Final Results

API Group PLC 09 December 2003 API GROUP PLC Preliminary Results for the year ended 30 September 2003 GOOD PROGRESS IN MANY AREAS. IMPROVEMENT EXPECTED IN 2004 • Sales down 2.4% to £176.2m reflecting challenging trading conditions throughout the year and the continuing focus on margin improvement • Operating profit before goodwill amortisation and exceptional items improved to £0.6m (2002: £0.2m) reflecting benefits from improved efficiencies, cost reductions and capital investment • Adjusted loss per share improved to 3.8p (2002: 4.5p loss) • Loss before interest and tax increased to £5.4m (2002: loss £2.7m) • Net borrowings reduced by £5.0m to £9.8m representing gearing of 18.6% (2002: 24.2%) • Foils and Laminates remained profitable despite challenging trading conditions • Profitability improved in Metallised Paper for the third consecutive year reflecting the benefits of ongoing cost reduction and performance improvement programmes • Performance in Converted Products also improved after the disappointing result in 2002 but remained below the Board's expectations. The future of Converted Products remains under review • Management reorganisation programmes initiated throughout the Group will yield annualised savings of £3 million • Improvement in performance is expected in 2004 Commenting on the results and prospects, Chairman David Hudd said: 'Despite tough trading conditions good progress has been made in many areas. However, overall the Group's results for the year remain disappointing and further improvement is required. 'We have responded vigorously to the issues that have adversely affected the performance of the Group during the current year and are confident of achieving further improvement in 2004.' EXTRACTS FROM CHAIRMAN'S STATEMENT RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2003 With the major restructuring of previous years behind us, the Group's objectives for 2003 were to further reduce borrowings and improve operational performance. Despite tough trading conditions, good progress has been made in many areas. However, overall the Group's results for the year remain disappointing and further improvement is required. Although sales fell by 2.4% from £181m to £176m, operating profits before goodwill and exceptional items improved to £0.6m (2002: £0.2m) reflecting challenging trading conditions throughout the year and the continuing focus on margin improvement rather than top line growth. The loss before tax increased to £7.1m (2002: £4.3m loss), after charging exceptional items of £5.6m (2002: £2.5m). The adjusted loss per share was 3.8p compared with 4.5p loss last year. The Group's net borrowings reduced by £5.0m during the year to £9.8m, resulting in net gearing of only 18.6% (2002: 24.2%). Net tangible assets per share were 157p (2002: 180p). The Foils and Laminates businesses experienced difficult trading conditions during the year and profitability deteriorated. Weak demand and increased competition resulted in disappointing performances in the US and European Foils businesses which were also affected by the war in Iraq. The outbreak of SARS and exchange rate fluctuations during the year had a significant impact on the results reported for the Group's Chinese Foils business, although the underlying performance remained strong. Laminates performed well and both sales and operating profits increased. We continue to make progress with cost reduction and productivity improvement initiatives in the Metallised Paper division which reported reduced losses on stable sales. As exports represent over 90% of sales, the majority of which are to Europe, the competitive position has improved because of favourable movements in exchange rates and the division is well positioned for further improvement in 2004. The Converted Products division continued to perform below the Board's expectations. While the performance of Tenza improved and significant progress was made in reducing losses at Learoyd Packaging, these gains were substantially offset by sales deterioration in Coated Products. We continue to consider all of the options available to us for improving performance and restructuring this area of the business. Following the disappointing trading results for the year and as explained in the trading statement issued by the Group on 6 October, a reorganisation programme has been initiated. This programme will be completed by the end of the calendar year and is expected to result in annualised savings of £3 million and a more focused approach to the management of the Group's businesses. The Board is proposing a cancellation of the Company's share premium account in order to eliminate the accumulated deficit on the profit and loss account of the Company and to create distributable reserves which would be available to pay dividends to Shareholders and to fund market repurchases of the Company's shares, in each case as and when the Board considers it appropriate. The Group's strategy is to focus on the development of its core Foils and Laminates and Metallised Paper businesses. Although each of these businesses operates in competitive markets, all have opportunities to increase market share and improve financial returns and we remain confident that all can be returned to acceptable levels of performance. The future of the Converted Products division remains under review and we are actively exploring options for withdrawal from underperforming businesses. Significant progress has been made in restoring the underlying operating performance of the Group and thanks are due to all our staff for their continuing effort and commitment. We have responded vigorously to the issues that have adversely affected the performance of the Group during the current year