Chamberlin : 2023 Annual Reports

Chamberlin plc

Annual Report and Accounts for the year ended 31 May 2023

PROUD HERITAGE, EXCITING FUTURE

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Chamberlin Plc - Annual Report - Year ended 31 May 2023

Table of Contents

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Chamberlin Plc - Annual Report - Year ended 31 May 2023

DIFFICULT THINGS DONE WELL

Success in UK engineering has not been easy to achieve in recent years, but its requirements can be simply stated; winners must do difficult things and must do them well.

We define "difficult things" as activities with high engineering content, delivering technically demanding products or processes. To take profitable advantage of them, it is essential that a business is properly managed and performs well.

"I am pleased to report significant operational improvements across the Group for the year ended 31 May 2023. The Group is well positioned to continue its journey to a full recovery and expects to return to a more sustainable level of profitability"

Chairman, Keith Butler-Wheelhouse

Investment Proposition

• Operating in markets with high barriers to entry protected by process know-how or market regulation
• Operating across diversified markets with sales driven by the global engineering economy
• Foundry and machining production capacity available to support growth in markets where industry capacity is constrained in the UK
• In-housedesign and engineering capabilities to rapidly develop high-quality, bespoke precision products for sale direct to the consumer and businesses
• A focused Board of Directors determined to position the Group for growth and to deliver shareholder value over the medium term
• Authentic UK manufacturer with a reputation for quality products developed over more than 130 years of engineering excellence

Key Points

Financial

• Improvement in Group operational performance continued in FY23, with a 68% increase in adjusted EBITDA and 94% reduction in cash outflow from operations
• Revenue of £20.7m (2022: £16.8m) was 23% higher than the prior year, following a 24% increase in revenue from the Foundry division and an 18% increase from the Engineering division
• The underlying operating loss reduced 17% to £0.6m (2022: £0.7m loss), with improving gross profit margins across both divisions being held back by an unexpected bad debt charge of £0.2m in the Foundry division. Excluding the bad debt, the operating loss would have reduced by 44% to £0.4m
• Underlying loss before taxation amounted to £1.1m (2022: £1.0m), and was adversely impacted by the effect of increases in the Bank of England base rate on financing costs
• The statutory result before tax was just above break-even (2022: £0.5m loss) and represents a 107% reduction from the prior year following the reversal of impairment losses previously taken in the Foundry division, reflecting the improved current year performance and future prospects at Chamberlin & Hill Castings (CHC)
• Loss after tax of £0.1m (2022: £0.1m profit) reflects one-off deferred tax charge of £0.3m relating to prior year enhanced capital allowance claims. Excluding the one-off deferred tax charge, profit after tax would have been £0.2m and ahead of last year
• Underlying diluted loss per share of (0.8)p (2022: (0.5)p loss per share)
• Total diluted loss per share of (0.1)p (2022: 0.1p earnings per share)

Operational

• Foundry revenues increased by 24% to £16.9m (2022: £13.6m) reflecting a recovery in revenue at CHC which increased by 22% and continued strong growth of 26% at RDC
• Foundry operating loss reduced to £0.2m (2022: (£0.5m loss) driven by a 48% reduction in losses at CHC following a successful period of new order intake. Excluding a bad debt charge of £0.2m, the operating result improved by 100% to break-even
• Engineering revenues of £3.8m increased by 18% (2022: £3.2m) continuing impressively from the 21% increase in 2022. This
  continued growth contributed to another record operating profit of £0.6m (2022: £0.5m), a 13% improvement on the prior year
• Completed the sale and leaseback of the freehold property in Walsall in June 2023, generating gross proceeds of £2.2m

Underlying figures are stated before non-underlying costs (restructuring costs, impairment, onerous leases and share based payment costs) together with the associated tax impact.

