Interim Results

CEPS PLC HALF-YEARLY UNAUDITED RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2010 CHAIRMAN'S STATEMENT Review of the period Trading in 2010 is proving to be equally if not more challenging than 2009. At the same time we are making some significant changes and investment to drive future profitability which is further depressing current profitability. Consumer spending remains extremely fragile and on the supply side we have seen a stream of raw material price increases and continued currency volatility. Revenue across the Group is up 5.5% in the first half to £7.9m (2009: £7.5m). However, our gross profit has fallen from £983,000 (13.1%) to £868,000 (11.0%), as the margin pressures I have mentioned here and in my last full-year report have intensified. Despite our operating expenses being well controlled across the businesses, our operating profit is down to £258,000 from £376,000 in the first half of 2009. After finance costs and provision for taxation the profit for the period was £ 122,000 (2009: £223,000). Earnings per share has fallen to 0.61p (2009: 2.14p) reflecting both the reduced earnings and the increased minority stake at Friedman's. In accordance with the Group's acquisition strategy, bank borrowings at the end of June 2010 were lower than at the prior year end by £221,000 at £700,000 (December 2009: £921,000). In addition, a further £100,000 of bank debt has been repaid since the end of the period. Financial review Inventories, in anticipation of second half revenue, and trade and other receivables have both increased in this period and trade and other payables reduced by the use of short-term bank funding. With this increased working capital and the reduced profitability, the overall cash used in operating activities was £274,000 (2009: cash generated £801,000). After interest charges of £81,000 (2009: £91,000) and capital expenditure of £ 59,000 (2009: £15,000) a net amount of £321,000 has been deducted from cash and cash equivalents, taking the total from £631,000 at the year-end to £310,000 at 30 June 2010. Cash in the six months has come under more pressure than previously, largely as a result of increased working capital, and net debt has risen to £2,520,000 (December 2009: £2,220,000) and gearing to 43% (December 2009: 38%). A further £288,000 of long-term debt has been repaid in the period, including £ 67,000 relating to hire purchase agreements and completion of that owed by Friedman's to Bank of Scotland. £414,000 has been generated from additional short-term bank funding that has been applied largely in reduction of creditors. Consequently, net cash generated from financing activities was £ 126,000 (2009: cash used £418,000). Group assets increased to £11,301,000 (2009: £11,115,000). Group borrowings, including £1,114,000 (2009: £1,247,000) of bank loans secured against the assets of subsidiary companies and with no recourse to the rest of the Group, were increased to £2,898,000 (2009: £2,843,000). Total equity has been increased by 9.8% to £5,887,000 (2009: £5,361,000). Operational review 1. Davies Odell During the preparation of the 2010 budget for Davies Odell, the Group agreed to invest specifically in the sales and marketing of the Forcefield brand, and in consequence our budgeted profit expectations for this business were scaled back from previous years. The out-turn for the six months to June has been just slightly disappointing, though heavily influenced by extremely poor trading conditions in the arctic weather of January/February. The investment in Forcefield is paying-off more slowly than we had hoped when setting the budget. However, sales in the first half are up 18.3% as we have deployed more sales effort in the UK and begun to build our European distributor network more systematically. The product range looks more sharply focused than ever and the vastly improved point-of-sale materials are now being delivered. Margins here are slowly improving, despite numerous raw-material inspired price increases. The matting business saw a 13.4% increase in turnover, with a modest margin improvement. Cowmat trading, especially for export, has been strong, as has business with fitness and gym flooring suppliers. The Equimat business has suffered as horse owners in the UK have quite literally reined-in their spending. As noted previously, a steady stream of raw material price increases, which have to be passed on, are plaguing the business's ability to attract new and repeat customers. Shoe repair sales have also grown modestly. However, there has been a particularly strong performance in our leather heel supply business and in factored sales to footwear and non-footwear businesses alike. The business is undertaking a thorough review of its buying and sourcing strategy in order to mitigate the effect of exchange rate changes on supplier prices. With the continued growth of overseas sales the effect of exchange rate fluctuations should reduce. Overall the segmental result of £25,000 (2009: £60,000) was very much within sight of the budget expectations we set last December. 