MPAC : Half-year Announcement 2019 - 05/09/19 – Download

5 September 2019

AIM: MPAC

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No. 596/2014

Mpac Group plc

(''Mpac'', "Company" or "Group")

Mpac, the global packaging and automation solutions group, today announces its results for the six months to 30 June

2019

Highlights

• Increase in Group sales of 62% to £45.8m (2018: £28.2m), including £5.5m from the acquisition of Lambert Automation Group ("Lambert")
• Underlying profit before tax of £4.5m (2018: £nil)
• Good progress made in executing Original Equipment orders during the first half of 2019, with a favourable repeat project mix generating improved margins
• Profits for the full year expected to be significantly above current market expectations
• On track to deliver the anticipated benefits from the acquisition of Lambert
• Overall order intake in the first half of 2019 is 54% above the first half of 2018. Services order intake growth was particularly strong in the first half, up 75% on the same period of 2018
• Order book at 30 June 2019 is broadly comparable to June 2018 on a like for like basis
• Underlying earnings per share of 21.3p (2018: loss of 1.6p)
• Statutory profit before tax of £2.9m (2018 loss: £0.6m). Basic earnings per share of 12.7p (2018: loss of 3.9p)
• Net cash of £9.6m (30 June 2018: £24.9m; 31 December 2018: £27.0m). Cash flows consistent with the improved trading performance of the Group and the acquisition of Lambert
• Triennial valuation of the UK pension scheme completed, and recovery plan agreed, with a gross reduction of contributions of £9.7m compared to the previous agreement

Tony Steels, Chief Executive, commented:

"I am really pleased with the results for the first half of the year which demonstrate the value of the strategic objectives we have been working hard to implement. The recent acquisition of Lambert is progressing to plan and has been well received by our current customers and potential new customers, increasing our prospects to provide full turnkey solutions. We remain focused on continuing to deliver on our strategic objectives supported by sound business fundamentals and growth markets."

For further information, please contact:

Mpac Group plc

Tony Steels, Chief Executive

Will Wilkins, Group Finance Director

Panmure Gordon (UK) Limited (Nominated Adviser & Broker)

Dominic Morley - Corporate Advisory

James Stearns

Hudson Sandler

Nick Lyon

Nick Moore

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Tel: [phone]

Tel: [phone]

Tel: [phone]

HALF-YEAR MANAGEMENT REPORT

Introduction

Mpac serves customers' needs for ingenious, innovative packaging machinery and automation encompassing, Make, Pack, Monitor and Service. We design, precision engineer and manufacture high speed automation and packaging solutions, with embedded process monitoring systems. The addition of Lambert to the Group in May 2019 further strengthens our position in the market to deliver complete solutions for factory automation and process innovation. With the acquisition we now provide complete turnkey solutions including the design and integration of packaging systems and a lifetime service for our machinery.

The Group's packaging machinery and automation business is focused on the high growth pharmaceutical, healthcare and

food and beverage markets, which we expect to enjoy long term growth rates of between 4% to 6%.

The opportunities for the Group are based on the following fundamental strengths:

• Robust long-term growth drivers in our target markets
• Heritage of innovative, high speed packaging machinery and automation solutions
• Global reach with embedded local presence providing exceptional service to our customers
• A talented and engaged workforce

As outlined at the time of the Company's final results, Mpac started 2019 with a significantly higher order book than at the start of 2018. The quality of this opening order book is the driver behind the financial performance achieved in the first half of the year. However, there remains the potential for forecast orders to be delayed due to general economic uncertainty for the medium term, driven by macro-economic and political circumstances outside of the control of the Group. Therefore, the Board anticipates that, while the results for 2019 will be above current market expectations, primarily as a result of an increased number of repeat projects and by operational efficiencies, the medium-term economic outlook, driven by macroeconomic factors, is less certain.

Strategic Progress

We have made further good progress in delivering upon our strategic plans. Growth at the target levels continues, underpinned by a commercial excellence programme and innovation roadmap. 'Service as a Business' is becoming embedded within the culture of the Group and operational efficiencies have been achieved resulting in improved margins and profitability.

The acquisition of Lambert provides the Group with a significant increase in scale and resource and positions the Group to be able to offer full turnkey automation and packaging solutions to our customers and a further presence in the strategically important healthcare market. Current and potential customers have expressed enthusiasm to work with our larger Group on relevant and larger scaled projects. Cost and efficiency synergies from the acquisition are on plan and we expect to deliver further savings over the medium term.

