TPG.L Regulatory News (TPG)

10 September 2019

TP Group plc

("TP Group" or the "Company" or the "Group")

Unaudited interim results for the six months ended 30 June 2019

Record sales pipeline and extended global offering underpins significant growth potential

TP Group (AIM: TPG), the providers of mission-critical solutions for a more secure world, today announces its unaudited interim results for the six months ended 30 June 2019.

Financial highlights

• Revenue up 63% to £26.0m (H1 2018: £16.0m) with strong growth in both business streams.

• Operating loss £1.0m (H1 2018 operating loss: £0.7m) - the increase arising from fees and accrued earn-out payments relating to acquisitions.

• Adjusted operating profit up 161% to £2.4m (H1 2018: £0.9m) - driven by the increase in revenue, whilst continuing to invest in business development and marketing.

• Order intake up 33% to £39.3m (H1 2018: £29.5m) underpinned by a number of major contract wins and new business initiatives.

• Closing order book up 63% to £78.9m (31 December 2018: £48.3m), providing visibility of c. 94% of FY2019 revenue expectations.

• Cash balance of £9.0m (31 December 2018: £22.4m) - after acquisition of Sapienza and further investment in the business.

Operational highlights

• Extended global reach and capability through new partnerships and an acquisition

o Acquisition of Sapienza, a leading provider of software and business services to the European space and defence sectors.

o Ongoing investment in people, products and services driving further organic growth initiatives.

o Accelerating U.S. partnerships network and other international business opportunities.

o Signed exclusive 9-year technology licensing agreement with Battelle Inc. ("Battelle") for their innovative nanotechnology.

• Significant H1 contract momentum exceeding £39 million order intake including:

o £16.9 million contract with a leading UK defence company to provide advanced packaged equipment.

o £6.4 million additional contract with Baker Hughes within the nuclear sector.

o £2.6 million of new and follow-on orders from the Ministry of Defence ("MoD").

o £1.4 million consulting agreement for the Land Environment Tactical Communication and Information Systems ("LE TacCIS") programme.

• Investment in business development initiatives underpinning sales pipeline and order book

o Built a pipeline of sales opportunities worth >£700 million across many years.

o Group order book continues to grow, with order intake more than 50% ahead of the rate of conversion to revenue.

Phil Cartmell, Chief Executive Officer of TP Group, commented:

"We are very pleased to report such a positive start to 2019. We have been very focused on investing in strengthening our core business, as well as building upon these foundations with acquisitions and partnerships to expand our propositions, customers and geographic reach.

"We have real talent within our team, and are working on exciting technical and commercial plans to build the future value of the business. The Board is confident in the Company's prospects for the rest of this year and anticipates delivering a full-year performance in line with market expectations."

Notes:

1. Adjusted operating profit is defined as operating loss adjusted to add back depreciation of property, plant and equipment and right-of-use assets, amortisation of intangible assets and impairment gains or losses on non-current assets, changes in fair value of contingent consideration, acquisition consideration accounted for as employment costs owing to on-going service conditions, any other acquisition-related charges, share based payment charges and non-operating costs. Non-operating costs are those items believed to be exceptional in nature by virtue of their size and or incidence. The directors of the Company believe this measure is more reflective of the underlying performance of the Group than equivalent GAAP measures. This is primarily due to the exclusion of non-cash items, such as share-based payments, impairment, depreciation and amortisation, as well as acquisition and non-operating costs. This provides shareholders and other users of the financial statements with the most representative year-on-year comparison of operating performance. This measure and the separate components remain consistent with 2018.

For further information, please contact:

Notes to Editors

TP Group designs and develops advanced technologies, engineers complex equipment and systems, and provides support throughout their operational life. The Company's shares have been traded on AIM since July 2001.

Business Review

Introduction

The Group has made a strong start to the year driven by a combination of organic growth and the positive impact of acquisitions. The business is on track to meet its 2019 objectives and to deliver full year performance in line with market expectations.

The Group continues to be recognised as a provider of mission-critical solutions across our global client base. We have now created a broad platform of advanced technologies and skills which we use to help our customers complete highly technical tasks.

TP Group now has over 400 employees, with talented engineers, technicians and consultants operating from six countries in Europe to deliver services and cutting-edge technologies across an international customer base.

The Group comprises two core business streams - Technology and Engineering and Consulting & Programme Services.