2. Friedman's Friedman's has managed to grow its turnover modestly in the first half (3.9%), but has improved its margins considerably as a result primarily of increased sourcing from the Far East. The additional turnover has come from export opportunities with sales in the UK flat. The business has also benefited from an increase in the production of bespoke print runs using the digital printer acquired in 2009 and by the exchange rates between the Pound Sterling and both the Euro and US Dollar. Overall, with overheads firmly under control, the segmental result improved on 2009 by 41.1% to £230,000 (2009: £163,000). 3. Sunline From our budgeting process in December we anticipated that Sunline would have a tough time in 2010 as a whole. We anticipated that the recession would leave large amounts of surplus capacity in the field of polywrapping and we already knew of a substantial reduction in business from a key customer at the Solutions business. As noted in my year-end 2009 report, numerous competitors in polywrapping have gone out of business, but several have arisen phoenix-like from the ashes. The upshot in 2010 is that in polywrap we have managed to restore our volumes and expand our customer base, but margins have been seriously eroded. With many `financially shaky' competitors, the management's task now is to restore the margins to previous levels. At Solutions the key customer noted above virtually ceased trading in May. The Sunline sales team is now fully engaged in finding replacement business to ensure in the medium/longer -term this business is suitably profitable. This is currently the number one priority for the Sunline team as a whole. On turnover up 3.1% it is a measure of just how intense margin pressures are that the segmental result has fallen 26.8% to £311,000 (2009: £425,000). Dividend Cash conservation remains the priority for the Group as the testing times sparked by the banking crisis have extended much longer than anticipated. As a result a dividend is not recommended at this stage. Prospects As shareholders are aware, the strategy in CEPS is to acquire profitable, cash generative businesses financed partially by medium term bank debt and by CEPS's cash resources. Over the past three years we have managed to repay all of the acquisition debt in Friedman's, £1.1m, and have made the planned reduction in the Sunline debt from £2.0m on acquisition to £600,000 today. The plan was to refinance these companies providing CEPS with the necessary cash to acquire other "profitable, cash generative businesses". We have been looking at a number of interesting situations where the skill base and overheads of the existing Group companies can be leveraged to make a considerable difference, but to date have been unable to complete on any situation. The almost total absence of debt finance has been the key obstacle to this. The caution I expressed in my full-year report for 2009 I would re-emphasise. There are few signs of consumer spending in the UK and Europe picking-up. Inflation in raw material prices, and to some extent in labour costs from the Far East, is squeezing margins on imported goods, as we are unable fully to pass on the increases. Where we manufacture in the UK profitability is improving, except where there is overcapacity, as in polywrapping. On a positive note, the steps we have taken to improve profitability at Friedman's are paying considerable dividends and we should remain confident about our full-year outlook. Equally the investments in Forcefield at Davies Odell are driving sales upward strongly in the teeth of a recessionary gale, particularly acute in our key market the world of motorcycling. There remains a great deal to achieve in 2010 particularly in driving some of the sales growth here into bottom line profit. Overall I anticipate that 2010 will be a tougher year than I suggested at the time of my 2009 report with Sunline in particular having a great deal to do to restore its longer -term profitability. The biggest risks this business faces are that the longer-term margins achievable in polywrapping cannot be returned to former levels and that the turnover gap at the Solutions subsidiary is not quickly filled. As ever our management teams are all too well aware of the challenges they are facing and are robustly seeking solutions to these and other problems. I remain confident that they are capable of outperforming their competitors and substantially improving profitability in the long haul out of this most damaging of recessions. Richard Organ Chairman 20 September 2010 CEPS PLC Consolidated Statement of Comprehensive Income Six months ended 30 June 2010 Unaudited Unaudited Audited 6 months to 6 months to 12 months to 30 June 30 June 31 December 2010 2009 2009 £'000 £'000 £'000 Revenue 7,917 7,503 15,880 Cost of sales (7,049) (6,520) (13,968) Gross profit 868 983 1,912 Net operating expenses (610) (607) (1,190) Operating profit 258 376 722 Analysis of operating profit - Trading 427 512 1,086 - Group costs (169) (136) (282) - Deemed loss arising on the - - (82) increase in the minority interest 258 376 722 Finance costs (81) (91) (146) Profit before tax 177 285 576 Taxation (55) (62) 43 Profit for the period from 122 223 619 continuing operations Other comprehensive