2 August 2017

EUROCELL PLC (Symbol: ECEL)

HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2017

A good first half - gaining share in a flat RMI market

Eurocell plc is a market leading, vertically integrated UK manufacturer, distributor and recycler of innovative window, door and roofline PVC products

Financial Highlights

·    Good sales growth of 9% (excluding acquisitions)

·    Gross margin reduction reflects the impact of raw material price inflation

·    Robust cash flow and net debt performance, despite significant investment in business expansion

Operational Highlights

·    On track to open 30 new branches this year, with 15 new sites in H1 2017

·    Initiatives driving strong growth in private sector new build business

·    Increased use of recycled material in manufactured products to 15% (H1 2016: 13%)

Mark Kelly, Chief Executive of Eurocell plc said:

"Eurocell has enjoyed a good first half, gaining share in a flat RMI market. We reported robust financial results, delivered another consistent operational performance and continued to invest in the growth of our business.

We are implementing selling price increases to mitigate raw material pricing pressure where possible, but the market does lag supplier price rises. We continue to manage underlying operating costs tightly, whilst progressing further our strategic priorities.

As a result, despite some signs of market hesitancy, our expectations for the full year remain unchanged. We believe that our proven strategy and capabilities will enable Eurocell to deliver value to our customers and shareholders throughout the remainder of 2017 and beyond."

NOTES FOR ANALYSTS AND EDITORS

Financial Review

·    Revenue growth of 9% (excluding acquisitions) includes:

-     Underlying⁽⁶⁾ sales growth of 6%

o  Profiles division organic sales growth of 6%

o  Building Plastics division like for like⁽⁷⁾ sales growth of 6%

-     Sales from branches opened in 2016 and 2017 of £2.3 million

·    Gross margin 51.4% (H1 2016: 52.1%)

-     Raw material price pressure, including resin prices up 11% in 2017 (17% in the last 12 months)

-     Larger fabricators growing strongly, taking a greater share of the available volume mix

·    Operating costs include the impact of acquisitions and investment in new branches

-     Underlying⁽⁶⁾ operating cost increase of 4%

·    Tax rate on adjusted profit before tax of 17.2% includes the benefit of Patent Box⁽⁸⁾ relief

·    Capital investment of £3.6 million (H1 2016: £2.7 million)

·    Interim dividend of 3.0 pence per share (H1 2016: 2.8 pence per share) up 7%

Business Review

·    Building customer prospect pipeline in the Profiles division

-     Moving a number of new trade fabricators on to Eurocell systems in H2

·    Increased sales of windows through branches to £3.8 million (H1 2016: £3.3 million)

-     Implementing configuration software across the branch network, with common pricing and specifications

·    Warehouse operations back in-house from February 2017 to enhance customer service

-     Improved on-time in-full deliveries to 96% (full year 2016: 91%)

·    Security Hardware acquired in February 2017 for consideration of £1.3 million

-     Supplier of locks, hardware and spares to the RMI market, with annual sales of £3 million

-     Developing the spares proposition for our branches

Notes:

(1)   Adjusted EBITDA represents earnings before interest, tax, depreciation, amortisation and non-recurring costs.

(2)   Adjusted profit before tax represents profit before tax and non-recurring costs.

(3)   Adjusted basic earnings per share excludes non-recurring costs and the related tax effect.

(4)   Non-recurring costs for H1 2017 of £0.5 million comprise professional fees and earn out costs related to the acquisition of Security Hardware, as well as the redundancy and settlement costs of a staff reorganisation. Non-recurring costs for H1 2016 of £0.5 million comprise duplicated costs relating to the handover period during which the Company employed two CEO's, as well as professional fees related to the acquisition of Vista Panels.

(5)   Net debt is cash and cash equivalents less bank overdrafts, other loans and borrowings.

(6)   Underlying sales and operating costs exclude acquisitions and branches opened in 2016 and 2017.

(7)   Like for like branch sales exclude branches opened in 2016 and 2017.

(8)   An HMRC approved scheme, allowing a 10% tax rate on profits derived from products that incorporate patents.

Enquiries:

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CHIEF EXECUTIVE'S REVIEW

I am pleased to report a good performance in the first half of the year. The RMI market has remained broadly flat, but we have continued to take share and delivered higher revenues and profits. Overall, sales were up 9% (excluding acquisitions) and adjusted EBITDA was up 5% and in line with our expectations. Further information on financial performance is provided in the Group Financial Review.

