12 December 2017

Pressure Technologies plc

("Pressure Technologies" or the "Group")

 

2017 Full Year Results

 

Pressure Technologies (AIM: PRES), the specialist engineering group, announces its full year results for the year ended 30 September 2017.  

 

John Hayward, CEO of Pressure Technologies, said:

"The reorganisation in recent years means that there are significant operational gearing gains to be made as volumes increase. The recent share issue improves the Group's ability to support large-scale organic growth, and with no immediate major capital expenditure required the Group is in good shape."

Financial

?    Revenue £38.4 million (2016: £35.8 million)

?    Adjusted operating profit*  £1.1 million (2016: loss £(0.4) million)

?    Reported loss before tax of £(1.9) million (2016: loss £(0.4) million)

?    Adjusted earnings per share of 6.3p (2016: loss (2.6)p***)

?    Reported basic earnings per share loss of  (7.9)p (2016: earnings 4.4p)

?    Operational cash inflow before working capital movement** of £2.5 million (2016: £0.5 million)

?    Closing net debt at £11.1 million (2016: £6.6 million)

?    Post year-end fundraising of net £4.8 million

 

*before M&A costs, amortisation and exceptional charges and credits 

**before payment of redundancy and reorganisation costs

***from continuing operations

 

Operational

?     Precision Machined Components Division order intake more consistent with stronger second-half

?     Manufacturing gross margins increased to 35% (2016: 31%)

?     Acquisition of Martract in December 2016

?     Creation of PMC brand to give improved customer offer

?     Alternative Energy restructured from a regional to a functional model and broke even (2016: loss £(1.1) million)

?     Full review of management capability resulting in additional senior management appointments

?     Investment in IT systems to improve communication and promote collaboration

 

For further information, please contact:

 

Pressure Technologies plc John Hayward, Chief Executive Joanna Allen, Group Finance Director Keeley Clarke, Investor Relations	Today Tel: 020 7920 3150 Thereafter, Tel: 0114 257 3622 www.pressuretechnologies.com
Cantor Fitzgerald Europe (Nominated Adviser and Broker)	Tel: 020 7894 7000
Philip Davies / Will Goode
Tavistock Simon Hudson	Tel: 020 7920 3150

 

COMPANY DESCRIPTION

 

Company description - www.pressuretechnologies.com  

With its head office in Sheffield, Pressure Technologies was founded on its leading market position as a designer and manufacturer of high-pressure components and systems serving the global energy, defence and industrial gases markets. Today it continues to serve those markets from a broader engineering base with specialist precision engineering businesses and has a worldwide presence in Alternative Energy as a global leader in biogas upgrading.

Pressure Technologies has four divisions, Precision Machined Components, Engineered Products, Cylinders and Alternative Energy, serving four main markets: oil and gas, defence, industrial gases and alternative energy.

Precision Machined Components

?     Al-Met, Mid Glamorgan, acquired in 2010 www.almet.co.uk  

?     Roota Engineering, Rotherham, acquired in March 2014 www.roota.co.uk  

?     Quadscot, Glasgow, acquired in October 2014 www.quadscot.co.uk  

?     Martract Limited, Barton-on-Humber, acquired in December 2016 www.martract.co.uk  

Engineered Products  

?     Hydratron, Manchester, acquired in 2010 www.hydratron.com  

Cylinders

?     Chesterfield Special Cylinders, Sheffield, IPO cornerstone in 2007 and includes,  CSC Deutschland Gmbh, which is based in Dorsten, Germany and Chesterfield Special Cylinders Inc. which is based in Houston, USA www.chesterfieldcylinders.com  

 

Alternative Energy

?     Greenlane Biogas, Sheffield, UK; Vancouver, Canada and; Auckland, New Zealand acquired in October 2014 www.greenlanebiogas.com  

 

 

CHAIRMAN'S STATEMENT

 

Overview

 

I look back on this past year for the Group as one of preparing for future growth across all our Divisions, whilst at the same time maintaining stability against a backdrop of very challenging oil and gas market conditions.

 

During the past three years, it is estimated that global oil and gas Capex and Opex spending has reduced by some 30%.  Reports indicate that Capex and exploration spending will have reduced by $1 trillion from 2015 through 2020.   The net impact on job losses worldwide is estimated at 440,000, with 124,000 in the UK alone.

