Full year results
11 April 2013
Elektron Technology plc
Full year results for the year ended 31 January 2013
Elektron Technology plc (AIM: EKT, "Elektron" or the "Group"), the global technology group, announces its full year results for the year ended 31 January 2013.
· Revenue: £55.7m (2012: £63.1m)
· Operating profit before non-recurring or special items ('trading profit'): £1.6m (2012: £4.9m)
· Non-recurring or special items, largely relating to UK streamlining and manufacturing consolidation: £2.3m (2012: £2.2m)
· Reported operating loss: £0.7m (2012: £2.7m profit)
· Adjusted earnings per share** ('Adjusted EPS'): 1.0p (2012: 3.2p); basic earnings per share ('Basic EPS'): 0.6p loss (2012: 1.7pprofit)
· Strong cash generation: up 57% to £5.8m (2012: £3.7m)
· Substantial investment in new product development: up 600% to £1.4m capitalised during the year (2012: £0.2m)
- First significant product launches: Bulgin, Queensgate, MPS II, with more in pipeline
· Continuing simplification of Group operations
- Rationalising portfolio to focus on core brands: ASL sold for £0.6m, Tinsley brand being discontinued, post year end agreement (subject to contract) for sale of Total Carbide for £2.3m
*Figures for continuing operations, except where otherwise stated
** Before non-recurring or special items
John Wilson, Chief Executive of Elektron, commented,
"We are continuing our transformation of the business, creating an innovation-led technology company with the infrastructure in place to support future growth.
"The challenge of the weak economic climate continues to affect our sales. However, we are addressing this by investing significantly in NPD, resulting in the first new product launches in many years and an exciting pipeline.
"We remain dedicated to creating future value though our strategy of innovation, streamlining operations, investing in our infrastructure, people and capabilities, as well as focusing resources on key brands and product offerings."
+44 (0) 1223 371 000
John Wilson - Chief Executive Officer
Noah Franklin - Chief Financial Officer
+44 (0)20 7220 0500
Ed Frisby/ Rose Herbert - Corporate Finance
Simon Starr/Victoria Bates - Corporate Broking
+44 (0)20 7457 2020
Adrian Duffield/ Rozi Morris
Notes to Editors
Elektron Technology is a global designer and manufacturer of precision engineered components which enable two of the most important technology areas of the always-on, networked economy: Connectivity and Instrumentation, Monitoring & Control ('IMC').
The Group has a broad portfolio of products that are recognisedleaders in their markets, playing a critical role in many industries from underwater construction to food preparation, semiconductor manufacture to emergency vehicle systems. The Group's products are sold worldwide to over 7,000 customers, around 100,000 end-users, and used in all seven continents and in space.
Elektron Technology is headquartered in Cambridge and traded on the AIM market of the London Stock Exchange.
Elektron is rapidly evolving into an innovation-led technology company, operating on an integrated basis worldwide, focused on a distinctive portfolio of high growth-potential products and brands.
The Group is working to address the legacy parts of the business which are not aligned with its vision and focus, improving or rationalisingthose brands which are sub-scale, commoditised, or with old product ranges. Elektron is also improving its complex operating configuration, rationalisingmanufacturing sites and standardisingIT systems.
The combination of these legacy inefficiencies and the current economic environment have adversely affected performance. Salesin the year to 31 January 2013 were £55.7m (2012: £63.1m) and trading profit before non-recurring or special items was £1.6m (2012: £4.9m). The IMC segment was particularly affected, but is now refocused and reorganised to improve its prospects.
Despite financial results which, as announced in the Group's trading update released on 1 February 2013, did not meet the Board's initial expectations, underlying progress in the last year has been substantial. The ongoing investment in new product development ('NPD') is already yielding results, with the Group's first significant new product launches for several years and a very encouraging pipeline of new products in development.
Having considered the resources needed to support Elektron's focus on investing in its infrastructure, product portfolio and capabilities, the Board believes that it is in the Group's best interests not to recommend the payment of a final dividend (2012: 0.56p per share). The Board will continue to monitor closely its policy in relation to dividends with a view to resuming dividends in due course.
