in the process of being tooled up in Korea. The product will be on sale in the second half of fiscal 2020.

United States

Finally, as I noted in the 2019 Interim Results Statement, results from our US business have improved significantly in the period. Sales for the twelve months increased by 51% to £983,000 (2018: £652,000) and, while Titon Inc. made no statutory profits in the full year, it generates a return for our UK manufacturing business and makes a contribution to Group income.

Board

As noted in the Interim Report, we appointed Mr Bernd Ratzke to the Titon Board as an independent Non-executive Director and he has immediately made a contribution to the Board's discussions and to other legal matters impacting the day-to-day activities of the Group. There have been no other changes to the Board during the fiscal year.

Employees

As ever, I offer my sincere thanks to all of the employees of Titon as the success of the Group is down to their hard work and talents. Although the business has not grown this year as we would have liked, this is not down to their contribution which, as usual, has been substantial.

Restatement

As reported in the 2019 Interim Results Statement, we announced in March 2019 that certain costs and revenues associated with products sold by Titon Korea in earlier accounting periods, up to and including 30 September 2018, had, in error, not been correctly accounted for in the relevant periods. This related to the incorrect accounting apportionment of costs and revenues between first and second fix installations of products manufactured by our 51% subsidiary, Titon Korea and sold by Browntech Sales Co. Ltd., our 49% owned associate company. The result of this error was a non-cash reduction of total equity attributable to equity holders of Titon by £826,000 from the figure shown in the 2018 Annual Report. In this Statement the total equity and other comparative 2018 numbers have been restated. For the fiscal year to 30 September 2018, revenue has been reduced by £172,000 to £29.8 million and profit before tax has been reduced by £209,000.

Investors

We have now been listed on the AIM market for one year since our move from the Main Market of the London Stock Exchange and I hope that shareholders have benefited from this move.

We have continued to engage the corporate research house Hardman & Co. which regularly writes and distributes investment research on Titon and which we believe has both widened interest in the Group and continues to have a positive impact in the share price over the past four years. Shore Capital, our Nominated Adviser and broker, has initiated research coverage on Titon during the year by publishing a research note on the Group in August 2019 entitled "Improving the air that we breathe", a sentiment we share. Finally, I would like to mention again the Group's dividend reinvestment programme (DRIP) which has operated for a number of years. This represents a straight-forward and cost effective way for shareholders to increase their holdings in Titon should they wish to do so.

Outlook

Despite the previously reported challenges in the Korean market, the Group remained profitable and cash generative. The dividend for the year was maintained at the same level as 2018, whilst our net cash reserves also increased significantly, further strengthening the Group's balance sheet.

The UK economy continues to grow, albeit at a slower rate than forecast at this time last year. How much of this slower growth is down to Brexit is difficult to say but sentiment amongst many consumers and businesses in the UK (and within the wider EU) is that uncertainty about Brexit has hit confidence and impacts adversely on trading. At Titon, we increased the buying of stock in advance of a possible Brexit date twice in 2019, to no benefit. We urge our politicians, of whichever party wins the General Election, to give certainty to the Country. Without it, of course, it is difficult to plan and commit funds to new investments. As a business and sector, too, we are subject to amendments to the current UK regulatory regime for ventilation and conservation of fuel and power, which could change demand for our passive and powered ventilation products.

In South Korea, the Group's largest net profit contributor, 2019 saw modest growth in GDP throughout the year of about 2.0%, which is below trend. The South Korean economy should continue to grow in 2020 with Focus Economics forecasting a rise in GDP in 2020 of 2.2% and 2.3% in 2021 as the Government continues its expansionary fiscal stance together with the impact of two interest rate cuts by the Bank of Korea. As noted above, we are in a transitionary period for our natural ventilation products in South Korea as market requirements change. Whilst we will be launching new products for this market in the second half of 2020, we expect adoption over a period of time. As a result, we anticipate that sales in Titon Korea in fiscal 2020 will be lower than in 2019.