STRATEGIC PRIORITIES

As reported earlier this year, in January we conducted a full review of the Company's strategy and the fundamental elements of our markets and activities. At the conclusion of this process, we reaffirmed that our overall objective remains to deliver sustainable growth in shareholder value by increasing sales and profits at above market level growth rates.

We have five clear strategic priorities to help us achieve our overall objective:

·          Target growth in market share

·          Expand the branch network

·          Develop innovative new products

·          Increase the use of recycled materials

·          Explore potential bolt-on acquisition opportunities

We have made further progress with these priorities during H1, with the key aspects described below.

OPERATIONAL PERFORMANCE

Health and safety

The safety and well-being of our employees and contractors is our first operational priority. We continue to maintain good safety performance and recorded no major injuries in H1 2017 under the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 2013 (RIDDOR).

We have however recently received notification from the Health and Safety Executive ('HSE') that they intend to prosecute the Company under the Health and Safety at Work Act, following a minor accident to an employee in August 2016. We are taking legal advice on the matter, with proceedings due to commence in August.

Production

We delivered another consistent production performance in H1 2017. Across our various sites we are working to standardise processes and share best practice wherever possible. This, together with judicious capital investment, on-going work on lean manufacturing techniques and continuous improvement driven by our Kaizen team, supports the delivery of on-going manufacturing efficiencies.

Warehouse logistics

We reported at our preliminary results in March that, following a period of outsourcing to DHL, the operation of our main warehouse facility was brought back in-house with effect from February 2017.

We have worked, with the full cooperation of DHL, to understand how the arrangements could be better structured to deliver a more efficient operation and improved customer service levels. We have made good progress, with on-time in-full deliveries increased to 96%, compared to 91% for full year 2016.  Initiatives include shorter production run times and revised warehouse shift patterns, with picking and relationship teams assigned to specific key accounts.

Recycling

The project to expand the capacity of our recycling facility remains on track. Use of recycled materials in our primary extrusion manufacturing processes increased to 15% in the first half, compared to 13% in H1 2016.

Our efforts to secure increased supplies of in-feed stock for the recycling plant are proving successful, with collections up 26% so far this year, compared to H1 2016. These initiatives include back-hauling material from our fabricator, installer and branch networks. This is an important programme, which should support our objective to continue to increase our use of recycled materials. 

PROFILES DIVISION REVIEW

⁽¹⁾ Acquired March 2016

Profiles revenue

Profiles third party revenue was up 9% in H1 to £46.4 million (H1 2016: £42.4 million), which includes an organic sales increase of 6%. The remaining growth was driven by the acquisition of Vista Panels in March 2016.

We have continued to gain share, with the RMI market (the most significant external driver of our performance) remaining broadly flat during H1 2017.

Our larger trade fabricators are still growing strongly, taking a greater share of the available volume mix. Generally, the larger trade fabricators have been increasing their capacity, by extending or adding factory units and investing in new plant and machinery. As such, they are benefiting from economies of scale and automation, which is allowing them to grow share at the expense of smaller fabricators.

In addition, on a number of trade accounts we have become a second supplier, which delivers some limited volume growth but importantly serves to protect margin, by avoiding excessive selling price competition. We are building our customer prospect pipeline and will be moving a number of new trade fabricators on to Eurocell systems during H2.

We have also continued to see good growth in the private new build sector, where our specifications teams have been successful in generating demand, well supported by our ability to supply excellent products through the new build fabricator network.

Finally, Vista Panels (acquired in March 2016) continues to perform in line with our expectations, with 39% of door sales now channelled through our branch network (H1 2016: 36%).

Profiles adjusted EBITDA

Adjusted EBITDA in H1 2017 was £11.7 million (H1 2016: £11.4 million), an increase of 3%.

Gross margin and return on sales in the Profiles division are lower in H1 2017, largely as a result of increasing raw material price pressure, particularly for resin. We are implementing selling price increases to mitigate this where possible, but the market does lag supplier price rises. In addition, margins have been impacted by a shift in sales mix towards larger fabricators at the expense of smaller customers as described above. The increase in adjusted EBITDA is therefore a function of sales growth.