 

Within the Group, we have reacted to these unprecedented market conditions by reducing our headcount by 40%, but have been careful to protect our knowledge and skills base, to be well positioned to respond to increased demand when it arrives.  We have also invested in further development of our people and added key leadership and sales resources across the Group.   Given the tough market conditions we've traded through for the past three years, I'd like to express my respect and admiration for the way our people have steadfastly risen to the various challenges we've encountered.

 

In addition to developing and adding to our skills base, we have invested in systems and processes that make us more efficient and productive and have restructured the Alternative Energy Division from a regional to a functional model, which will improve efficiency and the ways we win and execute projects.

 

It is heartening to report that, towards year-end, we were approached by institutional investors who expressed a desire to make further investment in the Group.  I see this as a sign that many market observers anticipate that the oil and gas market is about to rebound and they see Pressure Technologies as an enterprise that has been resilient in the downturn and is primed for growth.  This investment gives us more fire power to react to opportunities as they arise.

 

Whilst the oil and gas market has been in the doldrums, we have of course been busy pursuing other industrial sectors.  The biogas market continues to offer substantial potential, but has been frustratingly slow to deliver due to a whole range of factors, but we remain committed to retaining and building on our position as the market leader within our sphere.  CSC's market leadership in large high-pressure cylinders maintains our enviable position as the company of choice for many of the world's navies and air forces.

 

In December 2016, we acquired Martract, a business that specialises in the grinding and lapping of ball valves.  Martract is a company that we monitored for some time as a potential add-on to our PMC companies. It offers us potential for vertical integration by extending our core skill sets, along with pull-through opportunities into new industrial sectors, as 60% of Martract sales come from outside the oil and gas market.

 

Results

 

I am pleased to report that Group revenue increased to £38.4m, a 7.5% increase on last year, whilst adjusted operating profits were £1.1m, a substantial improvement from a loss of £0.4m recorded last year.  The increase in revenue was primarily driven by a 40% increase in sales seen in Alternative Energy on the back of a strong opening order book.   The improvement in adjusted operating profit was primarily driven by Alternative Energy, which broke even for the first time since the acquisition of Greenlane and the contribution from Precision Machined Components, including nine months of Martract.

 

Operating cash inflow before movements in working capital and reorganisation and redundancy costs was £2.5 million, significantly better than £0.5m recorded last year.  Net debt was £11.1 million, an increase of £4.5m versus last year, primarily due to the acquisition of Martract and net investment in working capital.  Post year-end the Group completed a share placing, raising net proceeds of £4.8m.

 

Despite the fact that this year's financial results are a clear improvement over last year, the board has resolved that no dividend shall be paid to shareholders this year, as cash reserves will be key to funding profitable growth in the coming months.

 

Outlook

 

The level of optimism within the oil and gas market is increasing by the month.  Major oil companies reported healthy profits for quarter-three 2017, which is a sure sign that their attentions will start to move towards investment and growth.  Recent assurances by OPEC that production cuts will be sustained until supply-demand has been rebalanced is encouraging.  Even the top three US-based shale producers have issued a cautionary note on the speed and level of investment that is prudent in order to sustain a profitable oil price.

 

Renewable energy is becoming more topical amongst the public at large and governments are making bold statements about moving away from carbon-based fuel sources.  Whether some of these rather ambitious political statements are achievable remains to be seen, but the general increase in awareness of what renewable energy has to offer is helpful.   The potential market for biogas is enormous and we remain confident it will materialise and offer us substantial opportunities for increasing sales and profits.

 

Given that we are already working on the design of cylinders for the Dreadnought-class of nuclear-powered submarines for the UK Ministry of Defence, which offers us a visible order pipeline for some years ahead, it is pleasing to conclude that all three of our other major industrial markets look promising for the foreseeable future.

 

Given a more positive outlook in our core markets and the recent fundraise that has bolstered our financial resources, supported by steps we've taken to ready our businesses for growth, the Board is optimistic that the Group is well prepared to capitalise on opportunities as they arise.

 

 

BUSINESS REVIEW

 

The Group's core technical skills are highly valued by our customers, many of whom are pioneers in what they do. They choose to work with us because of our ability to transform their innovative ideas into high-quality, safety-critical products where the opportunity cost of failure is often orders of magnitude higher than the cost of the product. This creates strong relationships built on the honest and open way in which we do business and our culture of delivering excellence.

We have an unrivalled heritage, with over 120 years of experience and knowledge making us clear leaders in our markets. Chesterfield Special Cylinders is the world's leading supplier of cylinders and inspection services into the naval and military aerospace markets. Our Precision Machined Components and Engineered Products businesses are trusted suppliers to the world's leading oil and gas innovators. Greenlane Biogas is a pioneer in biogas upgrading, a world leader with the largest installed base of upgraders, having supplied the world's two largest upgrading projects and recently developed the world's largest ever upgrader, the Kauri.