Our business model is robust but we continue to face political and economic uncertainties which have contributed to a challenging first two months of the fiscal year. Titon builds and delivers popular products across a unique geographical spread and a number of core market positions. We have good people, a strong balance sheet and continue to seek new growth opportunities in our target markets.

On behalf of the Board.

K A Ritchie

Chairman

11 December 2019

Notes:

1Underlying Operating profit, Underlying Profit before tax, Underlying EBITDA and Underlying EPS in the period are non-IFRS measures which are calculated by adding back an exceptional item of £181,000, which relates to transaction related costs in respect of a potential acquisition which did not proceed.

2 The Quick Ratio measures liquidity and is calculated as follows. Current Assets-less-Stocks divided by Current Liabilities.

3 Underlying ROCE is calculated by dividing Underlying EBIT by capital employed (capital employed being the sum of shareholders' funds, non-controlling interests and all debt less intangible assets and cash).

Unaudited Consolidated Income Statement

for the year ended 30 September 2019

* See note 6 for details regarding the restatement of prior year results

Unaudited Consolidated Statement of Comprehensive Income

for the year ended 30 September 2019

* See note 6 for details regarding the restatement of prior year results

Unaudited Consolidated Statement of Financial Position

at 30 September 2019

* See note 6 for details regarding the restatement of prior year results

Unaudited Consolidated Statement of Changes in Equity

at 30 September 2019

* See note 6 for details regarding the restatement of prior year results

Unaudited Consolidated Statement of Cash Flows

for the year ended 30 September 2019

* See note 6 for details regarding the restatement of prior year results

The Group cash and cash equivalents figure on the Consolidated Statement of Financial Position includes both the cash at the year end and the cash on treasury deposit of £nil (2018: £900,000) and totals £4,587,000 at 30 September 2019 (2018: £3,415,000).

*\* The net increase in Group cash including the movements on treasury deposits for the year is £1,172,000 (2018: £146,000).

Notes to the Preliminary Announcement for the year ended 30 September 2019

1 Earnings per ordinary share

The calculation of the basic and diluted earnings per share is based on the following data:

* See note 6 for details regarding the restatement of prior year results

2 Dividends

The Directors are proposing a final dividend of 3.0 pence (2018: 3.0 pence) per share. This will result in a final dividend totalling £332,512 (2018: £332,512), subject to approval by the shareholders at the Annual General Meeting. This dividend has not been accrued at the balance sheet date.

3 Revenue and segmental information

In identifying its operating segments, management generally follows the Group's reporting lines, which represent the main geographic markets in which the Group operates. The segment reporting below is shown in a manner consistent with the internal reporting provided to the Board, which is the Chief Operating Decision Maker (CODM). These operating segments are monitored and strategic decisions are made on the basis of segment operating results. The Group operates in four main business segments which are:

Inter-segment revenue is transacted on an arm's length basis and charged at prevailing market prices for a specific product and market or cost plus where no direct comparative market price is available. Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Research and development entity-wide financial expenses are allocated to the business activities for which R&D is specifically performed. Sales Administration and Other Expenses are currently allocated to operating segments in the Group's reporting to the CODM. Other Expenses include mainly central and parent company overheads relating to Group management, the finance function and regulatory requirements.

The measurement policies the Group uses for segment reporting under IFRS 8 are the same as those used in its financial statements.

The total assets for the segments represent the consolidated total assets attributable to these reporting segments. Parent company results and consolidation adjustments reconciling the segmental results and total assets to the consolidated financial statements, are included within the United Kingdom segment figures stated below.

Operating segment The Directors' primary review of performance is by geographical regions.

The South Korea Segment profit includes the Group's share of the profits from Browntech Sales Co. Ltd., (BTS), the Group's associate undertaking in South Korea, of £329,000.

Sales to BTS of £8.33m represented 31% of Group Revenue (2018: £11.39m - 38%). There are no other concentrations of revenue above 10% during the year (see Note 5 - Related party transactions).