In the Technology & Engineering business, our highly skilled teams apply advanced technologies to produce solutions for our customers which can be relied upon for high performance and long service life, often in difficult or dangerous environments. The Consulting & Programme Services business provides targeted through-life services and support to enable the transformation and evolution of our clients' systems and operations. Working within their specialist domains, we help them to meet their strategic objectives or business vision.

The Group has made significant progress over the past five years, with our management team keenly focused on accelerating growth to create a wider operational base from which to deliver value to our global customers and our loyal stakeholders.

The Group generated record revenues in H1 2019 of £26.0m, up £10m (63%) on H1 2018 with growth in both of the Group's business streams. Of this, organic growth was £5.6m and revenue from the acquired companies contributed £4.4m.

An operating loss in the period of £1.0m is £0.3m more than the equivalent period in 2018: £0.7m. This increase can be attributed to contractual deferred consideration for Westek and Sapienza as well as acquisition fees for Sapienza, and increased depreciation and amortisation from these acquisitions. This combination of charges was partially offset by a reduction in non-operating costs.

Adjusted operating profit of £2.4m is 161% higher than H1 2018 (£0.9m) driven by a combination of increased revenue and improved gross profit margins. Gross profit margin improved to 29.9% (H1 2018: 26.7%) through better returns on existing fixed production overheads, whilst continuing to invest in the business to support further growth, with a focus on business development and marketing activities.

The Group's closing cash balance was £9.0m (31 December 2018: £22.4m). This follows further investment in the operating structure of the business, the acquisition of Sapienza (£8.7m), and the subsequent funding of their further investment in Lift BV (c. £0.5m), a developer of Artificial Intelligence ("AI") systems to support rapid resourcing of large-scale technical projects. This investment increased Sapienza's shareholding from 33% to 69%. Working capital in the period shows an outflow of £4.1m. Much of this is timing, with approximately £2m relating to the over-achievement in the year-end 2018 closing cash position, and the balance relating to payments for a number of major contracts forecast to be collected in H2.

Pleasingly, the Group's order book continues to grow, increasing to £78.9m at the period end (31 December 2018: £48.3m). This includes £15.5m from Sapienza in addition to 31% organic growth from the existing business. This strong order book provides visibility of approximately 94% of the full year 2019 market expectations for revenue. There is also approximately £50m in the order book that will carry forward into future years' revenues, alongside an expanding pipeline of sales opportunities valued in excess of £700 million over many years.

Our growth strategy is driven by five priorities:

• Product development - ongoing investment in innovation and work with technology partners.

• Key account development - optimising cross-selling opportunities across the Group's international blue-chip customer base, and investing in business development and marketing resources to support this.

• Ongoing investment in our existing core business and capabilities.

• Execution and integration of acquisitions - as demonstrated by the recent transactions to acquire Polaris, Westek and Sapienza, alongside development of international partnerships that expand our reach and technology platform.

• Building a wider geographic presence through a mixture of organic business development and acquisition or partnership outreach.

The Group has continued to invest in business development resources, which includes both technology and headcount. This has further improved our access to key markets whilst also improving the effectiveness of our sales teams. These investments have helped us to secure several large or strategic sales of greater than £1m each. Two thirds of the intake in the first half year were of this type, supported by many smaller orders being converted efficiently across the business.

Acquisitions and Partnerships

In May 2019, the Group acquired Sapienza for an initial cash consideration of €10 million (£8.7 million) plus €1.5 million by way of the issue of 20,612,865 new ordinary shares and a possible earn-out of up to €2.0 million. Sapienza is a provider of highly complex solutions and skills to the European space and defence markets. With such specialist, technical services and skills, Sapienza is a highly complementary business for TP Group, with significant cross-selling opportunities. Sapienza has also developed a suite of commercial software tools and some technology-centric AI software which we are keen to leverage. Sapienza has facilities in six European countries, which immediately expands the Group's geographic reach, improving proximity to existing customers and access to a new international community. Once fully integrated, we believe Sapienza will help further drive the Group's participation in future European and global space programmes.

Our approach to M&A has been developed over the last seven years since the initial addition of the two Wellman companies that now underpin our Technology and Engineering business. This has enabled the Group to introduce new capacity, skills and customers and allowed us to support the acquired businesses with additional capital and resources. This formula is best demonstrated by the 2017 acquisition of Polaris, whose AI capability has been rapidly developed and who has now also built a key position in the MoD Skynet programme, the network of commercially managed military communications satellites operated on behalf of the MoD. Following these successes, the Group has used its relationships elsewhere to engage in detailed discussions with other industrial and government bodies on uses of AI for optimisation and intelligence processing.