 

The year witnessed further significant changes in the Group. The impact of major reorganisation in our three manufacturing Divisions: Precision Machined Components, Engineered Products and Cylinders undertaken in prior years began to show material bottom-line impact particularly in PMC and Cylinders. Further progress was made in the Alternative Energy Division, which broke-even, whilst at the same time undergoing a radical restructuring.

 

The key points for the year are:

 

Manufacturing Divisions

Precision Machined Components Division ("PMC")

 

	2017 £m	2016 £m	2015 £m	2014 £m	2013 £m
Sales revenue	10.4	10.7	18.8	13.0	6.4
Adjusted operating profit	1.8	1.4	4.5	3.0	1.0

 

PMC comprises Al-Met, Roota Engineering, Quadscot Precision Engineers and Martract - which was acquired in December 2016. Al-Met produces wear resistant components in a range of high alloy steels and tungsten carbide for using high-pressure control valves, designed to regulate flow volumes in extremely demanding applications in the subsea and surface oil and gas industries. Roota and Quadscot make a wide range of components for oil and gas pressure systems and down-hole tools, with Roota generally focusing on larger, longer product and Quadscot on smaller components, manufactured in a range of high alloy materials.  Martract specialises in grinding and lapping ball and seat assemblies and gate valves, which is highly complementary to the Division, enabling it to offer a product that is unmatched by competitors.

 

Significant progress has been made in the Division since the second-half of the 2016 financial year, which marked the low point for order intake from the core oil and gas market. In 2017, first and second-half sales were 1.7% and 10.4% higher than the second-half of 2016 respectively.

 

Increasing order volumes have given more consistent order intake patterns for Roota and Al-Met. This has resulted in improvements in gross margins, as the benefits of latent capacity created by investment in new technology and better productivity have been realised.  Quadscot remained affected by reduced customer spending throughout the majority of the year. A combination of increased activity from core and new customers lifted its final-quarter sales, which has continued into the new financial year.

 

The appointment of a Business Development Director in March has resulted in winning work from new customers, a trend that is expected to continue. To date, the Division has secured orders from eight new customers, with a focus on technical equipment manufacturers. The purchase of Martract in December 2016 is giving further opportunities to secure new customers, since 60% of their customers are outside the oil and gas industry. As a result, opportunities exist to cross-sell the Division's capabilities into other industries, such as chemical processing and nuclear decommissioning.

 

The strategy for PMC is to grow revenue and profits by building on the existing businesses through collaboration, cross-selling, product and key-account expansion, as well as the development of new markets that offer growth and strengthen the Division's resilience.  Any acquisitions will be complementary to this positioning.  In furtherance of this strategy, a rebranding exercise has been completed to give a common "feel" to logos and websites. This involved the creation of a PMC brand, which is important when dealing with major customers, as it highlights the strength in depth of the Division.  Promoting the brand highlights our ability to minimise supply chain risk, as we are able to move work between sites. At a time when our customers are also looking to reduce the number of companies on their Approved Vendor Lists ("AVL"), contracting with the PMC Division gives them four vendors for one entry in their AVL.

 

Near-term prospects for PMC remain positive, with our core customers expressing a more upbeat outlook for 2018 and significant potential for growth from new customers and markets. The Division is recruiting additional skilled engineers and operators and investing in new equipment to benefit profitably from increasing sales revenue.

 

Engineered Products Division ("EP")

 

	2017 £m	2016 £m	2015 £m	2014 £m	2013 £m
Sales revenue	3.9	4.1	6.7	8.1	7.3
Adjusted operating profit/(loss)	(0.5)	(0.3)	0.1	1.6	1.1

 

 

EP manufactures a range of Hydratron-branded air-operated, high-pressure hydraulic pumps, gas boosters, power packs, hydraulic control panels and test rigs, mainly for use in the oil and gas sector.

 

The Division continued to be impacted by reduced capital expenditure and discretionary spend from its core oil and gas market, so sales were 7% lower than 2016. The second-half of the financial year saw some patchy improvement in order intake and the engineered systems sales team was expanded to meet this increased level of activity. Action taken in 2016 to reduce costs and improve productivity contained the losses in 2017.

 

Considerable effort was focused on expanding the number and quality of distributors, with seven new distributors appointed, which should yield increasing revenues as 2018 progresses. The first-quarter of this new financial year has seen a continuation of the improved ordering pattern, with a more profitable mix of projects but, as yet, there is no clear pattern of improvement in their core oil and gas market.