IFRS 8 requires entity wide disclosures to be made about the regions in which it earns its revenues and holds its non-current assets which are shown below.

Operating segment

The South Korea Segment profit includes the Group's share of the profits from Browntech Sales Co. Ltd., (BTS), the Group's associate undertaking in South Korea, of £778,000.

Sales to BTS of £11.39m represented 38% of Group Revenue (2017: £9.53m - 34%). There are no other concentrations of revenue above 10% during the year (see Note 5 - Related party transactions).

IFRS 8 requires entity wide disclosures to be made about the regions in which it earns its revenues and holds its non-current assets which are shown below.

* See note 6 for details regarding the restatement of prior year results

Information about the Group's products

Within geographical segments the Directors also monitor the revenue performance of the Group within its two identified business streams. The Group's operations are separated between trickle ventilation and window and door hardware products and mechanical ventilation products. The following table provides an analysis of the Group's external revenue, irrespective of the geographical region of sale.

4 Tax expense

5 Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

Titon Korea Co. Ltd., the Company's 51% owned subsidiary, paid a dividend during the year to its shareholders amounting to £996,000 (2018: £849,000). Of this amount, £508,000 (2018: £433,000), before withholding tax, was paid to the Company with the other £488,000 (2018: £416,000) being paid to the non-controlling interests.

Transactions for the year between Group companies and the associate company, which is a related party, were as follows:

* See note 6 for details regarding the restatement of prior year results

Trading debts between subsidiaries and BTS are created only when the ultimate customer has accepted the successful inclusion of our products into buildings.

Key management who hold the authority and responsibility for planning, directing and controlling activities of the Group are comprised solely of the Directors. Aside from compensation arrangements, there were no transactions, agreements or other arrangements, direct or indirect, during the year in which the Directors had any interest.

6 Restatement of prior year results

In March 2019 the Company discovered that the correct accounting policy had not been followed at its Korean subsidiary and associate and that the Consolidated Statement of Financial Position as at previous year ends, up to and including 30 September 2018, had been misstated. An explanation of the reason for the adjustment is included within the Chairman's Statement and the required restatements have been included within these preliminary results.

The effect of the restatement on the relevant lines within the Consolidated Statement of Financial Position as at 30 September 2017 and 30 September 2018 is as follows:

The effect on the relevant lines of the Income Statement for the 12 months to September 2018 is as follows:

Additionally, during the period, the Directors have determined that it better reflects the classifications on the Income Statement to show carriage outwards as a Distribution Cost rather than being included within Cost of Sales.

As a result of this, Distribution Costs for the 12 month period to 30 September 2018 have been increased by £750,000 to £1,454,000 (previously reported as £704,000). Cost of Sales for 12 month period to 30 September 2018 have been reduced by £750,000 to £21,170,000 (previously reported as £21,920,000). There has been no overall impact on profit before tax or any Statement of Financial Position line item in any period as a result of this reclassification.

7 Principal risk and uncertainties

The key financial and non-financial risks faced by the Group are disclosed in the Group's Annual Report and Accounts for the year ended 30 September 2018 within the Report on Risk Management (pages 13 to 18) available at www.titonholdings.com. The Board considers that these remain a current reflection of the risks and uncertainties facing the business.

8 Basis of preparation 

The financial information for the year ended 30 September 2019 together with the comparative year has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs) as adopted by the European Union.

The accounting policies of the Group under International Financial Reporting Standards (IFRSs) are set out in detail in the 2018 Financial Statements which are available from the Group's website at www.titonholdings.com.

The Group has adopted the following new standards (effective 1 January 2018) in these preliminary results:

The information in this preliminary announcement does not constitute the statutory accounts of the Group and Parent Company within the meaning of Section 435 of the Companies Act 2006 for the year ended 30 September 2019 or 2018.

The financial information for the year ended 30 September 2018 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors have reported on those accounts; their report was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under s498(2) or s498(3) of the Companies Act 2006.

The financial information for the year ended 30 September 2019 is unaudited. The statutory accounts for that year will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 18 February 2020.