Redhall : Preliminary Results

Preliminary Results

Released : 31/01/2019 07:00

RNS Number : 6484O

Redhall Group PLC 31 January 2019

For immediate release

31 January 2019

Redhall Group plc ("Redhall" or the "Company")

Preliminary Results

Redhall Group plc (AIM: RHL), the high integrity manufacturing and services group, announces its unaudited full year results for the year ended 30 September 2018.

Highlights:

• · Group revenue of £37.8 million was 3% lower than the £38.9 million reported in 2017. Excluding £6.1 million of 2017 revenue associated with ceased operations*, Group revenue increased by £5.0 million to £37.8 million (2017 revenue excluding ceased operations*: £32.8 million).

• · Group adjusted operating profit** excluding exceptional items of £0.2 million was significantly lower than the £1.4 million reported in 2017. Excluding £1.3 million of 2017 adjusted operating profit** before exceptional items associated with ceased operations*, Group adjusted operating profit** excluding exceptional items was flat at £0.2 million.

• · Group adjusted operating profit** margin before exceptional costs, excluding ceased operations* reduced slightly to 0.4% (2017: 0.5%), largely driven by product mix, with a higher proportion of lower margin fabrication projects compared to higher value engineered products, and additional costs incurred due to project delays.

• · Group operating loss was £3.8 million (2017: £0.3 million) this includes an IFRS 2 credit of £0.2 million (2017: charge of £0.4 million), amortisation of intangible assets of £0.3 million (2017: £0.3 million) and exceptional costs of £3.9 million (2017: £1.1 million).

• · The Order Book as at year end was £21 million, an increase of 20% compared to prior year end (30 September 2017: £17 million). This value does not include the Framework Agreement with Cavendish Nuclear, anticipated to be worth up to £18 million for the first three years of activity. Market conditions remain encouraging and the Group has a strong pipeline of opportunities

• · Net Debt increased by £5.7 million to £5.6 million at the year‐end (30 September 2017: net cash £0.1 million), largely driven by increased working capital requirements on major projects; contract assets grew by £5.9 million, which is largely expected to unwind in 2019

• · Redhall remains committed to the long‐term Health and Safety of our employees, customers and suppliers. We are focused on driving continuous improvement in safe working practices and behaviours across the business

• · We continue to pursue our strategy of driving margin improvement and business stability through operational excellence and believe that this will deliver long‐term success for the Group

* Ceased operations includes the remaining elements of R Blackett Charlton Ltd, Redhall Nuclear Ltd and Redhall Marine which ceased in the prior year. These parts of the business contributed £6.1 million of revenue and £1.3 million of operating profit before exceptional items. Included within this was a reduction of £1.2 million of administration expenses.

**Adjusted operating profit/(loss) is operating profit/(loss) before IFRS 2 (charge)/credit and amortisation of intangible assets acquired with business combinations

Martyn Everett, Chairman of Redhall, commented:

"Market conditions remain encouraging in the majority of the Group's core sectors and the Group benefits from a secure order book and a strong pipeline of opportunities.

"We continue to pursue our strategy of the operational transformation of our manufacturing business and believe that this pursuit ofoperational excellence will deliver long‐term success for the Group."

Contact details:

Redhall Group plc

Tel: [phone]

Russ Haworth, Interim Chief Executive Officer Simon Comer, Chief Financial Officer

Buchanan, Financial PR

Mark Court, Sophie Wills, Hannah Ratcliff

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GCA Altium, NOMAD and Financial Advisors

Tim Richardson

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WH Ireland Ltd, Broker

Adrian Hadden, Jessica Cave, James Sinclair‐Ford

Tel: [phone]

CHAIRMAN'S STATEMENT

The Redhall Group is highly regarded by its customers for its high integrity manufacturing and services and for its ability to work in complex, secure and hazardous environments. This customer recognition has enabled the Group to continue to secure key contracts, particularly for highly engineered manufactured products in the nuclear and rail sectors. The Group continues to pursue a strategy of operational excellence and continuous improvement to drive its pipeline of opportunities in target markets. This strategy seeks to deliver sustainable financial performance and provide a platform for growth.