and are confident of achieving further improvement in 2004. EXTRACTS FROM GROUP CHIEF EXECUTIVE'S REVIEW The Group's products are used predominantly in specialised packaging applications in the luxury goods, beverages, tobacco and other premium consumer goods sectors. Reflecting market trends during 2003, the Group experienced reduced demand as a result of the weakness of many of the major economies into which its products are supplied, the loss of consumer confidence both during and after the war in Iraq and the reduction in international travel following the outbreak of SARS. The principal focus during 2003 was on restoring the Group's profitability by improving productivity, manufacturing efficiency and service levels. Good progress has been made in many areas, as the results for the first half of the year demonstrated. For the reasons outlined above, demand in the second half was weaker than expected and sales were adversely affected. Although action was taken to reduce the cost base, it was not possible to fully offset the impact of weaker demand, price competition and adverse currency fluctuations. Despite the disappointing operating performance, cash generation remained strong and we were able to reduce significantly our net borrowings. During the year, the Group also renegotiated facilities with its principal lender, Barclays Bank PLC. Debt which was previously short-term has been restructured and the facilities now include £25m which falls due for repayment or review between 2004 and 2009. We continued to invest in our core businesses and during the year spent £4.7m on capital projects. In 2004, we will make a significant investment in information technology systems and will install Oracle software throughout the majority of the Group. Although total expenditure will increase in 2004, it will still be well below the current depreciation charge of £8.3m. Following the success of the War-on-Waste programme during 2002, we initiated a series of similar performance improvement projects under a programme known as ABC. The focus of this programme is on delivering improved manufacturing processes. We expect ABC to continue to make a significant contribution to the Group's performance in 2004. In response to the disappointing results of the second half, the Group embarked upon a reorganisation programme which will be substantially completed by the end of the calendar year and which is expected to yield annual savings of £3m from 2004. There will be an exceptional charge of approximately £1m in the accounts for the year ending 30 September 2004 in connection with these changes. In addition, we have decided to consolidate the management of the businesses within the Foils and Laminates and Metallised Paper divisions and to adopt a sector-focused approach to sales and a product focused approach to manufacturing. Common business functions such as finance, administration, purchasing and logistics will also be reorganised to enable the Group to realise further benefits of scale and to leverage its purchasing power. Despite the disappointing results, the Foils and Laminates and Metallised Paper divisions responded well to the challenging trading conditions encountered during 2003. However, with the exception of Tenza, where profits improved, the performance of the Converted Products division was disappointing. In particular, progress in restoring the profitability of the Learoyd Group businesses was slower than expected and the deterioration in performance at Coated Products was of particular concern. Each of the Converted Products businesses has been refocused under new management and their future within the Group remains under review. REVIEW OF OPERATIONS Sales in the UK decreased by £4.1m (5.4%) due principally to weak demand from the luxury goods and beverages sectors following the war in Iraq and the outbreak of SARS. Sales to continental Europe increased by £5.4m (9.5%) due to the favourable movement in the Euro-Sterling exchange rate and increasing penetration of Eastern European markets by the Laminates and Metallised Paper businesses. Reported sales in the US decreased by £4.5m (15.3%) although over 50% of this deterioration is due to adverse movement of the US dollar exchange rate used on translation. The underlying reduction in the US reflects weak demand in the wake of the war in Iraq and the loss of a major customer in the second half of the year. Sales to the Rest of the World reduced by £1.2m (5.9%), due principally to the translation effect of the weakening Chinese Renminbi exchange rate. Foils and Laminates Foils and Laminates sales fell by 0.7% to £106.7m (2002: £107.4m) and operating profits before exceptional items and goodwill amortisation declined by £0.5m to £4.2m (2002: £4.7m). The majority of the division's sales are generated from international manufacturers of luxury goods, beverages and tobacco products and demand was affected to varying degrees by the loss of consumer confidence and the reduction in international travel both during and after the war in Iraq and the outbreak of SARS. Good performances in Laminates and European graphics foils were offset by deterioration in European security foils and in the Group's Chinese Foils business, while US Foils slightly improved its profitability on significantly reduced sales. The US Foils business continued to focus on profit improvement by targeting new markets and opportunities, eliminating low margin sales and achieving productivity and efficiency gains. Good progress was made during the first half and performance improved significantly. However, the second half results were adversely affected by economic slowdown and uncertainty due to the war in Iraq, generally weak demand for core graphics foils and price