Our expanding partner base provides a flexible pathway to new customers, geographies and technologies. In June 2019, we announced a nine-year technology partnership with US-based Battelle, giving the Group exclusive licensing rights for Battelle's innovative nanotechnology material, SAMMS. The Group intends to use SAMMS in an alternative approach to the management of carbon dioxide levels in confined spaces.

This agreement stands alongside the partnership with Micropore, signed in May 2018, and both are enabling us to be better positioned for global carbon dioxide management programmes.

Technology and Innovation

TP Group assists its customers to fly scientific and exploratory missions in deep space, protect national security by quietly patrolling the oceans, and communicate seamlessly and securely across continents. Our goal is to remain ahead of the curve in whatever our customers are aiming to achieve, and so investment in technology that creates a hub of innovation for our clients to exploit fits firmly at the centre of our business.

We are investing in technological capabilities across the Group, including facilities, equipment, skills and IP. This ongoing strategic focus has been applied in new areas such as AI, hydrogen systems and carbon dioxide management to deliver additional and relevant high value solutions. Recent steps on this development path include:

• A new lab test environment for the AI autonomous routing system which has successfully shown instant re-tracking as the landscape changes.

• A new carbon dioxide filtration system developed with American partners which shows 25% performance improvement over existing systems, to potentially reduce through life costs and the volume of consumables carried on missions.

Other developments are in progress and these will be showcased through our increasing involvement with industry and technical bodies, publication of papers and demonstration of innovations at trade shows and other events.

Work at the Group's Portsmouth facility on atmosphere management systems for use on submarines is well established and provides long-term earnings visibility for the business. Our innovations seek to maintain this leading position, using in-house resources and teaming with relevant partners where appropriate. New or enhanced approaches to carbon dioxide management and oxygen generation for confined workspaces have been developed, and we are seeking to explore other markets into which these technologies can be deployed. There is significant long-term value in this work, as each system generates around 30 years' additional through-life support and maintenance activity, which is typically worth at least the initial equipment sale revenue.

Our atmosphere management systems also produce hydrogen, which is increasingly relevant in terms of potential uses in future energy systems. We have invested in senior technical specialists to apply our technologies in innovative solutions to address energy storage, renewable power management and the migration of conventionally powered transport to new sources.

Outlook

The Group has evolved to become a balanced international group of companies that serves top-tier global customers with advanced equipment and services that they rely upon for their mission success. As these relationships develop and strengthen, we are increasingly invited to work on ideas and innovations to respond to their next round of challenges. This requires a depth of talent and knowledge to respond quickly, and we have invested to build this core capability. It also needs flexible, world-class facilities and people within our delivery centres to assure the highest quality and reliability of what we produce. We have invested here, too, to support our customers' critical missions to the fullest extent.

The strength of the core business, plus the exciting additions that we have made, and intend still to make, are reinforced by a large pipeline of sales prospects. We believe there is strong demand for what we do, and this presents a significant opportunity for the Group which validates our strategic vision and gives the Board confidence in the Group's future success.

Phil Cartmell

10 September 2019

Condensed consolidated statement of comprehensive income

All results relate to continuing activities.

1 Adjusted operating profit is defined as operating loss adjusted to add back depreciation of property, plant and equipment and right-of-use assets, amortisation of intangible assets and impairment gains or losses on non-current assets, changes in fair value of contingent consideration, acquisition consideration accounted for as employment costs owing to on-going service conditions, any other acquisition-related charges, share based payment charges and non-operating costs. Non-operating costs are those items believed to be exceptional in nature by virtue of their size and or incidence. The directors of the Company believe this measure is more reflective of the underlying performance of the Group than equivalent GAAP measures. This is primarily due to the exclusion of non-cash items, such as share-based payments, impairment, depreciation and amortisation, as well as acquisition and non-operating costs. This provides shareholders and other users of the financial statements with the most representative year-on-year comparison of operating performance. This measure and the separate components remain consistent with 2018. 

2 Acquisition costs consist of accrued earn-out payments on Polaris acquisition £262,000, Westek acquisition £275,000 and Sapienza £218,000. Costs associated with the purchase of Sapienza amount to £744,000 and £183,000 relates to ongoing acquisition opportunities. The H1 2018 costs include a change in the fair value of contingent consideration that resulted in a credit to the income statement of £222,000.

Condensed consolidated statement of financial position

Condensed consolidated statement of changes in equity

Condensed consolidated statement of cash flows

Notes to the condensed set of unaudited interim financial statements

1. Nature of operations

TP Group is a system engineering business working in defence, intelligence and security, space and energy sectors. With specialist consultants, engineers and precision manufacturing, we deliver mission-critical systems and equipment that keeps our customers and the wider public moving, working and secure.