The Board will also continue to consider market share purchases by the Group or the EBT in appropriate circumstances, but has no plans to initiate such purchases at present.
Current trading and outlook
Orders in the first two months of the current financial year have been satisfactory. However, as is normal, the Group's order book only gives a few weeks of forward sales visibility. Against an economic backdrop that remains challenging and with a portfolio still in need of some renewal and rationalisation, the Board remains cautious in outlook in the near term.
The Board anticipates that the current year will see further significant progress in implementing the Group's strategy. Plans include a full schedule of completing the systems implementation programme, streamlining the operating configuration, supporting recent launches and bringing new products to market.
Elektron's strategy is to innovate to create a high growth product portfolio; to focus resources behind winning propositions; to streamline operations to reduce costs and to invest in world class infrastructure, people and capabilities.
The Group now has approximately 40 high calibre engineers based mainly at its Cambridge Technology Centre, focusing on NPD. The Centre brings together skills that were previously fragmented in different locations.
To manage risk within its NPD function, Elektron follows a structured product development process, from idea generation and market feasibility analysis, through design, prototyping and testing, to production and launch. The Group's portfolio approach to NPD also mitigates some of the risk which a single product approach necessarily entails.
Each brand has a multi-year roadmap for investment, building on success to maintain a commercial and technological advantage. The Group has also adopted a modular technology platform approach, allowing certain developments to be applied to multiple brands, reducing costs and increasing speed to market.
Elektron's investment in innovation increased by 600% to £1.4m (2012: £0.2m) capitalised during the year, including over 26,000 hours of internal engineering time. A further £0.9m (2012: £0.9m) of R&D costs were recognised in the income statement. The Group also partners with leading specialists and researchers at universities across the world, to build and maintain a competitive edge in selected fields. Elektron was also awarded £0.3m of government grant funding to support its NPD effort. £0.1m of these awards was received during the year.
New product launches as a result of this programme included:
· Bulgin 6000 Series connectors for harsh environments;
· Queensgate Dual Sensor nanopositioning controller and stages;
· Elektron Technology MPS II for macular pigment screening; and
· Elektron Technology Checkit food safety and hygiene monitor (launched since the year end).
Elektron has a complex portfolio of products and brands, some of which have received little investment or innovation for many years. The Group is therefore focusing its resources on brand and product propositions which the Board believes have the most potential to provide substantial profitable growth in the future, and disinvesting from brands which do not show this potential or do not fit with Elektron's core product offering.
In line with this strategy, the Group has already made and announced some key disposals:
· The ASL brand and associated assets were sold to WIKA Instruments Limited in January 2013 for cash consideration of £0.6m, realising a net gain of £0.2m after tax.
· Potential sale of Total Carbide Ltd to Versarien plc for £2.3m, subject to contract. If this disposal proceeds, it will reduce the Group's non-core Materials segment to a minimal part of Group revenues.
· Phasing out of the Tinsley brand, with selected products being repositioned as sub-brands under the Elektron Technology umbrella.
Further brand and product disposals are possible, where they meet our value criteria.
Streamlining operations and reducing costs
Simplifying the Group's operating model remains a key focus, building scale, connecting teams effectively and eliminating unnecessary cost.
The Group's factory in Redhill has now closed and the centre for high tech manufacturing in Torquay is making good progress. Customer service and shared services for Finance and HR have also been consolidated into Torquay, leading to improvements in processes and reduced costs, with further still to be achieved.
Elektron has moved its Arcolectric switch production to its facility in Tunisia, with a corresponding reduction in manufacturing activities in China,which is no longer regarded by the Group as a low cost location. However, China remains an important market for Elektron products and the Group retains a significant presence there. The Group has an efficient and supportive labour force in Tunisia and has continued to operate effectively during recent political changes in the country.
Planning for the closure of the West Molesey factory continues and the Group also intends to move towards direct delivery in the USA, closing an inventory holding location in California.