Our aim to operate as a single entity business model, 'One Mpac' is progressing well and we have concluded on a project to harmonise our engineering platforms across the regions. Resources will be further utilised across the businesses more effectively, leading to efficiency gains, customer benefits such as reduced project delivery periods and an order book that is of higher quality and lower project complexity.

Make Service a Business has gained significant traction in the first half of the year with the results of the strategy having a material impact on the financial performance of the Group. Several long-term service agreements, generating recurring income, have been implemented and service order intake is above the prior year across all regions.

A new senior management team in Canada is now embedded and is providing the leadership necessary to support our strategic ambitions. Our planned expansion in the USA market is progressing well, starting with an enlarged sales team.

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Financial results

The Group entered the year with a strong order book and accordingly sales in the six months to 30 June 2019 were £45.8m (2018: £28.2m), a 62% increase on the same period in the prior year. Order intake in the first half of 2019 was 54% above the same period in 2018, although order intake was significantly higher in the second half of 2018. Currently, the order book is broadly in line with the level at the end of June 2018 and, although the Group has a robust level of prospects, the conversion of prospects to orders is more difficult to predict in the current environment as customers defer discretionary investments. The current order book has been reviewed in detail to confirm that projects remain on track within contractual terms.

Lambert, acquired on 1 May 2019, for an initial consideration of £16.8m, following adjustments for cash and working capital, has performed strongly during its initial period of ownership and will be materially earnings enhancing throughout 2019 and beyond. Further commercial and operational synergies are expected to be delivered over the medium term. Non- recurring costs associated with the acquisition were £0.8m.

Underlying operating profit before tax was £4.5m (2018: £nil). After a net tax charge of £0.3m (2018: £0.3m), the underlying

operating profit after tax for the period was £4.2m (2018: underlying loss £0.3m). The underlying earnings per share was

21.3p (2018: loss of 1.6p).

The underlying results are stated before pension related charges of £0.2m (2018: £0.4m), comprising charges in respect of

administering the Group's defined benefit pension schemes of £0.4m (2018: £0.5m) and financing income on pension

scheme balances of £0.2m (2018: £0.1m), a provision in respect of discontinued operations of £0.3m, acquisition costs of

£0.8m (2018: £0.1m), amortisation of acquired intangible assets of £0.2m and restructuring costs of £0.1m (2018: £0.1m).

On a statutory basis, the profit after tax for the period was £2.6m (2018: £0.9m loss). The basic earnings per share amounted

to 12.7p (2018: loss of 3.9p).

Finances

Net cash at 30 June 2019 was £10.5m (30 June 2018: net cash of £25.8m; 31 December 2018: £27.9m) after a net cash payment for the acquisition of Lambert of £10.6m. Net cash outflow from operating activities in the first half of the year was £5.7m. This is after an increase in working capital levels of £9.0m, reflecting growth in sales from working through the Group's order backlog and after deficit recovery payments to the Group's defined benefit pension schemes of £1.3m. Tax paid in the period was £0.3m. Capital and product development expenditure was £1.2m net.

The Group maintains bank facilities appropriate to its expected needs. In the UK, on 28 June 2019, the Group entered into committed secured borrowing facilities with HSBC UK Bank Plc of £10m. These facilities, which are committed until June 2022, are subject to covenants covering interest cover and adjusted leverage and are both sterling and multi-currency denominated.

Dividend

Having considered the trading results to 30 June 2019, together with the opportunities for investment in the growth of the Company, the Board has decided that it is appropriate not to pay an interim dividend. No dividends were paid in 2018. Future dividend payments and the development of a new dividend policy will be considered by the Board in the context of trading performance and the pension fund as and when the Board believes it is prudent to do so.

Operating performance

The Group manages the business in two parts (OE and service) and across three regions (Americas, EMEA and Asia Pacific). Individual contracts received by the OE business and the Service business can be sizeable. Accordingly, one significant order can have a disproportionate impact on the growth rates seen in individual markets year on year.

Original Equipment (OE)

The Group made sound progress in both securing significant growth in OE order intake in the first half of 2019 and in generating an increase in OE gross margin. Order intake was approximately 42% above the same period in 2018. At the end of June 2019, the OE order book is broadly in line with the level at June 2018.

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OE revenue in the Americas region increased from £9.1m in 2018 to £27.2m in the current period. The EMEA regional performance reduced by 32% to £7.9m (2018: £11.7m). Sales in the Asia Pacific region grew steadily to £3.1m (2018: £2.4m) an increase of 29%.

Sales to the Healthcare sector increased by over 200%, driven by the large contracts won in late 2018 and early 2019. Sales to the Food and Beverage and Other markets also showed steady progress. Pharmaceutical revenue was adversely affected by the timing of contracts within the industry and is expected to recover in the second half of the year.

