The 600 Group PLC

Unaudited Interim Results for the six months ended 1 October 2016

The 600 Group PLC ("the Group"), the AIM listed distributor, designer and manufacturer of industrial products (AIM: SIXH), today announces its unaudited interim results for the six months ended 1 October 2016.

Highlights:

•   Revenues were £23.16m (FY16 H1: £23.35m) despite difficult trading environment

•   Underlying* operating profit up 6% to £1.24m (FY16 H1: £1.17m)

•   Underlying* profit before tax was £0.76m (FY16 H1: £0.75m)

•   Margin improvement at Industrial laser systems continues

•   Industrial laser systems operating profit increased 41% to £0.89m (FY16 H1: £0.63m)

•   Australian machine tools business moves back into profit

*from continuing operations, before special items.

Commenting today, Paul Dupee, Executive Chairman of The Group said:

"Although both of our Divisions have been operating in uncertain and challenging market conditions they have still been able to deliver acceptable financial results for the six month period ended 1 October 2016.

The overall Group order book continues to improve and has risen from 20% above the prior year's level at the end of September 2016 to currently 30% above prior year and new quotation activity remains high.

The anticipated infrastructure spending programmes outlined in both the UK and the USA should improve the market for capital goods, and the products we supply in particular, and the medium term market outlook therefore appears to be brighter.

The actions taken to reduce overheads and become more efficient have yielded better margins and the Board remains of the view that the process of leveraging our industry recognised brands such as Colchester, Harrison, Clausing, TYKMA and Electrox through an increased worldwide distribution network will lead to revenue growth in the future."   

Reconciliation of underlying profit before taxation:

More Information on the group can be viewed at: www.600group.com

The 600 Group Plc

Executive Chairman's Statement for the six months ended 1 October 2016

Overview

Although both of our Divisions have been operating in uncertain and challenging market conditions they have still been able to deliver acceptable financial results for the six month period ended 1 October 2016. Revenue was £23.16m against £23.35m in the previous half year but the improved operating margins in TYKMA Electrox helped improve Group underlying operating profit by 6% to £1.24m (FY16 H1: £1.17m).

Whilst the Group has seen some benefit from the retranslation of foreign earnings into Sterling following the weakness of the Pound after Brexit this has also increased input costs for the UK which are predominately Dollar based.

We have continued to invest in facilities and new product developments to maintain our strategic goal of leveraging the strength of the Group's brands into niche markets worldwide.

Results and dividend

Revenue was £23.16m (FY16 H1: £23.35m) generating a net underlying operating profit (excluding the effects of special items) up 6% at £1.24m (FY16 H1: £1.17m).

After taking account of interest on bank borrowings and loan notes, the underlying Group pre-tax profit before special items was £0.76m (FY16 H1: £0.75m) and £1.38m (FY16 H1: £1.61m including £0.93m of pensions credit) after special items.

Special items have been noted separately so that the underlying trading performance can be better understood. In the current period share option costs, the amortisation of intangible assets acquired, amortisation of loan note expenses and the pensions credit interest on the scheme surplus, which are non-cash items, are included in special items. The prior period included in addition to these regular items a large credit of £0.93m as a result of liability reduction exercises by the pension scheme trustees, reorganisation and redundancy costs as a result of the integration of the TYKMA and Electrox businesses, and the cost of the Board change in April 2015.

The total profit attributable to shareholders of the Group for the financial period was £1.09m (FY16 H1: £1.12m including £0.93m of pensions credit), providing earnings of 1.05 pence per share (FY16 H1: 1.21 pence). The underlying earnings per share (excluding the large pensions credit last year, pension interest and other special items) were 0.71p   (FY16 H1:  0.85p).

The Board continues to believe the retention of earnings to grow the businesses is the most appropriate use of available finance and accordingly do not recommend the payment of an interim dividend.

Operating activities

Machine tools and precision engineered components

Revenues in our North American business were down 5% (19% at constant currency rates) against a backdrop of a declining market of around 17%. Gross margins improved by 1% and overheads were reduced by 11% to contain the fall in operating margin.

The Group believes the uncertainty of US exporters following Brexit and the effects of the US Presidential elections on domestic confidence were key factors in a difficult trading period. Actual quotation activity has been high, some 15 - 20% up on the prior year but the commitment of customers to place orders has, we believe, been affected by the uncertainty created by these two major events.

There has been a pick up in order activity since the election and the current order book is 37% higher in local currency (63% in Sterling terms) than at this time last year. The anticipated government infrastructure spending should also be positive for capital goods in general and our sector in particular in the medium term.

Product development has continued during the period with US built mills and saws being added to the range and work concluded on a CNC control for mills sold into the European market.

The machine tools business of Kondia, formerly Spain's largest manufacturer of milling machines, was acquired in early October 2016 for Euro 50,000. The Clausing operation had previously sold these products for over twenty years in the USA and has a good spares and service operation to support the existing population of machines. The popular FV milling machines will now be produced by the Group to complement the existing US built products and the worldwide spares supply will now be taken over by the Group. 

Trading in the European market also proved to be difficult with revenue falling short of the corresponding prior period by 4%. Since Brexit, enquiries have improved by approximately 40% led by the UK, Middle East and Northern Europe, but conversion to orders remains weak and patchy.