It was disappointing to have to announce on 26 September 2018 that progress during the year had not been at the pace that the Board had originally anticipated and that the Group's full year performance would be materially below previous expectations. Delays on a number of key projects outside of the Group's control and slower than expected operational efficiency gains were identified as the key drivers of this underperformance.

The Group order book as at 30 September 2018 stood at £21 million, up 20% compared with last year (30 September 2017: £17 million using the same basis of measurement).

Trading Results

Revenue in the year ended 30 September 2018 from continuing operations was £37.8 million (2017: £38.9 million). Operating loss was £3.8 million (2017: £0.3 million). Adjusted operating profit before exceptional items was £0.2 million (2017: £1.4 million). Adjusted diluted loss per ordinary share for the continuing business amounted to a loss of 0.12 pence per ordinary share (2017: profit of 0.20 pence per ordinary share).

The Group's reported loss for the year was £3.9 million (2017: £1.4 million) which represents a loss of 1.24 pence per ordinary share (2017: loss of 0.59 pence per ordinary share).

Financial Position

The Group has considered its obligation, in relation to the assessment of the going concern of the Group and each statutory entitywithin it and have reviewed the current budget, cash forecasts and assumptions as well as performing sensitivity analysis and a review of the main risk factors facing the Group. Whilst the Directors acknowledge that uncertainty exists in relation to the timing of award, commencement and performance on key new contracts during the forecast period, as well as a certain level of uncertainty regarding the continuing performance of key ongoing contracts, based on their review of current budget cash flows and assumptions and based on sensible downside sensitivity scenarios, the Directors do not believe that these uncertainties are material and the Group's ability to operate within existing loan and banking facilities is sufficient to fund its activities for not less than 12 months from the date of approval of these financial statements.

On 7 November 2018 a temporary uplift of £1.2 million was granted by HSBC to the Group's £2.0 million overdraft facility, extending through to 31 January 2019. In addition, on 24 January 2019 the Group raised additional short‐term loans of £2.0 million from major shareholders of the Group (£1.0 million from Lombard Odier and £1.0 million from Downing LLP). These loans, which expire on 1 October 2019, have been raised to fund unusually high, short‐term working capital balances, which are being driven principally by two of the Company's major contracts.

In the current year the Group adopted IFRS 15 Revenue from Contract with Customers which had the impact of a £3.9 million reduction to opening reserves. The adjustment relates to the recognition of customer claims according to the Group's assessment of each contract's performance obligation to be delivered to its customers. The full impact is shown in Note 26.

Dividend

The Board is not recommending a dividend for the year to 30 September 2018 (2017: nil).

People

On behalf of the Board I would like to thank all of our employees for their energy and commitment throughout the year. We operate in technically demanding markets and we rely on our highly qualified and experienced operatives to deliver the high standards required by our customers. Our commitment to invest in the development of our management teams, commenced last year, remains ongoing.

Board Changes

There were a number of Board changes during the year, both Executive and Non‐Executive roles.

Joe Oatley joined the Board on 15 May 2018 as the Senior Independent Non‐Executive Director. Joe was most recently the Chief Executive of Cape plc and he brings a wealth of experience to the Board. Phillip Hilling, who joined the Board as a Non‐Executive Director in October 2011, stepped down on 30 June 2018.

On 2 July 2018, Simon Comer joined the Board as Chief Financial Officer, replacing Chris Kelly, who had worked at the Group since May 2014. Simon has a track record of senior financial roles at engineering businesses.

Shortly after the year end, on 25 October 2018, Wayne Pearson, who had served as Chief Executive Officer since April 2018 and previously as Chief Operating Officer, resigned from the Board. Russ Haworth, a highly experienced executive with a track record in the aerospace, manufacturing and engineering sectors, has been appointed to the Board as Interim Chief Executive Officer. The process for the appointment of a full‐time Chief Executive Officer is underway.

On behalf of the Board, I would like to welcome the Directors who have joined the Group. I would also like to thank those Directors who have left the Group and wish them well for the future.

Corporate Governance

Maintaining high standards of corporate governance is one of the key responsibilities of the Board. I am therefore pleased to confirm that, in compliance with AIM Rules for Companies, the Board formally adopted the 2018 QCA Corporate Governance Code with effect from 25 September 2018. Enhanced disclosures in this regard have been made on the Group's website and will be included in the 2018 Annual Report. Further details are available on the investor section of the Group's website.