 

Cylinders Division

 

	2017 £m	2016 £m	2015 £m	2014 £m	2013 £m
Sales revenue	8.4	9.5	14.3	21.4	17.3
Adjusted operating profit	1.1	1.1	2.1	3.8	3.6

 

Chesterfield Special Cylinders ("CSC") supplies a range of high-pressure gas cylinder systems into the defence, oil and gas and industrial gases markets. Revenue for the year was lower by £1.1 million, as revenue from oil and gas reduced again. However, operating profit was maintained through a better mix of higher added value work in other markets.

 

The defence market is now the mainstay of the business, where the Division has over 80 years of experience in providing cylinders and services to the naval and military aerospace markets. This heritage in a highly demanding market, makes CSC the natural choice for cutting edge product development, as evidenced by the award of cylinder design for the Dreadnought class submarine, Trident's successor. Cylinders for the first boat-set will be delivered during 2018, along with further deliveries into overseas markets. Business Development efforts continue to focus on breaking into the substantial US defence market and the Pittsburgh sales team sales team has recently been strengthened.

 

For CSC, the oil and gas market remains depressed. The largest volume of sales has traditionally come from Air Pressure Vessels (APVs) for motion compensation systems on drillships and semi-submersible drilling rigs for the deepwater subsea sector. Fewer than 50% of the available vessels are currently utilised in this market and no major build program is forecast. Revenue in 2017 was limited to small projects for floating cranes; that said, CSC was awarded a contract to supply APVs for delivery in 2018 for a new drillship, the only such order placed in the last three years.

 

Revenue in the industrial gases market has largely come from service work with an upturn in the volume of high-pressure gas trailer statutory re-test and refurbishment arising from the phasing of prior capital expenditure by the Gas Majors. This work is forecast to increase further in 2018 and, together with our integrity management offering into the defence and oil and gas markets, will help underpin continued profitability. It is worth noting that since 2014, higher margin service related revenue has grown by almost 45%.

 

Capital investment in 2017 was centred on the ultra large cylinder forge project which is now complete. Investment in 2018 is planned to improve CSC's small cylinder spinning capability, which will increase productivity and also the potential product range.

 

The outlook for 2018 is positive, underpinned by the Dreadnought work and further expansion of CSC's service offerings.

 

Alternative Energy Division ("AE")

 

	2017 £m	2016 £m	2015 £m	2014 £m	2013 £m
Sales revenue	15.8	11.3	14.0	8.4	1.1
Adjusted operating profit/(loss)	0.0	(1.1)	(1.1)	1.1	(0.5)

 

AE is a designer and supplier of equipment used to upgrade biogas produced by the anaerobic digestion of organic waste into high-quality methane, which is suitable either for injection into the gas grid, or used as vehicle fuel. It trades under the name of Greenlane, the long-established market leader in water-wash biogas upgrader equipment acquired by the Group at the beginning of financial year 2015.

 

Against a backdrop of a further radical reorganisation, the Division broke-even, on an adjusted basis, for the first time since the acquisition of Greenlane. During the first-half of the year, a full review of the management structure and effectiveness was conducted. A functional structure has been implemented with the Division now centred in Vancouver, Canada. Sales and engineering support are still regionally based with Vancouver covering the Americas and China; Sheffield in the UK will be responsible for Europe, Africa and Asia. As a result of the reorganisation, headcount has been reduced by 20%, whilst at the same time, sales resources have been strengthened and a new President for the Division joined in November 2017.

 

Product development remained a priority for the Division with a first order received for a Kauri upgrader, the world's largest single upgrader plant, which is currently being commissioned in the USA.  A second generation, entry level, Kanuka upgrader has also been installed and commissioned in Finland. In addition to core water-wash technology, Greenlane is currently commissioning a biogas plant using pressure swing adsorption technology (PSA) in California.  The Division also offers membrane technology for cleaning gas, which differentiates Greenlane as the only "technology agnostic" provider of biogas upgraders in the world.

 

The closing order book at year end was £5 million, compared to £14 million at the end of 2016.  The significant pipeline of good quality sales opportunities proved frustratingly slow to convert to orders, partly due to the disruptive effect of the reorganisation, but in the main external factors were the root cause.  In the UK, a proposed change to the Renewable Heat Incentive, which favoured biogas upgrading, was initially delayed by a drafting error in the legislation, then further delayed by the general election and is now expected at the end of the first quarter of calendar year 2018.  In North and South America, several potential orders were delayed due to customer issues around project funding and environmental permits.  Since year end, one contract has been secured in the UK and three projects are at final negotiation in the UK, USA and Brazil.