BUILDING PLASTICS DIVISION REVIEW

⁽¹⁾ Acquired February 2017

Building Plastics revenue

Building Plastics revenue was up 13% to £61.8m (H1 2016: £54.8m), which includes an increase in like for like sales of 6%, as well as the impact of branch openings and the acquisition of Security Hardware.

Like for like sales includes growth from branches opened in 2015 and prior, as the more recent sites from that vintage begin to mature. Growth was bolstered by increased sales of windows through the branch network, which were £3.8 million in H1 2017, compared to £3.3 million last year. We are implementing configuration software across the network, using common pricing and specifications for windows supplied to all Eurocell branches. This is proving successful and we will develop the software to incorporate products such as Skypod and doors.

Like for like growth also includes some benefit from an initiative to improve our proposition as a one-stop shop for customers, via the roll-out of an additional 500 product lines in 2016. In addition, the acquisition of Vista Panels has supported growth in the sales of doors through the branches, which reached £3.1 million in H1 2017 (H1 2016: £2.6m).

In terms of new branches, we opened 15 in H1, compared to 7 in the first half of last year. We now have a total of 174 branches providing national coverage across the UK, which offers a significant competitive advantage, and remain on track to open a total of 30 new sites this year. Branches opened in 2016/17 added £2.3 million to sales in H1 2017.

Building Plastics adjusted EBITDA 

Adjusted EBITDA for H1 2017 was £3.2 million (H1 2016: £2.7 million), an increase of 19%.

Gross margin and return on sales were both slightly improved during the first half compared to H1 2016. Although we continue to experience price pressure on raw materials and some traded goods, this has to date been substantially mitigated with a selling price increase implemented in April 2017. The increase in adjusted EBITDA is therefore driven largely by sales growth.

Higher overheads in Building Plastics includes important investment to accelerate the pace of expansion of our branch network described above. New branches are a key driver of future sales and profit growth, but they do create downward pressure on profitability in the short-term due to investment in central infrastructure and in our teams at new sites. However, we are making good progress with initiatives to support new branches reaching profitability sooner, which now include a more comprehensive and sustained marketing campaign.

Looking to the future, following trials in the first quarter, we have now rolled-out Peer Pricing across the full branch network. This is a mechanism which displays to branch staff at point of sale the average historic selling prices for products sold by their branch, region and nationally across the Eurocell Group. We expect Peer Pricing to support margin in the branches.

Security Hardware

The Building Plastics division also includes Security Hardware, acquired in February 2017 for consideration (net of cash acquired) of £1.3 million. Security Hardware is a supplier of locks and hardware, primarily to the RMI market, with annual sales of approximately £3 million.

Security Hardware stocks around 3,000 products, covering the major hardware brands and an own label offering. This extensive product range enables the business to supply a significant proportion of the replacement parts routinely required by the RMI market.

The acquisition means we can offer the full product range throughout our branch network, allowing Eurocell to better engage with facilities management companies and other large maintenance contractors. This forms another part of our objective to become a one-stop shop for anything window related for our customers. We also plan to develop a range of hardware to complement our window profile. This will enable our fabricator customers to offer a fully certified common specification of window (including hardware), allowing us to target a greater share of the new build market and grow sales of windows through the branches.

The business is performing in line with our expectations and the integration is on track, with inventory now available in every branch.

OUTLOOK

Eurocell has enjoyed a good first half, gaining share in a flat RMI market. We reported robust financial results, delivered another consistent operational performance and continued to invest in the growth of our business.

We are implementing selling price increases to mitigate raw material pricing pressure where possible, but the market does lag supplier price rises. We continue to manage underlying operating costs tightly, whilst progressing further our strategic priorities.

As a result, despite some signs of market hesitancy, our expectations for the full year remain unchanged.

We believe that our proven strategy and capabilities will enable Eurocell to deliver value to our customers and shareholders throughout the remainder of 2017 and beyond.

Mark Kelly

Chief Executive Officer

GROUP FINANCIAL REVIEW

⁽¹⁾ Overheads represent distribution and administrative expenses excluding depreciation and amortisation.

REVENUE

Revenue for H1 2017 was £108.1 million (H1 2016: £97.2 million), which represents growth of 11%, or 9% excluding acquisitions. Underlying sales growth (i.e. excluding the impact of acquisitions and branches opened in 2016/17) was 6%.