Outlook

Market conditions remain encouraging in the majority of the Group's core sectors and the Group benefits from a secure order book and a strong pipeline of opportunities. We continue to pursue our strategy of the operational transformation of our manufacturing business and believe that this pursuit of operational excellence will deliver long‐term success for the Group. The near‐term performance of the Group remains difficult to predict, being materially affected by the timing of both contract deliveries and awards, and the pace of operational transformation.

Martyn Everett

Chairman

31 January 2019

STRATEGIC REPORT

I was delighted to join the Redhall Board as Interim Chief Executive Officer in October 2018, shortly after the financial year end. While the Group as a whole has had a challenging year, my initial assessment is that the fundamentals of the businesses within the Group, and their target markets, remain attractive. There is much work to do but I am positive about the future prospects for the Group.

I am supportive of the objectives of the business transformation strategy as set out by the Board last year. In summary, this strategy seeks to drive margin improvement and business stability through operational excellence, a competitive cost base and a balanced order book. With these elements in place, the Group will be well‐positioned for further investment and growth. The limited progress to date is a function of implementation, which we are now addressing.

The improvement of operational performance has been a recurrent focus for me in previous executive roles and I am very pleased to be able to apply this experience at Redhall.

It will take time to fully deliver the desired business improvements, but I am confident that we can take important steps towards that objective in the short‐term. My initial focus has been on business basics, ensuring we have capable, efficient processes which match the overall business and customer requirements. We must also become more agile in matching customer driven contract variations, flexing and closely managing our costs and outputs.

I am pleased to report the continued growth of the Group order book which at 30 September 2018 stood at £21 million (30 September 2017: £17 million using the same basis of measurement). This does not include the value of the framework agreement with Cavendish Nuclear, anticipated to be worth up to £18 million over the first three years of activity. The majority of the order book is derived from high integrity manufacturing projects for the nuclear, defence and rail sectors.

The Group uses adjusted operating profit* to reflect the underlying profitability of the Group as the GAAP measure incorporates non‐repeating exceptional costs which would distort comparisons of KPI's. Adjusted operating profit on continuing operations was £0.2 million (2017: £1.4 million) on revenue of £37.8 million (2017: £38.9 million), representing a net adjusted operating margin of 0.4% (2017: 3.7%). Before deducting Group and central services costs, the adjusted operating profit was £2.4 million (2017: £3.6 million).

Health & Safety

The health and safety of our employees and those who may be affected by our business remains our highest priority. All of our subsidiaries have accredited management systems to control health and safety risks to OHSAS 18001 and environmental management systems certified to BS EN ISO 14001.

During the year, our main subsidiaries obtained a minimum of the Gold Award for health and safety from The Royal Society for the Prevention of Accidents (RoSPA). These awards, which receive entries from organisations around the world, recognise achievements in health and safety management systems, including practices such as leadership and workforce involvement.

Trading

The Group's performance in the year to 30 September 2018 was disappointing compared to original expectations but the fundamentals of the businesses within the Group, and their target markets, are positive.

We believe that our Group companies are leaders in their respective fields, allowing them to work with many of the key operators within their markets. The focus of the Group remains on performance improvement and growth through cultivating customer relationships, devising bid‐winning strategies and delivering our quality products and services efficiently.

*Adjusted operating profit/(loss) is profit/(loss) before financial expenses, IFRS 2 charge, tax, exceptional items and amortisation of intangible assets acquired with business combinations.

Booth Industries

Booth is a leading provider of high integrity steel doors for a broad range of specialist applications across a range of industrial sectors.

Activity in the year was again dominated by the manufacture of highly engineered doors, predominately for the nuclear, defence and rail sectors. During the year, the business commenced delivery of high‐performance doors to a new Anglo‐France defence Technology Development Centre in France and the UK's Crossrail project.

The financial performance of the business for the full year was lower than the prior year. Revenues were weighted toward the second half of the year, with the first‐half impacted by delays in activity on a number of contracts.