Adjusted EBITDA defined as operating profit before interest, taxation, depreciation, amortisation and non-underlying items

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Chamberlin Plc - Annual Report - Year ended 31 May 2023

CHAIRMAN'S STATEMENT

I am pleased to report to shareholders a continuation this year of the turnaround in the fortunes of Chamberlin from the low point of our recent history in 2021. The vast majority of our key operational metrics have again taken a significant step forward in the year, building on the progress made in 2022. Revenue increased by 23%, adjusted EBITDA improved by 68%, the loss before tax reduced by 107% to just above break-even and operating cash outflow reduced by 94%.

The most satisfying part of the Group's operating performance in 2023 has been the turnaround in the fortunes at Chamberlin & Hill Castings (CHC), which in the previous two financial years had been diluting the strong performances of Russell Ductile Castings (RDC) and Petrel. Although CHC was not profitable overall in 2023 due largely to headwinds in the first half, it increased its revenue by 22% and reduced operating losses by 48% and was successful in securing new programs with customers, the full benefit of which will come through in 2024 and for several years ahead.

RDC and Petrel continue to go from strength to strength and continue to win new business and market share, delivering revenue growth of 26% and 18% respectively in 2023. Both of these businesses have been re-invigorated further by the appointment of new management teams that share the Board's ambitions to continue their recent growth trajectory and to develop the business as leaders in product development, innovation and technical excellence in their respective markets.

In January 2023, Chamberlin completed a placing and subscription raising £650,000 to support the Group's working capital requirements as it enters a period of profitable growth. At that time, the Board stated that it was continuing to evaluate further opportunities to strengthen the balance sheet, including in relation to the Group's property assets and in June 2023 the sale and leaseback of its freehold property in Walsall was completed. The transaction generated gross proceeds of £2.2m, of which £1.1m was paid to the pension fund to reduce the deficit by around half on a trustee's basis and to eliminate the 31 May 2023 deficit entirely from the Group balance sheet. The Board continues to review the various options available to support the Group's working capital requirements as we continue to deal with repaying legacy debt and providing adequate funding for three growing businesses.

The Board and Staff

The Board has remained focused on continuing to improve the operational performance of the business and their dedication to the cause is continuing to be reflected in the operational results across all divisions.

Our employees have continued to remain loyal through some challenging times in recent years, but we are now beginning to see the fruits of their endeavours and the green shoots of a prosperous future. Chamberlin's transformation to a sustainably profitable Group will be driven through the tireless efforts of our people and I am confident that we have a workforce that share the Board's aims and who have the right skills, attitude, and talent to take the Group forward for the benefit of all our stakeholders.

Outlook

Whilst having delivered incrementally modest improvements to operating performance in the last two years, the Board firmly believes that all of the Group's businesses will make further progress in 2024 and that Chamberlin will deliver the step change in performance we have been working towards. The Board is anticipating a further increase in revenue of between 15% and 20% and profit after tax of between £0.8m and £1.0m in FY24.

KEITH BUTLER-WHEELHOUSE

CHAIRMAN

30 November 2023

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Chamberlin Plc - Annual Report - Year ended 31 May 2023

GROUP AT A GLANCE

GROUP OVERVIEW

Product Areas

Chamberlin operates across four locations in the UK.

The Foundry Division specialises in technically demanding castings in complex shapes and in specialist metallurgies.

Work is allocated across its two foundry sites and one machining facility based on size and metallurgy as follows:

• Light Castings based in Walsall produce castings up to 20kg in grey iron.
• Heavy Castings based in Scunthorpe make up to 6 ton castings, in a wide variety of iron grades.
• The machining centre, opened in 2017, supports the light castings made in Walsall.

The Engineering Division manufactures and supplies hazardous area lighting to regulated markets operating from a site in Birmingham.

Principal Markets

The Group manufactures products that are used across a highly diversified number of industries, including:

Passenger automotive vehicles

Commercial vehicles

Heavy plant and machinery

Renewable energy

Oil and gas

Ports and shipping

Infrastructure projects

Direct exports are an important part of the Group's activities and accounted for 24% of revenue in 2023 (2022: 21%) to our customers in Europe, America, the Middle East and Asia. Global demand for UK engineered products is strong and our customers are typically leaders in their sectors.

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Chamberlin Plc - Annual Report - Year ended 31 May 2023

STRATEGIC REPORT

The Directors are pleased to present the Strategic Report for the year ended 31 May 2023, further details of which can be found on pages 7 to 13.

The matters that are required to be included in the Strategic Report and where they can be found are shown below:

1. 1. fair review of the business of the company (page 7)

1. 2. description of the principal risks and uncertainties facing the company (page 12)

1. 3. the development and performance of the business of the company during the financial year (page 7)

1. 4. the position of the company at the end of the year, consistent with the size and complexity of the business

(page 7)

1. 5. analysis using financial key performance indicators (page 11) o 6. Non-financial information about:
2. • environmental matters (pages 13);
   • the company's employees (pages 15 and 23);
   • community issues (page 15);
   • social matters (page 13);
   • respect for human rights (page 15); and
   • anti-corruptionand anti-bribery matters (page 17)

1. 7. a description of the principal risks relating to the specified non-financial matters arising in connection with the company's operations (page 12)

1. 8. Review of strategy and business model (pages 7 and 8)

1. 9. The strategic report must include a statement (a 'section 172(1) statement') which describes how the directors have had regard to the matters set out in section 172(1)(a) to (f) when performing their duties under section 172 (page 13).

The Strategic Report was approved by the Board 30 November 2023 and signed on its behalf by:

KEVIN PRICE

CHIEF EXECUTIVE

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Chamberlin Plc - Annual Report - Year ended 31 May 2023

CHIEF EXECUTIVE'S REVIEW

2023 has been a year of consolidation and modest progress that gives the Board the confidence of a return to sustainable operational profitability in 2024. It was particularly satisfying that all three of the Group's trading subsidiaries, Chamberlin and Hill Castings (CHC), Russell Ductile Castings (RDC) and Petrel, improved their revenue and operating results when compared to 2022. Work winning across the divisions has been strong during the year and they each enter the new financial year with solid order books and opportunities to further enhance growth.

Group revenue of £20.7m (2022: £16.8m) was 23% higher than the prior year reflecting a strong increase in operational performance across all divisions, with revenue increasing by 22% at CHC, 26% at RDC and 18% at Petrel. The improvement at CHC included new programs secured at the foundry and more importantly, new orders for the machining facility which had been significantly under-utilised for around 18 months from the end of the 2021 financial period. The investment made at RDC at the end of 2022 to improve its production capacity was a contributing factor to the increase in revenue, as customer demand that previously would have been unfulfilled was able to be delivered. The increase in revenue at Petrel in 2023 was largely driven by the UK market, and in particular growth in sales of portable lighting.

The underlying operating loss reduced to £0.6m (2022: £0.7m), with an improvement in gross profit margins and financial operating performance from the trading divisions partially offset by increased corporate costs and a one-off bad debt charge of £0.2m. Excluding the bad debt charge, the operating loss would have been 44% lower than the previous year at £0.4m. The improved gross profit margin at CHC and RDC was largely due to operational efficiencies deriving from higher revenue, thereby increasing productivity and achieving economies of scale savings. Petrel maintained its operating profit margin at around 16% despite some supply chain cost pressures in the early part of the financial year associated with the war in Ukraine, which initially limited the availability of certain electronic components.

Net interest costs increased to £0.5m (2022: £0.3m), primarily reflecting the impact on invoice financing costs of consecutive monthly increases in the Bank of England base rate during the year. This resulted in the Group making an underlying loss before tax of £1.1m (2022: £1.0m loss). With non-underlying items amounting to a £1.1m credit (2022: £0.5m credit), the statutory result before tax was just above break-even (2022: £0.5m loss), a 107% improvement on the previous year. The non-underlying credit of £1.1m in 2023 is largely the result of the reversal of £1.4m of the £3.8m impairment charge recognised in 2021 against plant and machinery at CHC's machining facility. This impairment reversal reflects an increase in activity during the year and the return to sustainable profitability in the medium term for the machining facility based on the new programs it has secured. The tax charge in 2023 amounted to £0.2m (2022: £0.6m credit) and reflected a one-off deferred tax charge adjustment of £0.3m relating to enhanced capital allowances claimed in the prior tax year, and losses arising in the current year on which a deferred tax asset could not be recognized of £0.3m. These charges were largely offset by research and development tax credits receivable of £0.3m and a deferred tax asset of £0.3m recognised on trading losses in respect of RDC in the light of their continued improved financial performance. The loss after tax amounted to £0.1m (2022: £0.1m profit) but excluding the one-off prior year deferred tax charge of £0.3m would have been ahead of the prior year at £0.2m profit.