In addition to expected annual cost savings of more than £3m, these changes will result in a greatly simplified operating configuration, providing closer control of product quality and lead-time to customers. Further site consolidations may be considered in due course, to enable still greater streamlining of operations.
Investment in infrastructure, people and capabilities
Elektron continues to build an organisation designed to support its growth aspirations. Since the Group's relocation to Cambridge in 2011, the senior management team has been strengthened with expert additions to key functions, while inefficient legacy management structures have been dismantled.
The Group continues to invest in its IT infrastructure to connect teams across the world and to provide fast, consistent and high quality information to control and drive the business.
The roll-out of the Group's single Enterprise Resource Planning ('ERP') system is now almost complete and the final implementation is scheduled to take place in the coming months. The ERP system is complemented by other systems and infrastructure including:
· A single Customer Relationship Management system, providing a comprehensive database of commercial contacts, supporting the sales process from lead generation through to sale;
· Business Intelligence software;
· Integrated email and telephony systems;
· Specialist tools to support the NPD programme; and
· Robust data links and storage solutions.
Elektron's marketing activities have been consolidated in Cambridge, bringing greater scale, expertise and proximity to other key functions. All brand logos and websites have been given consistent branding and the Group's e-commerce capabilities are currently being upgraded.
Regional Sales Performance
Sales in the Americas (£8.1m, 2012: £8.2m) were relatively resilient and prospects in the region remain encouraging. During the year the Group has strengthened its direct sales resource for its IMC brands, with a focus on targeting Latin American markets.
The Asia Pacific region (£9.8m, 2012: £11.9m) remains a key focus for future growth and the distribution network in this region has been further expanded to include key territories such as South Korea, Japan and Taiwan. The sales pipeline for the newly launched MPS II macular pigment screening machineis building ahead of plan in areas where regulatory approval has been obtained, with new territories scheduled to open up during the coming year.
Overall, sales in the region have been impacted by declining demand for legacy products from the Queensgate brand. A substantial renovation of this brand's offering is underway and is expected to start to replace the lost volume, as customers gradually design the enhanced technology into their product ranges.
The Group's legacy Indian business, offering factored calibration and instrumentation equipment, albeit with little differentiation, has also seen a decline due to local competition and falling overall demand. While the Group is actively reviewing the future of that part of the business, other Elektron brands are well-established in India and continue to prosper there.
In EMEA (£37.8m, 2012: £43.0m) the eurozone crisis and decline in UK government spending have slowed demand. Sales of the Qados and Carnation brands have historically been dependent on capital spending by the UK National Health Service and are experiencing delays in the conversion of opportunities into orders. The Group continues to develop the Carnation brand internationally, reducing its reliance on UK public sector spending.
Connectivity (sales £28.2m, trading profit £1.8m; 2012: sales £29.2m, trading profit £2.4m)
Connectivity sales were £1m lower, leading to a reduction in trading profit. However, sales stabilised in the second half of the year, in part, due to the introduction of the new Bulgin 6000 series connectors, with Bulgin products overall registering 5% growth in the second half. The growth in Bulgin sales has been offset by a decline in sales of lower margin Arcolectric products.
IMC (sales £21.4m, trading loss £0.3m; 2012: sales £27.5m, trading profit £2.3m)
The IMC business has seen major structural changes during the second half of the year, with a renewed management team bringing greater focus on key brands in terms of commercial leadership, operations and new product development.
The new team has undertaken a thorough review of the IMC product portfolio to identify the areas most likely to deliver profitable growth. This has led to a significant investment programme to revitalise the segment through selected brands and enhanced distributor partnerships. New products were launched during the year and since the year end. Each of these new products has the potential to contribute significantly to the growth and profitability of IMC in 2014 and beyond.
The IMC brand and product portfolio has been substantially rationalised, with the sale of the ASL brand and the phasing out of legacy products, particularly under the Queensgate and Tinsley brands. These changes, together with the factors affecting the business in the EMEA region described above, have resulted in a reduction in sales and profits, not yet fully offset by growth from the new products. Some further rationalisation may be needed, but prospects for the newly refreshed and focused portfolio are greatly improved.