The introduction of the Clausing product range of saws, drills, mills and grinders into the UK, and European markets has proved successful and is a growing part of the product portfolio. These products are very often found alongside our Colchester and Harrison lathes in the many facilities we sell into and are a natural extension to our existing product range in these markets. These types of product represent about 50% of the total machine tools sold by our North American operation against only about 4% currently for UK and Europe.

The first machines from our new Indian partners are due in the next few weeks and several quality and marketing visits have been made during this period by both parties.

The weakness of Sterling following Brexit has increased input costs which are predominately US Dollar based and in line with most of our competition a price increase has had to be implemented from 1 November on all products.

The Australian operation in contrast enjoyed a significant turnaround in both volumes and profitability during the period with both domestic Australian business and South East Asia improving. Volumes improved 73% over the same period last year and the business moved from a small loss into profit.

 The development of new sales channels for our branded products in South East Asia including new distributorships in Thailand, Vietnam and Singapore has continued throughout this period.

Industrial Laser systems

The consolidation of manufacturing onto one site in Ohio USA and revision of the supply chain was completed during this period and the improved margins seen towards the end of the last financial year have continued.

Top line progress has however, we believe, been affected by the uncertainty caused by Brexit in the UK and other issues within Europe and the presidential campaign in the USA. Although quotation activity in this Division has been strong recently, up over 30% from the levels in April and May this year, the conversion into orders has been held back by uncertainty.

Also unit volumes have improved by 11% against the same period last year, but the market has seen a degree of price deflation with unit prices falling particularly at the lower specification end of the market.

The combined TYKMA Electrox business now has worldwide credibility and in addition to securing initial sales to a number of new multi-national corporations in the period the business has recently been awarded a multiple unit repeat order for delivery in the second half of the year to a global operator with potential follow on business for sites in other countries.

A number of new products were launched in September at the IMTS trade show in Chicago providing an expanded range of products to support existing export areas and facilitate growth in these countries and Asia Pacific through a new international sales manager.

The divisional operating profit and margin have shown an increase over previous periods demonstrating the benefits of the businesses' integration and reflect an increase in overall manufacturing efficiencies.

Facilities

The industrial laser systems manufacturing operation was consolidated in Chillicothe, Ohio during the period and the reduced UK operation moved to smaller leasehold premises enabling the Letchworth long leasehold building to be sold for its book value of £2m in early July 2016.

Financial position

Net assets decreased in the six month period by £2.7m to £38.1m largely as a result of the pension asset decrease. Net assets excluding the effect of pension schemes (and associated taxation) increased by £2m to £16.2m as a result of net profit generation, the increase of £0.6m in the value of the ProPhotonix investment and the currency movements on the retranslation into Sterling of our overseas assets.

Cash used in operations was negative at £1.35m with £1.46m of funds from operating activity absorbed in restructuring costs, paydown of creditors and working capital increases in the UK, as a result of the seasonal sales to educational establishments, and in the USA to support the move of laser manufacture from the UK to the USA. The net proceeds of £2m from the sale of the Letchworth site were received in July 2016 and used to reduce UK borrowings. The exchange effect of the retranslation of our US borrowings at 1 October 2016 compared to the rates ruling at 2 April 2016 has increased the stated borrowings by £0.4m.

Net debt as a consequence of these movements increased by £0.45m to £14.34m resulting in gearing of 37.6% (March 2016: 34.8%).

New increased UK bank facilities were put in place in August 2016 with HSBC to support the UK machine tool business and Bank of America renewed and increased their working capital facilities for Clausing and TYKMA in the USA in September 2016.

UK pension scheme

The accounting surplus on the UK pension scheme decreased during the period from £42m at 2 April 2016 to £35m as a result of changes in underlying assumptions, most notably the yield on corporate bonds upon which the valuation is based.

The funding position of the scheme using the much more prudent technical provisions basis for valuation in the latest draft tri-ennial valuation at 31 March 2016 was a surplus of £2.2m compared to the tri-ennial valuation deficit at 31 March 2013 of £25.4m. Consequently it is expected that an agreement will be reached to ensure that there will continue to be no requirement for any cash funding from the Company.

The scheme continues to benefit from active management of the investment portfolio with the overall aim of securing members' benefits without reliance on future contributions from the Group.  The Directors and Trustees continue to work in close co-operation, and liability reduction exercises are ongoing.

Outlook

Market conditions generally remain unpredicatable and although current enquiry levels are at a relatively high level, customer confidence to commit to purchase is, we believe, still affected by the uncertainties of Europe and policies which have been suggested will be implemented by the new US President. Underlying order activity is currently giving us less than two month's visibility and therefore trading results are subject to uncertainty and potential monthly volatility.

Despite these factors the overall Group order book continues to improve and has risen from 20% above the prior year's level at the end of September 2016 to currently 30% above prior year and new quotation activity remains high.

The anticipated infrastructure spending programmes outlined in both the UK and the USA should improve the market for capital goods and the products we supply in particular and the medium term market outlook therefore appears to be brighter.

Resource continues to be directed into sales and marketing across all businesses and new products and new markets are being developed.

The actions taken to reduce overheads and become more efficient have yielded better margins and the Board remains of the view that the process of leveraging our industry recognized brands such as Colchester, Harrison, Clausing, TYKMA and Electrox through an increased worldwide distribution network will lead to revenue growth in the future.

Paul Dupee

Executive Chairman

6 December 2016