As described in the Divisional Reviews, sales have been driven by strong like for like growth in the Building Plastics branch network (£3.5 million, or 6% for the division) and the positive impact from branches opened in 2016/17 (£2.3 million, or 4% for the division). We have also delivered good organic growth in Profiles (£2.4 million, or 6% for the division). Together, the acquisitions of Vista Panels and Security Hardware added £2.7 million to sales in H1 2017. 

GROSS MARGIN 

We have experienced increasing price pressure for raw materials and traded goods, with resin in particular up 11% so far this year and 17% over the last 12 months. In addition, margins have been impacted by the sales mix, with stronger growth in sales to larger fabricators relative to smaller customers.

As described in the Divisional Reviews, these factors have been mitigated by the implementation of selling price increases where possible, and the increased use of recycled materials in our primary extrusion operations.

Overall, this has resulted in a reduction in our gross margin from 52.1% in H1 2016 to 51.4% in H1 2017.

OVERHEADS

Overheads for the half year were £40.7 million compared to £36.4 million in H1 2016, representing a very similar percentage of sales for both periods. The increase includes £1.6 million as a result of new branches opened in 2016/17 and £1.4 million from acquisitions. The balance of £1.3 million relates to an increase of 4% in the underlying business, where sales growth was 6% as described above. We continue to focus on the tight control of underlying overheads, with the increase driven largely by the impact of the Minimum Wage legislation and higher volume related distribution costs.

DEPRECIATION AND AMORTISATION 

Depreciation and amortisation for H1 2017 is £3.3 million (H1 2016: £3.1 million), with the increase due to amortisation of acquired intangibles relating to the acquisitions of Vista and Security Hardware.

FINANCE COSTS

Finance costs for H1 2017 were £0.3 million (H1 2016: £0.4 million), reflecting lower average net debt in 2017.

ADJUSTED PROFIT MEASURES

Adjusted EBITDA, adjusted operating profit and adjusted profit before tax all exclude non-recurring costs (see below). Adjusted profit after tax and adjusted earnings per share exclude non-recurring costs and the related tax effect.

Adjusted profit measures are provided as additional guidance to statutory measures to help better describe the underlying performance of the Group.

NON-RECURRING COSTS

Non-recurring costs for H1 2017 of £0.5 million comprise professional fees and earn out costs related to the acquisition of Security Hardware, as well as the redundancy and settlement costs of a staff reorganisation. Non-recurring costs for H1 2016 of £0.5 million comprise duplicated costs relating to the handover period during which the Company employed two CEO's, as well as professional fees related to the acquisition of Vista Panels.

TAX

The effective tax rate on adjusted profit before tax for H1 2017 of 17.2% was lower than the standard corporation tax rate for this year due to the benefit of Patent Box relief. The effective rate on adjusted profit before tax for H1 2016 of 18.9% was close to the standard rate for that period. The effective tax rate on reported profit before tax for H1 2017 was 17.4% (H1 2016: 18.8%).

The full year tax rate for 2016 of 17.7% was lower than the standard rate due to the beneficial impact on deferred tax of future reductions in the corporation tax rate enacted in the period, as well as adjustments to prior year taxes.

EARNINGS PER SHARE

Taking into account all of the factors described above, adjusted basic earnings per share for the period was 9.4 pence (H1 2016: 8.7 pence). Reported basic earnings per share was 8.9 pence (H1 2016: 8.4 pence). The dilutive impact of outstanding share options is not significant.

ACQUISITIONS 

As previously described, the Group acquired Security Hardware in February 2017 for an initial consideration of £1.3 million (net of cash acquired, see also Cash Flow below). The impact of Security Hardware on Group earnings for 2017 is not expected to be material. 

DIVIDENDS 

On 1 August 2017, the Board approved an interim dividend for the six months ended 30 June 2017 of 3.0 pence per share (£3.0 million), representing an increase of 7% on the corresponding period. This is in line with the policy set out at our IPO, to target initially a dividend of approximately 40% of adjusted earnings, with a progressive policy in future years, and with interim and final dividends in the approximate proportions of one-third and two-thirds.

The interim dividend will be paid on or before 6 October 2017 and shares will be marked ex-dividend on 8 September 2017.