Although the business has made slower than expected progress on improving operational efficiencies between engineering, manufacture and installation, this remains a key opportunity and focus. Significant improvements have been made in improving the process for identifying new business opportunities and follow through of high‐quality tender documentation which matches customer expectations.

We continued to invest in product development to expand the core range of high integrity doors, investing £0.6 million during the year.

The business maintains a strong pipeline of opportunities in its core markets. Whilst defence and infrastructure markets continue to represent a significant proportion of the pipeline, we are also seeing more opportunities to deliver high performance, multi‐function doors into new markets. The UK rail market remains attractive with continued investment in major infrastructure projects connected to extending the London Underground network. The recovery in the oil and gas sector represents a renewed opportunity and the business has received a number of preliminary enquiries from this sector.

Jordan Manufacturing

Jordan manufactures and fabricates bespoke equipment in carbon steel, stainless steel and complex alloys for the nuclear, defence, industrial and architectural sectors.

The business has been very successful in securing work during the year. Order intake was robust with the award of three contracts with Balfour Beatty for the supply of specialist manufactured metal products for incorporation in the marine works at Hinkley Point C ('Hinkley'). These contracts substantially increased the scope of work at Hinkley for which Jordan was named preferred bidder. The business was also successful in securing a sizeable contract in the defence sector.

In addition to secured orders in the year, the business was successful in winning a significant long‐term framework agreement for Cavendish Nuclear for glove boxes on the Sellafield nuclear site in Cumbria. The potential value of this framework agreement is not included in the Group's reported order book. The business also made good progress on the implementation of the "runners and repeaters" strategy across a more diverse range of sectors, which is a key element of improving its resilience.

The performance of Jordan in the year has been significantly affected by changes to the timing of the Hinkley project, both the contract award and subsequent deliveries. In particular, the change in our immediate customer on the project caused a delay in signing the contract to March 2018, significantly reducing first half revenues. With production works on Hinkley commencing in August 2018, revenues recovered strongly towards the end of the financial year.

The business has invested in specialist welding skills and technology to bring about the efficient delivery of the Hinkley contract, which will continue throughout 2018 and into 2019, and is well equipped and located to benefit from additional potential work on Hinkley.

As a result of significant bid activity this year, we have a substantial pipeline of quality tendered projects which we remain optimistic of securing. We are also confident that Jordan will have the opportunity to secure several large runner and repeater programmes that will give us a strong baseload of future work.

Redhall Jex

Jex provides design, manufacture, installation, relocation and refurbishment of process equipment, structural steelwork and packing lines. While the food market remains a key focus, the business is looking to expand into other industrial sectors and has been successful in adding electrical contracting to its portfolio of expertise.

Order intake in the year, particularly in the second half, was lower than expected as some customers maximised their production, resulting in lower than usual levels of project work for the business.

Revenue was slightly lower than the previous year. However, operating profits improved, supported by the successful consolidation of the activities of Jex in Grimsby into the Trafford Park facility. During the year, the business successfully completed the delivery and installation of a rubber micronisation plant for Michelin‐owned Lehigh Technologies in Spain. This plant is designed to cryogenically grind shredded tyres into powder for re‐use in new tyre manufacture.

Our key customers operate in fast moving environments which involve a high level of innovation and process change to keep pace with trends in the market. All of our major food sector customers, including Kellogg's, Mondelez, Mars and Nestlé, have committed capital spend programmes for 2019 and we are now seeing positive levels of bidding for a 2019 pipeline of opportunities. We also expect deferred project activity to start in 2019.

We therefore expect the business to continue to perform well into 2019, albeit we note increasing price pressure from competitors.

Redhall Networks

Networks specialises in the installation, commissioning and maintenance of mechanical and electrical equipment for the private communications network sector.

Order intake and revenues in the year were lower than the previous year, mainly due to delays in the roll out of their 5G networks by certain telecommunications operators following auctions and awards earlier in the year.

Due to the nature of contract visibility in the Networks market, the order book remains commensurate with short‐term order intake.

Mobile communications are an ever‐increasing part of the UK's national infrastructure. We are confident that the maintenance, upgrading and consolidation of the network by the operators will provide us with a return to strong volumes and growing profitability. The business also sees significant opportunities in the short and medium‐term following the Home Office's decision to extend the