 

The sales pipeline has a value in excess of $200 million and the market in the USA is set for rapid expansion, a major reason for the centring of the Division in North America. To rapidly extend market reach, AE is in negotiation with a number of potential collaborators with allied technology, for example anaerobic digester manufacturers, to pool opportunities and present a "one stop shop" to potential customers. Pooling will also give the opportunity to bring third-party funding into projects where our current individual projects are too small to warrant investors' attention. At the same time, AE is looking to licence upgrading technology for markets that are either too small, or complicated for direct selling.

 

People

 

The Group has undergone substantial downsizing during the past three years in response to the downturn in the oil and gas market, resulting in a 40% reduction in headcount overall.  We have, however, been careful to protect our knowledge and skill base and taken steps to prepare the Divisions for the inevitable market recovery.  During the course of 2017, we have undertaken a thorough review of management competence, capability and bench strength throughout the Group.  As a consequence, a number of development programs have been implemented and additional management resource has been hired in the shape of a Head of HR at Group level and new Divisional Directors in AE and PMC.

 

As ever, we remain committed to training, education and continuous development. The apprentice levy will have no impact on the Group as we expect to fully recover this through our apprentice and management training programmes. We work in a high-technology environment where continuous improvement in our levels of training and education is essential if we are to maintain competitive advantage.

 

To improve communication and collaborative working across the Group, office systems are in the process of migration from local server based software to Google Suite, thereby allowing real time sharing and collaboration between individuals and businesses. This has been completed for Head Office and the Manufacturing Divisions and will be extended to Alternative Energy during 2018. Health and Safety management is now run on a group-wide basis with regular meetings involving all Divisions and this model has been extended to include cybersecurity and information technology management in 2018.

 

All manufacturing businesses in the Group, with the exception of Martract, now have OH SAS 18001 accreditation for health and safety. Martract will gain this as a branch of Roota Engineering during 2018. In the Alternative Energy Division, Vancouver does not yet have accreditation and is targeted to achieve this by the end of 2018 as is Head Office.

 

Outlook

 

The outlook for Cylinders and Precision Machined Components is much stronger than it was a year ago. Defence work in Cylinders and more stable ordering patterns in PMC gives far greater visibility and confidence in forecasts. Engineered Products is still experiencing unpredictable ordering patterns but at a level that makes the business sustainable. Alternative Energy remains in a position of unfulfilled promise but the reorganisation and market dynamics give cause for optimism.

 

Across all its markets, the Group is well positioned with solid, long-term relationships with global blue chip customers and a growing pool of new customers, distributors and partners. Renewed confidence in the oil and gas market will eventually extend to growth in Cylinders and Engineered Products, as it is currently doing in Precision Machined Components.

 

The reorganisation in recent years means that there are significant operational gearing gains to be made as volumes increase. The recent share issue improves the Group's ability to support large scale organic growth, and with no immediate major capital expenditure required the Group is in good shape.

 

John Hayward

Chief Executive Officer

12 December 2017

 

 

 

FINANCIAL REVIEW

Highlights

 

?    Revenue up 7.5% to £38.4m (2016: £35.8m)

?     Adjusted operating Profit* £1.1m (2016: loss £(0.4)m)

?     Adjusted operating cash inflow^*** £1.0m (2016: £5.1m)

?     £3.6m Acquisition of Martract Ltd

?     Revenue per employee** up 27% to £161k(2016: £126k)

?     Return on Revenue 2.9% (2016: -1.1%)

?     Closing Net Debt £11.1m (2016: £6.6m)

?     Post year-end fundraising of £4.8m

 

*excluding acquisition costs, amortisation on acquired businesses and exceptional charges and credits. Including 9 months post-acquisition result of Martract

** based on straight average number of employees

*** before payment of redundancy and reorganisation costs  

 

I am pleased to present the results of what has been a very busy and progressive year for the Group.  The Manufacturing Divisions are beginning to experience an uplift in activity:  on a like-for-like basis, second-half oil and gas sector revenue was a further 3.4% up on the first-half, demonstrating that the second-half of 2016 was a clear low point.  We have also seen profitability continue to improve. Like-for-like, the 3.7ppt year-on-year increase in gross margin percentage is a reflection of both the impact of actions taken by management in recent years, plus the volume and mix of work in the high margin niche sectors supplied by the Group. 