OE gross margin in the period was 27.2% (£10.4m) (2018: 18.0% (£4.2m)) with the increase in profitability the result of delivering the higher opening OE orderbook at contract margins. The 2018 comparative performance included a significant cost contingency driven by two technically challenging legacy contracts. There are no equivalent costs associated with legacy contracts included within the gross margins reported to June 2019.

Service

Services order intake in the period was 75% higher than in 2018. The increase was the result of additional focus on making 'Make Service a Business' across all regions and an improved offering in conjunction with new machine sales. This led to a 52% increase in service revenues, with the improvement being broadly equal between the Americas and EMEA regions. Service sales in Asia Pacific improved more steadily but still showed progress, growing at 20% over 2018.

The increased revenue from services generated a gross margin in the period of £2.7m (2018: £1.7m). Improved operational

and supply chain efficiency led to an increase in service margin in the period to 36% (2018: 34%).

Investment Property

The Group owns an investment property and land comprising of 10 acres in Monks Risborough, Buckinghamshire, UK, which is held at a net book value of £0.8m and is not required for the Group's operations. The Group was not successful in its recent efforts to have the site designated for residential housing development but will continue to explore all high-value options for the investment.

It is difficult to be precise about the future value of the land if planning approval was obtained for housing. It is not the Group's current intention to redevelop the site itself.

Pension schemes

The Group is responsible for defined benefit pension schemes in the UK and the USA, in which there are no active members. The Company is responsible for the payment of a statutory levy to the Pension Protection Fund.

The IAS 19 valuation of the UK scheme at 30 June 2019 shows a surplus of £29.3m (£19.2m net of deferred tax), compared with a surplus of £20.5m (£13.2m net of deferred tax) at 31 December 2018. The main driver of the increase in the surplus was the strong asset performance, partially offset by a decrease in the discount rate.

The UK scheme was subject to a formal triennial actuarial valuation as at 30 June 2018, which was completed in the first half of 2019. The principal terms of the deficit funding agreement between the Company and the Trustees are set out in note 7. The next funding valuation will be carried out no later than at 30 June 2021 and the agreement between the Company and the Fund will be reassessed at each of those valuations.

The actuarial deficit in the UK scheme reduced from £69.9m at 30 June 2015 to £35.2m at 30 June 2018 in the formal triennial valuation. The actuarial deficit is now expected to be eliminated in July 2024, compared to August 2029 under the previous valuation, representing a gross saving of £9.7m. The current annual deficit recovery payments have been maintained but will now cease more than five years earlier than was agreed under the previous valuation.

The net valuation of the USA pension schemes at 30 June 2019, with total assets of £17.6m, showed a deficit of £6.1m, which was unchanged from 31 December 2018.

The aggregate expense of administering the pension schemes was £0.4m (2018: £0.5m). The net financing income on

pension scheme balances was £0.2m (2018: £0.1m).

Acquisition strategy

The Board will continue to evaluate potential acquisition opportunities that strategically fit and will enhance our global presence in packaging solutions serving the Pharmaceutical, Healthcare, Food and Beverage markets.

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Outlook

It has been a positive start to the year with the sound foundations established in 2018 flowing through into 2019, resulting in an improved financial performance. Additionally, an increase in the number of repeat projects and in operational efficiencies generated incremental margins and consequently the expected results for the full year 2019 are above current market expectations. The order book and future prospects remain strong, underpinned by long term growth factors in our target markets.

Execution of the Group's strategic plans is beginning to have a tangible impact and the Group is in an excellent position to benefit from further commercial successes in the second half of the year.

The acquisition of Lambert provides a significant step forward in being able to deliver full turnkey solutions to our customers and to complete for large scale commercial opportunities. The integration plans are on track to deliver the expected results from the acquisition in 2019.

The Group has both the financial and managerial resources available to develop its business, with the prime focus being on organic growth, through leveraging of its global position, development of its products and most particularly through an improved service offering to its customers. In conjunction with this, we are looking at a number of acquisition opportunities which will be complementary to the Group's existing operations.

General market uncertainty has increased with global FMCG companies under pressure to eliminate plastic in consumer products leading to investment delays whilst they develop new solutions. Order intake is also variable and sensitive to geopolitical events and recent signs of slowing growth resulting in delayed investment decisions.

Overall progress in the development of the Group's business is expected to continue and the Board believes that short term prospects remain positive.

Tony Steels

Chief Executive

4 September 2019

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