Our customers trust us to ensure the safety, reliability and performance of complex systems in the most challenging or arduous situations. With global presence and proven field experience, TP Group is the first choice for platform builders, integrators and users of both military and industrial systems. The Group consists of two business streams:

TP Group plc (the "Parent Company") is the Group's ultimate parent company, which is incorporated under the Companies Act and domiciled in the United Kingdom. The address of the registered office of the Parent Company is Cody Technology Park, Old Ively Road, Farnborough, Hampshire, GU14 0LX. The Parent Company's shares are listed on the Alternative Investment Market of the London Stock Exchange.

The condensed consolidated unaudited interim financial statements are presented in pounds sterling, which is also the functional currency of the Parent Company, and all values are rounded to the nearest thousand pounds except when otherwise indicated.

The financial information set out in this interim report does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The Group's statutory financial statements for the year ended 31 December 2018, prepared under IFRS as adopted by the EU, have been delivered to the Registrar of Companies. The auditor's report on the 2018 financial statements was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under Section 498(2) or Section 498(3) of the Companies Act 2006.

The condensed consolidated unaudited interim financial statements were approved for issue by the Board of Directors on 9th September 2019.

2. Basis of preparation

These condensed consolidated unaudited interim financial statements are for the six months ended 30 June 2019.

These condensed consolidated unaudited interim financial statements have been prepared under the historical cost convention using accounting policies consistent with International Financial Reporting Standards (IFRS) as adopted by the European Union. The accounting policies, presentation and methods of computation in the condensed set of financial statements are as they will be applied in the Group's 2019 annual audited financial statements. While the financial figures included in this half-yearly report have been computed in accordance with IFRS applicable to interim periods, this half-yearly report does not contain sufficient information to constitute an interim financial report as that term is defined in IAS 34.

Going concern

The directors of the Company are satisfied that the Group has adequate resources to continue in business for the foreseeable future, and accordingly continue to adopt the going concern basis in preparing the accounts. In reaching this conclusion, the directors of the Company have considered forecasts that cover a period of at least twelve months from the date of the approval of these unaudited interim financial statements and mitigating actions available to them, including the ability of management to make certain reductions to the Group's discretionary expenditure if required. 

Changes in accounting policies

The following Standards and Interpretations are effective from 1 January 2019. Application of these standards has no material impact on the results of the Group:

Notes to the condensed set of unaudited interim financial statements

3. Segmental reporting

The following is an analysis of the Group's revenue and results from the continuing operations by reportable segment.

 Notes to the condensed set of unaudited interim financial statements

4. Loss per share

The calculation of the basic loss per share is based on the loss after tax for the period divided by the weighted average number of shares in issue during the period as follows:

The weighted average number of shares in issue has been reduced by deducting the weighted average number of shares held by the Employee Benefit Trust of 1,606,770 shares (six months ended 30 June 2018 and year ended 31 December 2018: 1,606,770 shares).

The issue of additional shares on exercise of employee share options would decrease the basic loss per share and there is therefore no dilutive effect of employee share options.

5. Business combinations

On 30 April 2019, the Group through its parent company TP Group plc, acquired 100% of the issued share capital of Sapienza Consulting Holdings BV ("Sapienza") on a normalised working capital and cash free/debt free basis, for a combined initial consideration of €10 million in cash and €1.5 million by way of the issue of 20,612,865 new ordinary shares of 1 pence each in the Company. In addition, a maximum of €2.0 million may also be payable in cash on delivery by the vendors of certain transition activities within two years following completion of the acquisition. The acquisition costs have been paid in cash from the Group's existing cash resources. Sapienza was a privately-owned group of services and software companies serving the space and defence sectors.

On 28 June 2019, the Group via its subsidiary Sapienza Consulting Holdings BV acquired additional shares in Lift BV, increasing its shareholding of 33% to 69%. The additional 36% was acquired for an initial consideration of €486,000 in cash, paid from the Group's existing cash resources, and a further consideration of €216,667 in cash to be paid over an 18 month period, again from the Group's existing cash resources. Lift is a software business that designs AI based conversational technology.

The principal reason for the acquisition of Sapienza and the increased investment in Lift is to support the Group's evolution as a diversified engineering and services group. Sapienza and Lift form part of the CaPS business segment.

Provisional estimates of the fair value of identifiable assets and liabilities acquired are as follows: