Samuel Heath & Sons : Published Accounts MARCH 2023

SAMUEL HEATH

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SAMUEL HEATH

_____________________________ DIRECTORS AND OFFICERS_____________________________

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Secretary:Simon Latham

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SAMUEL HEATH

______________________________ CHAIR'S STATEMENT_____________________________

As anticipated in the half year report, the second half proved to be more difficult than the first half, with tightening market conditions adding to the expected reductions in margins. However, given the uncertainties at the half year, the overall result was better than we feared might be the case, also taking into account that the previous year saw exceptional outperformance at the profit level due to what we highlighted at the time to be unsustainably low cost levels.

Total revenue for the year of £14.717m represented a 5% increase compared to the prior year (2022: £14.015m). Operating profit for the year was £1.167m (2022: £2.152m) and profit after tax £0.931m (2022: £1.472m).

The sales increase versus prior year occurred almost exclusively in the first half, with sales decreasing in the second half compared to the first half (£7.157m versus £7.560m). The USD exchange rate movement against Sterling accounted for virtually all the increase. The order book held up reasonably well during the year, but sales were held back by production difficulties caused by machinery breakdowns and labour shortages.

As mentioned above, and in the half year report, profit margins have reduced as the result of a number of factors. Machine breakdowns and maintenance have been particularly disruptive, as some Computer Numerical Control (CNC) lathes are coming to the end of their useful lives. Replacements have been ordered, requiring new programming and tooling, but there are long lead times before they can be fully commissioned. Shortages of skilled labour have also caused delays and inefficiencies and, whilst the staffing situation has now improved, new recruits require long training periods. Energy costs increased by £366k (71%) year on year and general cost inflation also took its toll. The other major cost increase arose from investment in sales and marketing resources: selling and distribution costs increased by 22%, as a result of recruiting more sales personnel, resuming attendance at international trade fairs, and investing in new product development. The directors consider this investment to be essential to secure the future health of the business.

The balance sheet continued to be robust, indeed more so than in the prior year, with net assets increasing from £7.676m to £11.193m. The increase was due to the reduction in the pension scheme deficit from £4.8m in 2022 to £0.5m in 2023 (calculated under IAS 19 rules), as a result of the increase in interest rates and gilt yields. However, the most recent Actuarial Valuation showed a deficit of £5.528m at 31 March 2022. The directors decided to ask the scheme trustees to request an Annual Funding Update from the scheme actuary as at 31 March 2023. This has been received and shows a deficit of £1.030m.

Cash and cash equivalents decreased by £1.697m, from £4.410m to £2.717m. Capital expenditure accounted for £1.163m, and mainly comprised the cost of replacing production machinery. Also £311k was capitalised as product development costs and £471k was spent increasing inventories as part of our policy of securing supplies and avoiding supply chain disruption.

We have experienced some weakness in sales in the first quarter of the year to 31 March 2024. Anecdotal reports from our customers, both in the UK and North America, indicate a marked downturn in their order books. We will need to wait until after the usually quiet summer period to find out whether this is a longer- term market issue. In any event, it seems unlikely that there will be much good news on the macro-economic front, with the Bank of England determined to raise interest rates and cool the economy down quickly. Growth is slowing in the US market, although we currently have only a small market presence and there are significant opportunities for us to increase our market share.

The investment in new equipment will enable us to accelerate the cycle time for getting new product ranges into the market. We have recently launched a new range called 'The Forme Collection', which is generating much excitement in our customer base. It combines a high quality, elegant design with more efficient, lower cost production, and correspondingly lower price point, and we are hopeful that this will assist in combatting any adverse market conditions.

Much depends on the markets in 2023/24 and market conditions will not be helpful at least for the first half, so we are expecting the order book to decline and therefore some worsening in trading. We are still working through historical orders. In the near term, production continues to be constrained by the time it takes to bring new equipment up to speed and we are currently having to work significant overtime to meet our order book. However, the directors are hopeful that the actions they have been taking will give us a fair chance of restoring growth in the second half year. I would like to congratulate the executive management team for their pro- active approach in meeting the challenges and also our loyal staff for working diligently to provide an excellent service for our customers.

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SAMUEL HEATH

The directors recommend maintaining the final dividend at 7.5625p (2022: 7.5625p), which will be paid on 21 September 2023 to shareholders registered as at 4 August 2023.

Anthony Buttanshaw

Non-Executive Chair

20 July 2023

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