competition in metallic ink products. In response to the downturn in activity, the US management initiated a series of cost cutting measures and despite a 15% reduction in sales to £24.5m, the operating result for the year showed a small improvement to a loss of £0.7m (2002: £0.8m). The European Foils business generated an operating profit of £0.3m (2002: £0.5m) on sales down 3% to £32.6m. Despite intense competition, the core graphics and pigment foils business based in Livingston performed well. Although sales to the UK declined by 10%, sales into Continental Europe and the Rest of the World increased by 12% due partly to favourable movements in the Euro-Sterling exchange rate which improved the competitive position. Good progress was made with the rationalisation and refocusing of the product range and both productivity and manufacturing output improved leading to improved profitability at Livingston. In contrast, the security foils business based in Salford, which specialises in the production of holographic foils for use in brand and other product authentication applications, performed poorly. Sales were down significantly following a failure to secure repeat orders from existing customers or to win new business. Action has been taken to downsize the business and to address the underperformance and we are exploring a number of options for the future of this activity. In China, the business was heavily impacted by the outbreak of SARS which significantly affected revenues and profits during the third quarter. Despite this, sales revenues remained relatively stable in local currency terms reflecting good progress in developing markets for higher margin products such as holographic foils and the continuing success of initiatives to supply markets outside of China with products from the Group's SuperGrafix range of graphics foils. Operating profits reduced to £2.1m (2002: £2.7m) principally due to the impact of the SARS outbreak, the increasing cost of providing technical support for development of new products and markets and adverse movements in the Chinese Renminbi exchange rate, which is linked to the US dollar. Laminates experienced difficult trading conditions in its core markets as demand from the luxury goods and beverages sectors were impacted by both the war in Iraq and the SARS outbreak. However, recent efforts to expand into consumer goods packaging markets such as health and beauty, drinks, and food products have been successful and this, together with stronger than expected demand from the UK tobacco sector, contributed to sales growth of 15%. Although profitability improved to £2.5m (2002: £2.3m), average margins deteriorated reflecting the high initial cost associated with the development of new markets. Metallised Paper The operating loss before exceptional items and goodwill amortisation was reduced to £0.4m (2002: £1.0m loss) on stable sales of £26.4m (2002: £26.6m). Reduction in waste levels, increased production efficiencies and realisation of the full benefits from the plant consolidation completed in 2001, all contributed to improved margins. With a high proportion of customers in Continental Europe, sales benefited from the 7.5% movement in the Euro-Sterling exchange rate from an average of €1.60 in 2002 to €1.48 in 2003. However, the exchange rate movement adversely affected raw material prices and this, together with increasing competitive pressure offset much of the benefit. Performance for the year could have been better, but for issues with reliability of major items of equipment that adversely affected productivity in the seasonally busier final quarter of the year. The favourable movement in exchange rates, together with more consistent product quality and improved service levels enhanced the competitiveness of the division and allowed it to defend its market position against an increasing threat of low-cost supplies from Southern Europe and the Far East. The strategic emphasis continues to be on moving away from sales of high-volume, low-margin products in to more specialised products capable of generating improved returns. Metallised Paper will continue to benefit from the progress made in improving production efficiencies and service levels. Converted Products Converted Products reported an operating loss before exceptional items and goodwill amortisation of £0.8m (2002: £1.0m loss) on sales down 7% to £43.1m (2002: £46.6m). The performance of Tenza and Learoyd Packaging improved, whilst that of Coated Products, Filmcast and Morris Plastics deteriorated. At Tenza, operating profit before exceptional items and goodwill amortisation improved to £0.9m (2002: £0.3m) on sales down 5% to £19.6m (2002: £20.6m). Following intense competitive pressure during the first half, a decision was taken to reduce our presence in the self-adhesive labels sector. The associated restructuring is almost complete and an exceptional charge of £0.9m was recorded in the year. The laminating capacity created by the withdrawal from labels and recent investment has been successfully filled with higher margin production and capital projects are in place to enable new and more profitable products to be manufactured, placing Tenza in a good position for further profit improvement. Although some progress was made in stemming the losses at Learoyd Packaging, the Learoyd Group continued to experience weak demand and increasing competitive pressure and sales declined by 7% to £12.9m (2002: £13.9m). The operating loss before exceptional items and goodwill amortisation improved to £1.9m (2002: £2.3m loss) principally as a result of cost reduction measures implemented during 2002 in Learoyd Packaging. Sales volumes at Filmcast Extrusions improved significantly with spare capacity