The Board and senior management have continued to prioritise improving liquidity and cash flow and strengthening the Group balance sheet during this period of high revenue growth. Net cash outflow from operations of £0.2m (2022: £4.0m outflow) was a considerable improvement on the prior year due to a rigorous focus on working capital flows, which improved from a £2.7m outflow in 2022 to a £0.2m inflow in the current year. The Board recognises the belief that shareholders have in the prospects of the Group and appreciate the support shareholders provided through a £0.65m equity fundraising in January 2023, and then subsequent to the year end, a further £0.33m to support the investment and growth opportunities that the Group has. In addition, to further improve balance sheet strength and liquidity, the Group completed the sale and leaseback of its Walsall property in June 2023. The transaction generated gross proceeds of £2.2m, of which £1.1m was used to reduce the pension scheme deficit. This payment to the pension scheme effectively reduced the deficit in the scheme on a Trustee basis by half and eliminated the deficit on the balance sheet at 31 May 2023 of £0.6m. With the ongoing repayment of legacy debts and three growing businesses that need working capital to execute Chamberlin's growth plans, the Board continues to maintain a rigorous focus on cash management and to review its funding options to improve liquidity.

At the end of June 2023, the triennial valuation of the pension scheme was completed, and a revised schedule of deficit recovery payments was agreed with the Trustees. The deficit recovery payments now being made to the scheme are expected to eliminate the deficit by September 2027, a significant improvement on the expectations at the previous valuation date in 2019 of August 2032.

This financial year has seen the Group maintain its strategic course for a return to sustainable operational profitability and the Board now believe that 2024 will see a return to a level of sustainable profitability not seen at Chamberlin for almost a decade The prospects of the Group's three trading subsidiaries that support the Board's view regarding profitability are discussed below:

Chamberlin & Hill Castings Ltd - Casting Facility and Machining Facility ("CHC")

CHC has been successful in its strategy of diversification away from the automotive sector having secured a number of new programs and orders that will utilise some of the excess capacity at the foundry and machining facility.

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Chamberlin Plc - Annual Report - Year ended 31 May 2023

During the year, orders with a potential aggregate annualised revenue value of approximately £1.2m were secured in the construction, cast iron radiator and commercial vehicle markets. Production commenced on all these programs at the end of the first quarter of the 2023 calendar year, with volumes ramping up through the course of the 2024 financial year. A significant proportion of these new orders are the result of the concerted efforts of customers to source from local UK supply chains and CHC has the excess capacity and technical expertise to be able to benefit further from this trend.

In June 2023, the company also secured a major new contract worth approximately €7.3 million of revenue over an eight-year term with a leading European automotive industry components supplier. Under the contract, CHC will supply complex turbo-charger bearing housing castings to the European automotive OEM that will be utilised in its passenger car engines. Secured after a rigorous competitive tender process, tooling production commenced in July 2023 and supply of the pre-series sample production parts will take place throughout FY24. Serial production commences in July 2024 and is expected to contribute annual revenues of approximately €1.1 million. This contract provides an element of long-term visibility and security of revenue and utilises some of the excess capacity at CHC which will drive labour productivity improvements and enhance profitability.

Furthermore, in November 2023, CHC received a letter of intent and tooling orders from an existing customer in relation to two 10-year serial production programs for products in the heavy plant sector. Manufacture of the tooling has commenced, and sample production will take place through 2024, with the approval to enter production expected in the final quarter of the 2024 calendar year. These programs will ramp up through the early part of 2025 and are expected to contribute approximately €7.1 million of revenue over their lifetime.

