Mincon : Half yearly report

Mincon Group plc

2016 Half Year Financial Results

Mincon Group plc (ESM:MIO AIM:MCON), the Irish engineering group specialising in the design, manufacture, sale and servicing of rock drilling tools and associated products, announces its half year results for the six months ended 30 June 2016.

Joe Purcell, Chief Executive Officer, commenting on the results, said:

"Revenue for H1 was 11% ahead of last year at €36.3 million, which tracked through to an improvement of 11% in profit before tax to €5.0 million (H1 2015 €4.5 million), and a 12% improvement in earnings per share.

The gross profit margin in the first half of 2016 of 41% was consistent with the same period last year (H1 2015: 41%), the operating profit margin was 13.5% (H1 2015 13.8%), and the profit attributable to shareholders improved to 11.2% of sales (H1 2015 10.7%).

These are relatively satisfactory numbers against the backdrop of the cyclically depressed volumes and margins in some of the sectors we service.

These results were achieved after increasing provisions to continue building a robust balance sheet, increased R&D investment which we expense, and incurring a €0.4 million charge to reduce head count in operations. While some of these charges are not expected to repeat, we believe it is appropriate to approach our reserves on a considered basis while delivering organic growth in profits and sales.

We are seeing growth in the Americas and Australia, with only Africa retrenching in the first half. The instability of the South African rand, while relatively neutral in it's effect on our accounts during the first half of the year, has caused significant caution and margin pressure in the South African market in the short term and has had a knock on effect to neighbouring African countries.

We are investing in our factories to provide for the expansion of our product ranges, and new equipment is in the process of being commissioned in several of our manufacturing plants. We expect to begin to see sales growth from these products in the 2017 year, with the rest of 2016 being used to test and complete designs, and to develop marketing and sales plans.

In conjunction with the release of these half year results, the Board of Mincon Group plc has recommended the payment of an interim dividend in the amount of €0.01 (1 cent) per ordinary share, payable in September 2016".

Over 50% of Group revenue is derived from sales of Down The Hole (DTH) products and 77% of turnover is manufactured in the Mincon factories. Within the product line-up we have seen some cyclical lows in, for example, Reverse Circulation (RC) products for the exploration market, but on the other hand, some products have begun to grow quickly as drilling techniques change and new uses are found for existing and newly developed products.

We have been considering how to best develop the Group, and have followed up on our analysis by beginning to establish regional hubs in Chile for South America and in Perth for Australasia. Ireland acts as the base for Europe. In setting up these regional hubs we can locate inventory for onward distribution and facilitate better informed and timely decision making. Combining this with standardised, more operationally oriented reporting metrics and systems, we should see benefits in the years to come. The Americas and Australia are the fastest growing markets for the Group.

Since the majority of what we sell is Mincon-manufactured product, most of the inventory is either the raw materials that we use, our own products going through the factories as work in progress (WIP) or finished products located at our distribution points. Inventory reductions should be obtainable from redeploying our own inventory, and turning production over to back orders or tuning it down while we trade inventory down to target levels.

We have been active in approaching potential acquisition targets, but we did not see value for the Group in the terms that were being sought by vendors, compared with the cost of investing in our own engineering competencies to build a competitive offering. We consider these opportunities on a case-by-case basis.

Through the cycle we have seen Private Equity owned companies being withdrawn from sale and refinanced, and other companies seeking unrealistic prices even while their sales and profits fall. However, we are still committed to growing both organically and by acquisition. We prefer to control our own products and our own channels to market.

We have elected to invest primarily in organic growth rather than exhaust our resources by buying that which we could competitively make ourselves. We also continue to invest in new products as they move into beta testing from the research stage, and in keeping with our R&D policy, we expense those costs as they are incurred.

We have put work into understanding and planning to mitigate the P&L impacts of currency movements, should these steps be required, but we have seen a broadly neutral position in the first half of the year. We make our decisions based on what the operations require for long term funding, and the standard operating terms between subsidiaries that allow predictability to our internal cash flows. We monitor this carefully with the aim of achieving neutrality in the P&L impact of movements.

The gross margin has been steady at 41% for the last few reporting periods as the growth of the Group normalises. Added volume delivers additional profit at these levels, and we continue to invest through the down cycle to improve our factories and the availability of our products to our customers. Our operating profit margin has been steady at 13.5% (H1 2015, 13.8%), and the profit attributable to shareholders at 11.2% (H1 2015, 10.7%) has improved over the same period last year.

The Mincon Group balance sheet remains strong with net assets of €99.9 million. Receivables have increased by €3.1 million in H1 this year, following the normal seasonal pattern, and 74% of these balances are current, which is not significantly different from usual.

Inventory has seen some growth since the year end, due to a number of factors including replacing inventory that was previously consignment inventory from third parties, and taking back inventory from distributors being replaced by our own subsidiaries. Raw materials also increased as orders reached a seasonal peak for volumes to be delivered in the second half. Working capital again absorbed approximately €5 million of cash in H1 as it did during the same period last year, and if the cycle follows through we should aim to recover this from working capital by the year end, subject to the requirements of the new product cycles.

The Group had net cash of €33.8 million at 30 June 2016, (31 December €38.6 million), with capital expenditure of c.€3 million (H1 2015, €0.84 million) replacing acquisition investment in the first half compared to last year. The investment is directed at expanding production of the current ranges, improved processes and equipment for the underinvested Marshall's factory and on the equipment for new products. We see this investment trend continuing for the next two years, subject to the strategy being successful, and itemised approval from the Board.

This engineering investment path is designed to result in external work being brought in-house and manufacturing being expanded and standardised to protect quality, deliver improved consistency and support production efficiency.

The Board of Mincon Group plc has recommended the payment of an interim dividend in the amount of €0.01 (1 cent) per ordinary share, which will be paid on 26 September, 2016 to shareholders on the register at the close of business on 2 September, 2016.

We are seeing growth in our sales, which we believe is due to increased market share rather than a general improvement in our target markets. Having said that, there are improvements in some commodity prices and certain end-markets appear to be beginning to return to growth. This should lead on to a recovery in the exploration businesses in due course and then across the mining sector. We believe that the underlying tone is improving, even if this is anecdotal rather than observable.

We continue to engage in dialogue with potential acquisitions and investments, but in some cases, the asking price is not supported by the earnings, and others have withdrawn to work through the down-turn in private. Nevertheless there are fine companies in the sector, worth acquiring, and we are actively continuing to identify and engage with those that we believe would add more than they would cost, and which would continue to fill out our geographic footprint, and our product and service offering.

19 AUGUST 2016

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Profit attributable to:

The accompanying notes are an integral part of these financial statements.