Materials (sales £6.1m, trading profit £0.1m; 2012: sales £6.4m, trading profit £0.2m)
Within the Materials segment, the Titman Tip Tools brand has performed well, with significant new customer gains. However, this was offset by declining sales from the Total Carbide brand which refined its sales and marketing strategy by concentrating on a smaller number of large accounts.
Group sales from continuing operations were £55.7m (2012: £63.1m).
The reduction in sales, coupled with the effect of fixed production costs, has contributed to a reduction in gross profit margin to 37.5% (2012: 40.6%). However, operating expenses (excluding non-recurring or special items) were lower at £19.3m (2012: £20.7m), reflecting early benefits from the Group's streamlining programmes.
Trading profit margin was 2.9%, down from 7.8% in 2012, largely as a result of the lower sales, leaving trading profit of £1.6m (2012: £4.9m). All the trading profit was generated in the first half of the year, reflecting seasonal sales patterns.
The consolidated net interest charge of £0.3m (2012: £0.3m) is covered five times by operating profit before non-recurring or special items (2012: 16 times).
The Group has initiated several programmes to streamline operations and improve profitability. £1.9m was invested in these programmes during the year and has been recorded as restructuring in non-recurring or special items (2012: £1.9m). A further c.£2.5m is expected to be incurred to bring these programmes to completion. In aggregate they are expected to deliver annual savings in excess of £3m in steady state.
The average number of people employed by the Group during the year has reduced by 11% to 1,014 (2012: 1,145).
Other non-recurring or special items include £0.2m (2012: £0.2m) amortisation of intangible assets arising from past acquisitions and £0.2m (2012: £nil) charge relating to share-based incentive plans.
Group pre-tax profit before non-recurring or special items was £1.3m (2012: £4.6m). Reported pre-tax loss was £1.0m (2012: £2.4m profit) and was partially offset by a £0.4m tax credit and £0.2m gain on the disposal of the ASL brand, leaving a net loss for the year of £0.4m (2012: £1.9m profit). ASL is reported as a discontinued operation in the year, with prior year numbers restated accordingly.
The tax credit on the loss for the year is at an effective tax rate of 44.3%, in part due to the availability of R&D tax credits. The Group's future underlying tax rate is expected to benefit from scheduled reductions in the standard UK tax rate.
The average number of ordinary shares in issue during the year was 105.4m, compared with 106.4m in the prior year. Basic EPS and Adjusted EPS were 0.6p (loss) and 1.0p (profit) respectively (2012: 1.7p profit and 3.2p profit).
The Group's strategy of investing in innovation, a world class infrastructure and streamlining operations is reflected in its cash flows for the year. Capital investment in the year totalled £3.4m (2012: £2.2m) and exceeded depreciation and amortisation by £1.8m, while cash investment in the streamlining programmes was £2.5m (2012: £1.0m).
The increased level of capital spend is attributable to the build-up in activity of the Technology Centre in Cambridge, with capitalised development costs of £1.4m net of government grants received (2012: £0.2m). Investment in other fixed assets includes continuing development of the Group's IT infrastructure (£0.5m) and physical infrastructure and equipment needed to support the new operating configuration and to manufacture the newly developed products.
This level of investment has been supported by £5.8m (2012: £3.7m) cash generation from operating activities before restructuring, which partly reflects improvements in working capital management. Cash inflows also included £0.6m proceeds received on the disposal of ASL.
Elektron has paid £1.1m to shareholders in the year (2012: £0.8m) via dividends and share purchases by the Employee Benefit Trust ('EBT').
Net debt increased to £5.0m (2012: £4.4m), but remained well within the Group's total borrowing facilities of over £14m. These currently include a revolving credit facility ('RCF') of £6.5m, invoice finance facilities of up to £6m and leasing facilities of up to £2m. All the facilities have recently been renewed for a further 12 months, except the RCF which runs until April 2016, amortising by £1.1m each year.
Net gearing (net debt divided by total equity) at year end was 35% (2012: 28%).
To continue reading this noodl, please get the original version here.