CAPITAL EXPENDITURE 

We continue to invest in our future, with capital expenditure for H1 2017 of £3.6 million (H1 2016: £2.7 million). Capital expenditure includes investment to increase our recycling capacity of £0.6 million and in new branches opened in H1 2017 of £1.0 million. Investment of £0.8 million in Operations includes new tooling costs and general maintenance capex. Other capital expenditure of £1.2 million includes branch refurbishments and various IT related costs.

CASH FLOW 

Net cash generated from operating activities was £10.3 million for the period, compared to £9.7 million in H1 2016.

This includes a net outflow from working capital for H1 2017 of £1.8 million, comprised of an increase in stocks (£2.5 million), an increase in trade and other receivables (£5.8 million) and an increase in trade and other payables (£6.5 million). This compares to a net outflow from working capital of £3.3 million in H1 2016. It also includes tax paid of £2.6 million (H1 2016: £1.2 million).

The increase in stocks so far this year has been driven largely by the 15 new branches, as well as the introduction of new product lines to the branch network. However, stock days were 58 at 30 June 2017, compared to 67 at 30 June 2016 and 58 at 31 December 2016. The changes to trade receivables and payables reflect normal business seasonality, alongside increased activity and growth in 2017.

Other payments include acquisitions of £1.3 million (H1 2016: £6.3 million), capital investment of £3.6 million (H1 2016: £2.7 million) and financing costs of £0.3 million (H1 2016: £0.3 million).

Dividends paid in H1 2017 represent the final dividend for 2016 of 5.7 pence per share (or £5.7 million). (H1 2016: 2015 final dividend of £5.2 million)

Taking all of these factors into account, net debt increased by £0.5 million during the first half to £20.8 million at 30 June 2017 (31 December 2016: £20.3 million).

BANK FACILITIES 

We have an unsecured, multicurrency, revolving credit facility of £45 million, provided by Barclays and Santander. The Group operates comfortably within the terms of the facility and related financial covenants. The facility matures in 2020.

SEASONALITY OF TRADING

The Group is affected by seasonality. Demand in the second half of the year is usually higher than in the first half, with September to November typically representing our peak sales period. In addition, the new build markets are typically slow during the first quarter of the year.

PRINCIPAL RISKS AND UNCERTAINITIES

The principal risks and uncertainties faced by the Group are set out in the 2016 Annual Report (pages 36-39). These risks remain unchanged and are as follows:

·      Macro-economic conditions

·      EU Referendum

·      Raw material prices

·      Raw material supply

·      Unplanned plant downtime

·      Corporate and regulatory risks

·      Unsuccessful branch openings

·      Customer credit risks

·      Failure to develop new products

·      Ability to attract and retain key personnel and highly skilled individuals

·      Cyber security

·      Failure to identify, complete and integrate bolt-on acquisitions

Michael Scott 

Chief Financial Officer

RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE HALF YEAR REPORT

We confirm that to the best of the Directors' knowledge:

·    The condensed set of financial statements has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' (IAS 34) as adopted by the EU and;

·      The interim management report includes a fair review of the information required by:

(a)  DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b)  DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last Annual Report that could do so.

By Order of the Board

Mark Kelly                                                                                          Michael Scott

Chief Executive Officer                                                                       Chief Financial Officer

1 August 2017                                                                                     1 August 2017

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the six months ending 30 June 2017

INDEPENDENT REVIEW REPORT TO EUROCELL PLC

REPORT ON THE HALF YEAR CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Our conclusion

We have reviewed Eurocell plc's half year condensed consolidated financial statements (the "interim financial statements") in the half-year results of Eurocell plc for the 6 month period ended 30 June 2017. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

·      the consolidated statement of financial position as at 30 June 2017;

·      the consolidated statement of comprehensive income for the period then ended;

·      the consolidated cash flow statement for the period then ended;

·      the consolidated statement of changes in equity for the period then ended; and

·      the explanatory notes to the interim financial statements.

The interim financial statements included in the half-year results have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the Directors

The half-year results, including the interim financial statements, is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-year results in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express a conclusion on the interim financial statements in the half-year results based on our review. This report, including the conclusion, has been prepared for and only for the Company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose.  We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What a review of interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the half-year results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

PricewaterhouseCoopers LLP

Chartered Accountants

Birmingham

1 August 2017

a)   The maintenance and integrity of the Eurocell plc website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim financial statements since they were initially presented on the website.

b)   Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.