income Actuarial loss on defined benefit - - (74) pension plans Other comprehensive loss for the - - (74) period, net of tax Total comprehensive income for the 122 223 545 period Profit attributable to: Owners of the parent 51 178 550 Minority interest 71 45 69 122 223 619 Total comprehensive income attributable to: Owners of the parent 51 178 476 Minority interest 71 45 69 122 223 545 Earnings per share - basic and diluted 0.61p 2.14p 6.62p CEPS PLC Consolidated Balance Sheet As at 30 June 2010 Unaudited Unaudited Audited as at as at as at 30 June 30 June 31 December 2010 2009 2009 £'000 £'000 £'000 Assets Non-current assets Property, plant and equipment 1,471 1,492 1,548 Intangible assets 4,738 4,819 4,744 Deferred tax asset 164 24 164 6,373 6,335 6,456 Current assets Inventories 1,836 1,692 1,569 Trade and other receivables 2,714 2,304 2,622 Cash and cash equivalents 378 784 736 4,928 4,780 4,927 Total assets 11,301 11,115 11,383 Equity Capital and reserves attributable to owners of the parent Called up share capital 416 416 416 Share premium 2,756 2,756 2,756 Retained earnings 2,244 1,895 2,193 5,416 5,067 5,365 Minority interest in equity 471 294 400 Total equity 5,887 5,361 5,765 Liabilities Non-current liabilities Borrowings 1,082 1,436 1,346 Provisions for liabilities and charges 55 55 55 1,137 1,491 1,401 Current liabilities Borrowings 1,816 1,407 1,610 Trade and other payables 2,394 2,668 2,562 Current tax liabilities 67 188 45 4,277 4,263 4,217 Total liabilities 5,414 5,754 5,618 Total equity and liabilities 11,301 11,115 11,383 CEPS PLC Consolidated Statement of Cashflows Six months ended 30 June 2010 Unaudited Unaudited Audited 6 months to 6 months to 12 months to 30 June 30 June 31 December 2010 2009 2009 £'000 £'000 £'000 Cash flow from operating activities Cash (used in)/generated from operations (274) 801 1,326 Tax paid (33) (25) (202) Interest paid (81) (91) (126) Net cash (used in)/generated from (388) 685 998 operations Cash flow from investing activities Purchase of property, plant and (59) (15) (62) equipment Disposal of property, plant and - - 3 equipment Net cash used in investing activities (59) (15) (59) Cash flow from financing activities Increase in/(repayment of) bank loans 193 (324) (650) Repayment of capital element of hire (67) (94) (190) purchase agreements Net cash generated from/(used in) 126 (418) (840) financing activities Net (decrease)/increase in cash and cash (321) 252 99 equivalents Cash and cash equivalents at the 631 532 532 beginning of the period Cash and cash equivalents at the end of 310 784 631 the period Cash flows from operating activities The reconciliation of operating profit to cash flows from operating activities is as follows: Operating profit for the period 258 376 722 Adjustments for: Depreciation and amortisation charge 142 140 285 Loss on disposal of property, plant and - - 9 equipment Increase in minority interest - - 82 Difference between pension charge and (33) (27) (74) cash contribution Operating profit before changes in 367 489 1,024 working capital and provisions (Increase)/decrease in inventory (267) 103 226 (Increase)/decrease in trade and other (92) 524 206 receivables Decrease in trade and other payables, (282) (315) (130) including trade receivables backed working capital facilities Cash (used in)/generated from operations (274) 801 1,326 Cash and cash equivalents Cash at bank and in hand 378 784 736 Bank overdrafts repayable on demand (68) - (105) 310 784 631 CEPS PLC Consolidated Statement of Changes in Shareholders' Equity Six months ended 30 June 2010 Share Share Profit Attributable Minority Total capital premium and loss to the interest account owners of the parent £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 416 2,756 1,717 4,889 249 5,138 2009 (audited) Profit for the - - 178 178 45 223 period Total - - 178 178 45 223 comprehensive income for the period At 30 June 2009 416 2,756 1,895 5,067 294 5,361 (unaudited) Actuarial loss - - (74) (74) - (74) Profit for the - - 372 372 24 396 period Total - - 298 298 24 322 comprehensive income for the period Increase in - - - - 82 82 minority interest charged against profit for the period At 31 December 416 2,756 2,193 5,365 400 5,765 2009 (audited) Profit for the - - 51 51 71 122 period Total - - 51 51 71 122 comprehensive income for the period At 30 June 2010 416 2,756 2,244 5,416 471 5,887 (unaudited) General information The Company is a limited liability company incorporated and domiciled in the UK. The address of its registered office is 11 George Street, Bath, BA1 2EH and the registered number of the company is 507461. The Company has its primary listing on AIM. This condensed consolidated half-yearly financial information was approved for issue on 20 September 2010. This condensed consolidated half-yearly financial information does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2009 were approved by the Board of directors on 30 April 2010 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006. This condensed consolidated half-yearly financial information has not been reviewed or audited. Basis of preparation This condensed consolidated half-yearly financial information for the six months ended 30 June 2010 has been prepared in accordance with IAS 34, `Interim financial reporting' as adopted by the European Union. The condensed consolidated half-yearly financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2009, which have been prepared in accordance with IFRSs as adopted by the European Union. Accounting policies Except as described below, the accounting policies applied are consistent with those of the annual financial statements for the year ended 31 December 2009, as described in those annual financial statements. Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings. a. New and amended standards adopted by the Group Currently there have been no new standards or amendments to standards adopted by the Group. b. Standards, amendments and interpretations to existing standards effective in 2010, but not relevant to the Group * IFRS 3 (revised) - Business combinations - effective from 1 July 2009. The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the Consolidated Statement of Comprehensive Income. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest's proportionate share of the acquiree's net assets. All acquisition-related costs should be expensed. The Group will apply IFRS 3 (revised) prospectively to all business combinations from 1 January 2010; * IFRIC 17, `Distribution of non-cash assets to owners', effective for annual periods beginning on or after 1 July 2009. This is not currently applicable to the Group, as it has not made any non-cash distributions; * IFRIC 18, `Transfers of assets from customers', effective for transfer of assets received on or after 1 July 2009. This is not relevant to the Group, as it has not received any assets from customers; * `Additional exemptions for first-time adopters' (Amendment to IFRS 1) was issued in July 2009. The amendments are required to be applied for annual periods beginning on or after 1 January 2010. This is not relevant to the Group, as it is an existing IFRS preparer; * Improvements to International Financial Reporting Standards 2009 were issued in April 2009. The effective dates vary standard by standard, but most are effective 1 January 2010. c. The following new standards, new interpretations and amendments to standards and interpretations have been issued, but are not effective for the financial year beginning 1 January 2010 and have not been adopted early: * IFRS 9, `Financial instruments': * Revised IAS 24, `Related party disclosures'; * `Prepayments of a minimum funding requirement' (Amendments to IFRIC 14); * IFRIC 19, `Extinguishing financial liabilities with equity instruments'; * Improvements to International Financial Reporting Standards 2010 were issued in May 2010. The effective dates vary standard by standard, but most are effective 1 January 2011. Principal risks and uncertainties The Group set out in its 2009 Annual Report and Financial Statements the principal risks and uncertainties that could impact on its performance; these remain unchanged since the Annual Report was published. The main area of potential risk and uncertainty over the remainder of the financial year centres on the sales and profit impact from the economic conditions and fluctuations in foreign exchange rates. For further consideration see the "Operational review" in the Chairman's Statement. Certain statements within this report are forward looking. The expectations reflected in these statements are considered reasonable. However, no assurance can be given that they are correct. As these statements involve risks and uncertainties the actual results may differ materially from those expressed or implied by these statements. Notes to the financial information 1. Segmental analysis All activities are classed as continuing. The chief operating decision maker of the Group is its Board. Each operating segment regularly reports its performance to the Board which, based on those reports, allocates resources to and assesses the performance of those operating segments. Operating segments and their principal activities are as follows: * Davies Odell, the manufacture and distribution of protection equipment, matting and footwear components; * Friedman's, the conversion and distribution of specialist Lycra; * Sunline, a supplier of services to the direct mail market The United Kingdom is the main country of operation from which the Group derives its revenue and operating profit and is the principal location of the assets of the Group. The Group information provided below, therefore, also represents the geographical segmental analysis. Of the £7,917,000 revenue, £ 6,855,000 is derived from UK customers. The Board assesses the performance of each operating segment by a measure of adjusted earnings before interest, tax and Group costs. Other information provided to the Board is measured in a manner consistent with that in the financial statements. i) Results by segment Unaudited 6 months to 30 June 2010 Davies Friedman's Sunline Group Odell 2010 2010 2010 2010 £'000 £'000 £'000 £'000 Revenue 2,591 1,691 3,635 7,917 Segmental result (EBITDA) 25 230 311 566 Depreciation charge (17) (18) (104) (139) Group costs (169) Interest expenses (81) Profit before taxation 177 Taxation (55) Profit for the period 122 Unaudited 6 months to 30 June 2009 Davies Friedman's Sunline Group Odell 2009 2009 2009 2009 £'000 £'000 £'000 £'000 Revenue 2,349 1,628 3,526 7,503 Segmental result (EBITDA) 60 163 425 648 Depreciation charge (15) (14) (107) (136) Group costs (136) Interest expenses (91) Profit before taxation 285 Taxation (62) Profit for the period 223 ii) Assets and liabilities by segment Unaudited as at 30 June Segment assets Segment liabilities Segment net assets 2010 2009 2010 2009 2010 2009 £'000 £'000 £'000 £'000 £'000 £'000 CEPS Group 88 110 (80) (43) 8 67 Davies Odell 2,363 1,906 (1,153) (862) 1,210 1,044 Friedman's 3,003 2,932 (1,483) (1,580) 1,520 1,352 Sunline 5,847 6,167 (2,698) (3,269) 3,149 2,898 Total - Group 11,301 11,115 (5,414) (5,754) 5,887 5,361 2. Earnings per share Basic earnings per share is calculated on the profit after taxation for the period attributable to equity holders of the Company of £51,000 (2009, £ 178,000) and on 8,314,310 (2009, 8,314,308) ordinary shares, being the weighted number in issue during the period. Diluted earnings per share is calculated on the weighted number of ordinary shares in issue adjusted to reflect the potential effect of the exercise of share warrants and options. No adjustment is required in either period because the fair value of the warrants and options was below the exercise price. All share warrants lapsed on 20 April 2010. 3. Net debt and gearing Gearing ratios at 30 June 2010 and 31 December 2009 are as follows: 30 June 31 December 2010 2009 £'000 £'000 Total borrowings 2,898 2,956 Less: cash and cash equivalents (378) (736) Net debt 2,520 2,220 Total equity 5,887 5,765 Gearing ratio 43% 38% The final £21,000 of the Friedman's bank loan was fully repaid during the period under review and a further £200,000 of Sunline's bank loan was repaid in the six months to 30 June 2010. Davies Odell has negotiated additional short-term bank funding to finance the purchase of inventories which bears interest at 3.5% above the bank's base rate and is repayable within 90 days. At 30 June the balance outstanding on these loans was £414,000. 4. Related-party transactions The Group has no material transactions with related parties which might reasonably be expected to influence decisions made by users of these financial statements. 5. AIM Compliance Committee In accordance with AIM Rule 31 the Company is required to have in place sufficient procedures, resources and controls to enable its compliance with the AIM Rules; seek advice from its nominated adviser ("Nomad") regarding its compliance with the AIM Rules whenever appropriate and take that advice into account; provide the Company's Nomad with any information it requests in order for the Nomad to carry out its responsibilities under the AIM Rules for Companies and the AIM Rules for Nominated Advisers; ensure that each of the Company's directors accepts full responsibility, collectively and individually, for compliance with the AIM Rules; and ensure that each director discloses without delay all information which the Company needs in order to comply with AIM Rule 17 (Disclosure of Miscellaneous Information) insofar as that information is known to the director or could with reasonable diligence be ascertained by the director. In order to ensure that these obligations are being discharged, the Board has established a committee of the Board (the "AIM Committee"), chaired by Richard Organ, a non-executive director of the Company. Having reviewed relevant Board papers, and met with the Company's Executive Board and the Nomad to ensure that such is the case, the AIM Committee is satisfied that the Company's obligations under AIM Rule 31 have been satisfied during the period under review. 6. Distribution of the Half-Yearly Report Copies of the Half-Yearly Report will be available to the public from the Company's website, www.cepsplc.com, and from the Company Secretary at the Company's registered address at 11 George Street, Bath BA1 2EH. For further information please contact:- Peter Cook, Group Managing Director CEPS PLC Tel: 07788 752560 Gavin Burnell, Nominated Adviser Astaire Securities plc Tel: 020 7492 4750 Statement of directors' responsibility The directors confirm that, to the best of their knowledge, these condensed consolidated interim financial statements have been prepared in accordance with IAS 34 as adopted by the European Union. The interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely: * an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements , and a description of the principal risks and uncertainties for the remaining six months of the financial year; and * material related-party transactions in the first six months of the financial year and any material changes in the related party transactions described in the last Annual Report. The directors of CEPS PLC are listed in the CEPS PLC Annual Report for 31 December 2009. A list of current directors is maintained on the CEPS PLC Group website: www.cepsplc.com By order of the Board P G Cook Group Managing Director 20 September 2010

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