Our acquisition of Martract was completed in December 2016 and in the nine months since acquisition the business has contributed £0.3 million of operating profit.

Alternative Energy has delivered the contracts in the opening order book posting £15.8 million total revenue in the year (2016: £11.3 million) of which £12.6 million was for biogas upgrader projects (2016: £8.9 million).  Expected gross margin improvement has, however, yet to be seen due to cost overruns on certain European projects, and reported gross margin is slightly lower than prior year at 17.3% (2016: 17.4%). 

Across the Group, we have continued to invest in new products and capital equipment for both production capability and IT systems.  Some £0.3 million in plant and machinery has been invested in the Manufacturing Divisions, £0.6 million in new product development and a further £0.4 million in group-wide IT.

In the short-term, the financial priorities continue to focus on the reduction in net debt with working capital management to the fore.  While debtor days are generally acceptable in the Manufacturing Divisions, we have seen certain oil and gas customers routinely stretch payment beyond terms at quarter-ends. Good progress has however been made in the control and reduction of raw material and consumable stock, particularly in the EP Division.  This, combined with the phasing of contract revenue, has resulted in a net investment in working capital in 2017 of £1.5 million (2016: net benefit £4.6 million).

The post year-end oversubscribed share placing, which resulted in net proceeds of £4.8 million, immediately reduced net debt and positions the Group well to capitalise on the clear momentum in market opportunity being experienced, particularly in the PMC Division.

Trading result

Manufacturing

 

?     Revenue down 7.4% to £22.6 million (2016: £24.4 million)

?     Gross profit margin 35.4% (2016: 31.0%)

?     Adjusted operating profit* up 12.5% to £2.4 million (2016: £2.2 million)

?     Return on revenue 10.7% (2016: 8.8%)

?     Revenue per employee** up 13.1% to £124,000 (2016: £109,000)

?     Adjusted operating cash inflow***£2.7 million (2016: £5.0 million)

?     Cash conversion 1.1: 1 (2016: 2.4:1)

?     Restructuring costs £0.1 million (2016: £0.8 million)

 

PMC and CSC are beginning to experience an uplift in activity, with increased confidence in the oil market providing PMC with a stabilised and increasing order-load, whilst strong defence contracts secured in CSC stretch into the medium-term.  These two divisions contributed £2.9m of operating profit in 2017, an increase of 18.4%.  Return on Revenue has increased by 3.4ppt to 15.5%, demonstrating the benefits of both the mix of work in CSC and the volume of activity in PMC, underpinned by cost reduction initiatives implemented in recent years.

Restructuring benefits in EP are still to be reflected in the bottom-line, as low oil and gas volumes continue to impact. Second-half revenue increased 23% over the first-half, with a 7.6ppt increase in Return on Revenue. Whilst encouraging, this was not enough to exceed their break-even point. The current low market volumes magnify the effects of the mix of work and, together with the impact of lower spares sales in the summer months, was a contributory factor in the second-half operating loss.

The Manufacturing Divisions £2.4 million adjusted operating profit for the full-year was slightly ahead of the latest market expectation (£2.3 million).

Alternative Energy

 

?     Revenue £15.8 million (2016: £11.3 million)

?     Gross profit margin 17.3% (2016: 17.4%)

?     Adjusted operating profit* at break-even (2016: loss £(1.1) million)

?     Return on revenue 0.0% (2016: loss (9.4)%)

?     Revenue per employee** up 40% to £353,000 (2016: £242,000)

?     Adjusted operating cash outflow*** £(0.8) million (2016: inflow £0.9 million)

?     Closing order book £5.0 million (2016: £14.2 million)

?     Restructuring costs £0.4 million (2016: £0.8 million)

 

Revenue from the installation and commissioning of biogas upgraders in the year was delivered from the opening order book.  No new biogas upgrader projects commenced in the year, although there was a scope increase on one project.  Non-upgrader sales for aftermarket support and other products were £3.2m.

Gross margins were adversely impacted in the second-half due to cost overruns on certain European projects, which negated the benefit of the 5.5ppt margin improvement in the first-half versus the second-half of 2016, resulting in a marginally lower gross margin for the full year.

The Division began restructuring in March 2017 and this was largely complete by the fourth-quarter.  The benefits of this have yet to come through to the operating profit and Return on Revenue, which in the second-half was adversely impacted by both the weighting of sales to the first-half and lower gross margins. 

The result for the full-year was in-line with the latest market expectations.