CHC's machining facility has also won several recent new orders that will see production ramp up by the end of this calendar year as these programs gather momentum. These orders are expected to have an aggregate annualised revenue value of around £1.0m and will enable five out of the six machining cells to be fully occupied on a single shift basis for the first time in nearly two years.

In addition, CHC, through its Emba cookware brand, has entered into an agreement with a well-established cookware company to develop, market and sell, a jointly branded cookware range, through their substantial existing network of distributors and retailers. The initial product range entered production in October 2023 and became available for retail sale in November. This arrangement is a promising and exciting development for the Group's Emba brand, providing access to a much wider customer base than could have been established with the Group's in-house resources and supporting the potential for Emba to become a more meaningful contributor to CHC's diversification strategy.

CHC has a strong order book, supported by sizeable long-term contract wins, and is expected to achieve further revenue growth in 2024. In addition, CHC is in the process of developing its capability to deliver products in ductile iron for the first time. This is in response to a substantial increase in enquiries from new and existing customers for products made from this type of iron, which will open up access to a vastly greater market where demand is extremely buoyant and foundry capacity is limited.

Russell Ductile Castings Ltd ("RDC")

RDC's prospects for continuing its progress in the new financial year are positive, supported by a large, high-quality order book. RDC

has been extremely successful in winning new orders from blue-chip companies with an annualised value in excess of £4m following the demise of a competitor foundry. In addition, RDC has signed a two-year exclusivity agreement for an established company in the renewables sector, with the potential to generate up to £1m of revenue per annum. This agreement further entrenches RDC's strong position in the buoyant renewables market, which is expected to continue to expand with further UK Government funding for wind and tidal power announced in August 2023. In addition, RDC is enhancing its current steel making capabilities in order to fulfill demand from existing customers that previously the Group had to turn away.

Year to date operating profit in the 2024 financial year is 50% higher than the corresponding period in 2023 and the strength of the order book gives the Board confidence that this trend can continue for the remainder of this financial year.

Petrel Ltd

Petrel's operating performance has improved markedly in the last two financial years and the Board expects this to continue in the 2024

financial year. Having delivered two consecutive years of record operating profit, Petrel is on track to improve again this year. Having changed the management team in 2022, the Board has supported the addition to the sales force of a European Business Development Manager and an Eastern European Agent to drive the strategy of increasing export sales from around 20-25% to 35-40% of total sales by 2026. Petrel continues to improve its offering through enhancing existing product ranges and providing lighting design services that give customers tailor-made lighting solutions that exactly meet their requirements and needs in an energy efficient and cost-effective way.

During 2023, Petrel has invested in two new machines that will enhance productive capacity and deliver cost-saving efficiencies. In the first half of the current financial year, Petrel has introduced upgrades to its product range, including a self-test emergency option for the popular 7 series. With expectations of double-digit revenue growth again in 2024 at operating margins that have consistently been around 16% for the last 2 years, the Board believes that Petrel is well placed to contribute a materially enhanced operating profit in 2024.

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Chamberlin Plc - Annual Report - Year ended 31 May 2023

Outlook

From the challenging position Chamberlin found itself in at the end of the 2021 financial period, the Group has made year on year progress on its journey to a sustainable return to operational profitability. The economic headwinds that have been a feature of the last two years have made this journey more challenging and therefore it has taken longer than the Board anticipated. However, these headwinds are now largely in the past and the improvements and building blocks that have been hard fought over the last two years have put the Group into the position where the strategic goal of returning to operational profitability is expected to be delivered in the 2024 financial year.

KEVIN PRICE

CHIEF EXECUTIVE

30 November 2023

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Chamberlin Plc - Annual Report - Year ended 31 May 2023

PERFORMANCE REVIEW

FOUNDRY Division

Our three foundry division sites cast a range of products ranging from 1kg up to 6,000kg and deliver castings with complex geometry and challenging metallurgy.

ENGINEERING Division

Our engineering site produces certified lighting for use in hazardous and explosive environments and other industrial applications.

By operating segment

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Chamberlin Plc - Annual Report - Year ended 31 May 2023