Central costs

 

Unallocated central costs (before M&A, amortisation on acquired businesses and exceptional charges) were £1.4 million (2016: £1.5 million).  The reduction continues to reflect the group-wide focus on cost reduction, investment in IT systems and combining of roles.

In respect of the Group's various share option plans a share based payment cost of £0.1 million has been recognised in adjusted operating profit (2016: £0.3 million).

Exceptional items

 

Reorganisation and redundancy costs in the year were £0.7 million (2016: £0.7 million), which predominantly relate to the AE Division and Group.

M&A related exceptional items and amortisation costs were £2.0 million (2016: £1.1 million credit) and include the £0.6 million write-back of the deferred consideration of Martract Limited.  Underlying amortisation charges were £2.4 million compared to £2.2 million in the prior year, the increase being solely due to the acquisition of Martract.

Taxation

 

The tax credit for the year was £0.8 million (2016: £1.0 million).

The loss before tax, effect of the change in tax rates in the year and adjustments in respect of prior years have all contributed to the tax credit in 2017. The applicable current tax rate for the year is 19.5% (2016: 20%). The reduction in rate of tax and the utilisation of losses have resulted in a lower effective tax rate than the current rate of tax.

Corporation tax refunded in the year totalled £0.2 million (2016: £0.5 million), which relate to the UK and Canada.

Foreign Exchange

 

The Group has exposure to movements in foreign exchange rates related to both transactional trading and translation of overseas investments.

In the year under review, the principal exposure arising from trading activities, was to movements in the value of the Euro and the US Dollar relative to Sterling. As Group companies both buy and sell in overseas currencies, particularly the Euro and the US Dollar, there is a degree of natural hedge already in place.

In the AE Division, currency exposure is actively managed at the outset of a project and where appropriate forward contracts taken out to cover the majority of the exposure.  Exposure (both translational and transactional) to the movements in the USD versus the CAD and GBP are expected to increase as the focus of the AE Division turns to this market. 

In 2017 the net loss recognised in adjusted operating profit in respect of realised and unrealised transactions in Euro, US Dollar, Canadian Dollar and New Zealand Dollar was immaterial (2016: net gain £0.7 million).  In 2016, a loss of £0.5 million was recorded below adjusted operating profit in respect of the retranslation of the deferred consideration liability denominated in New Zealand Dollars.

As at 30 September 2017 there were no forward contracts in place (2016: none).

At the present time, no cover is held against the value of overseas investments or intercompany loans with overseas entities as these are expected to be held for the long-term and over the next year dividend flows from these to Group are not expected to be significant.

Acquisition of Martract

 

On 7 December 2016, the Group acquired 100% of the issued share capital of Martract Limited for an initial consideration less net cash acquired of £3.6 million, plus maximum contingent deferred consideration of £0.6 million.

Intangible assets acquired with the business comprise £0.9 million in relation to non-contractual customer relationships and £2.8 million in relation to the manufacturing intellectual property.

The contingent consideration was initially recorded at a fair value of £0.6 million, which had been estimated based on future earnings, with a discount rate of 3%, assuming that £0.6 million would become payable.  Subsequently, the second-half performance and forecasts have been reviewed by the Directors and they consider it unlikely that the contingent deferred consideration will be paid and the provision has therefore been released.

A fair value adjustment related to an Employment Related Securities liability was made as a result of the vendors' shareholder restructuring immediately prior to completion. This liability was funded by the vendors of Martract Limited and was settled in January 2017.

Financing, cash flow and leverage

 

Operating cash inflow before movements in working capital and reorganisation and redundancy costs was £2.0 million higher at £2.5 million (2016: £0.5 million).  After a net investment in working capital of £1.5 million (2016: net reduction £4.6 million), cash generated from operations was £1.0 million (2016: £5.1 million). Our investment in working capital shows a significant increase during the year arising from the timing of large contract down payments, phasing of contract revenue and the adverse impact of certain major customers stretching payment terms at the end of 2017.

Cash flows from investment activities total £4.5 million and comprise predominantly the acquisition of Martract.  No item of capital expenditure is individually significant in the year, so the spend reflects general ongoing investment.  Where appropriate new machines are now acquired using dedicated equipment finance and these assets are then self financing through trading cash inflow.

The significant increase in adjusted EBITDA means the Net Debt to Adjusted EBITDA leverage ratio in respect of the revolving credit facility (RCF) reduced to 3.1:1 at 30 September 2017 (2016: 3.7:1).  All facility covenants have been complied with throughout the period and the facility has now been extended to March 2019. 

Net debt was £11.1 million (2016: £6.6 million), the increase driven primarily by the acquisition of Martract and net investment in working capital.  The Group's £15 million RCF was fully drawn at the year-end.  Post year-end the Group completed a share placing, raising net proceeds of £4.8m.  Some £2.7m was repaid immediately as a tranche of debt, leaving the group £12.3m drawn at the time of writing. 

Earnings per share and dividends

 

Adjusted earnings per share increased to 6.3 pence (2016: (2.6) pence loss per share).  Basic loss per share was (7.9) pence (2016: 4.4 pence from continuing operations).

No dividends were paid in the year (2016: £0.8 million) and no dividends have been declared in respect of the year ended 30 September 2017 (2016: nil).  Distributable reserves in the parent company increased 20.1% to £22.1 million (2016: £18.4 million).

Statement of financial position

 

Goodwill and intangible assets (at cost) increased by £5.8 million to £37.9 million (2016: £32.1). £4.8m related to the acquisition of Martract, the remainder was investment in new product development and investment in IT systems.  Amortisation in the year was £2.4 million (2016: £2.2 million).  

Net current assets reduced to £9.1 million (2016: £10.0 million). This decrease is predominantly due to net investment in working capital in the year.

Non-current liabilities increased to £18.0 million (2016: £15.8 million) after borrowings increased to £15.6 million (2016: £12.4 million).

Net assets decreased by 2.9% to £33.8 million (2016: £34.8 million) and therefore net asset value per share decreased to 233 pence (2016: 241 pence). Had the post year-end fundraising taken place at the year-end date, the net asset value per share would have been 207 pence.

Joanna Allen

Chief Financial Officer

12 December 2017

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the 52 week period ended 30 September 2017

	Notes	52 weeks ended 30 September 2017	52 weeks ended 1 October 2016
		£'000	£'000
Revenue	1	38,418	35,753
Cost of sales		(27,710)	(26,211)
Gross profit		10,708	9,542
Administration expenses		(9,611)	(9,923)
Operating profit/(loss) before M&A costs, amortisation and exceptional charges and credits	1	1,097	(381)
Separately disclosed items of administrative expenses:
Amortisation and M&A related exceptional items	3	(1,968)	1,123
Other exceptional charges and credits	4	(703)	(798)
Operating loss		(1,574)	(56)
Finance income		4	32
Finance costs		(343)	(335)
Loss before taxation	2	(1,913)	(359)
Taxation	6	766	1,002
(Loss)/profit for the period from continuing operations		(1,147)	643
Discontinued operations
Loss for the year from discontinued operations	5	-	(1,331)
Loss for the period attributable to owners of the parent		(1,147)	(688)
Other comprehensive income Items that may be reclassified subsequently to profit or loss: Currency translation differences on translation of foreign operations		(4)	(426)
Total comprehensive income for the period attributable to the owners of the parent		(1,151)	(1,114)
Basic earnings per share
From continuing operation	7	(7.9)p	4.4p
From discontinued operations	7	-	(9.2)p
From (loss)/profit for the period		(7.9)p	(4.8)p
Diluted earnings per share
From continuing operation	7	(7.9)p	4.4p
From discontinued operations	7	-	(9.2)p
From (loss)/profit for the period		(7.9)p	(4.8)p

 

 

 

 

 

 

CONSOLIDATED BALANCE SHEET

As at 30 September 2017

	Notes	30 September 2017	1 October 2016
		£'000	£'000
Non-current assets
Goodwill	9	16,062	15,020
Intangible assets	10	13,658	11,329
Property, plant and equipment		12,583	13,765
Deferred tax asset	16	343	544
		42,646	40,658
Current assets
Inventories		4,986	5,210
Trade and other receivables	12	11,339	11,279
Cash and cash equivalents		4,791	6,073
		21,116	22,562
Total assets		63,762	63,220
Current liabilities
Trade and other payables	13	(11,748)	(12,069)
Borrowings	14	(219)	(242)
Current tax liabilities		(23)	(258)
		(11,990)	(12,569)
Non-current liabilities
Other payables	13	(238)	(1,398)
Borrowings	14	(15,642)	(12,411)
Deferred tax liabilities	16	(2,089)	(2,027)
		(17,969)	(15,836)
Total liabilities		(29,959)	(28,405)
Net assets		33,803	34,815
Equity
Share capital		725	724
Share premium account		21,637	21,620
Translation reserve		(405)	(401)
Retained earnings		11,846	12,872
Total equity		33,803	34,815