on the co-extrusion line being utilised more effectively. The results of Coated Products, which specialises in the manufacture of siliconised release products, were particularly disappointing with sales down 12% to £10.6m and operating profits reduced to £0.2m (2002: £1.0m). Increased competitive pressure and reduced demand, both in the UK and overseas, contributed to the sales shortfall and it was not possible to reduce costs quickly enough to respond. Action has now been taken to refocus the business under a new management team which is prioritising improved operating efficiencies and regaining lost volume. Coated Products continues to have many exciting opportunities for the development of new products for medical, hygiene and food applications, both in Europe and the Far East. PROSPECTS The operating results for the year were achieved against a background of reduced demand during and after the war in Iraq and the outbreak of SARS and increased competition in many of the Group's markets. The ability to withstand such pressures and to deliver an operating profit and generate cash provides further confirmation of the underlying strength of many of the Group's businesses. In addition, debt was reduced and financial stability significantly strengthened. Trading conditions are expected to remain challenging in the year ahead. However, the cost reduction measures implemented in recent months, the action taken to reorganise the senior management of the Group and the significant capital investments made during 2003 and planned for 2004, are all expected to yield benefits, both in terms of cost reduction and improved effectiveness. The Board expects that further improvement will occur in 2004. GROUP PROFIT & LOSS ACCOUNT for the year ended 30 September 2003 __________________________________________________________________________________________________________________ 2003 2002 £'000 £'000 Turnover 176,192 180,580 Operating profit/(loss) Continuing operations before goodwill amortisation and exceptional items 600 213 Goodwill amortisation (447) (446) Continuing operations before exceptional items 153 (233) Exceptional items (5,593) (2,873) Total operating loss on continuing operations (5,440) (3,106) Profit on disposal of land & buildings - 395 Loss on ordinary activities before interest and taxation (5,440) (2,711) Net interest (1,621) (1,599) Loss on ordinary activities before taxation (7,061) (4,310) Taxation 753 1,303 Loss on ordinary activities after taxation (6,308) (3,007) Equity minority interests (995) (1,097) Loss attributable to shareholders (7,303) (4,104) Dividends - - Balance transferred from reserves (7,303) (4,104) Pence Pence Loss per ordinary 25p share Basic and diluted (22.0) (12.3) Adjusted loss per ordinary 25p share (before exceptional items and goodwill amortisation) Basic and diluted (3.8) (4.5) Dividend per ordinary share - - GROUP BALANCE SHEET as at 30 September 2003 __________________________________________________________________________________________________________________ 2003 2002 £'000 £'000 Fixed assets Intangible assets 5,966 6,413 Tangible assets 50,545 60,124 Investments 435 435 56,946 66,972 Current assets Stocks 18,368 19,356 Debtors 35,019 38,455 Short term investments 1,440 1,500 Cash at bank and in hand 9,396 7,194 64,223 66,505 Creditors: Amounts falling due within one year (39,759) (62,584) Net current assets 24,464 3,921 Total assets less current liabilities 81,410 70,893 Creditors: Amounts falling due after more than one year (19,926) (140) Provisions for liabilities and charges (1,749) (2,742) Accruals and deferred income (511) (766) Net assets 59,224 67,245 Share capital and reserves Called up share capital 8,463 8,463 Share premium account 50,563 50,563 Revaluation reserve 2,892 2,892 Capital redemption reserve 549 549 Profit and loss account (9,623) (1,410) Shareholders' funds 52,844 61,057 Equity minority interests 6,380 6,188 59,224 67,245 GROUP CASH FLOW STATEMENT for the year ended 30 September 2003 __________________________________________________________________________________________________________________ 2003 2002 £'000 £'000 Reconciliation of operating loss to net cash inflow from operating activities Operating loss (5,440) (3,106) Amortisation and depreciation less government grants 8,586 8,471 Impairment charge against tangible fixed assets 5,215 - Loss on disposal of fixed assets, other than land & buildings 26 3 Decrease in stocks 620 3,318 Decrease in debtors 2,447 3,638 Increase in creditors 2,082 604 (Decrease)/increase in provisions (357) 55 Net cash inflow from operating activities 13,179 12,983 Cash outflow of £404,000 (2002: £2,816,000) resulted from exceptional items incurred during the financial years 2002 and 2003. 2003 2003 2002 2002 £'000 £'000 £'000 £'000 Cash flow statement Net cash inflow from operating activities 13,179 12,983 Returns on investment and servicing of finance Interest paid (1,892) (1,475) Interest received 47 100 Issue costs on new long term loans (158) - Dividends paid to minority interests (475) (2,478) (1,134) (2,509) Taxation UK (865) 661 Overseas (32) (897) 1,593 2,254 Capital expenditure and financial investment Payments to acquire tangible fixed assets (4,678) (4,087) Receipts from sales of tangible fixed assets 91 1,005 Receipt of government grants 82 (4,505) - (3,082) Acquisitions and disposals (51) (103) Net cash inflow before management of liquid resources and financing 5,248 9,543 Management of liquid resources Increase in short term investments (23) (312) Financing Decrease in short term borrowing (18,590) (11,569) New long term loans 20,000 - Increase/(decrease) in cash in the period 6,635 (2,338) Exchange movement (243) (500) Balance sheet movement in net cash 6,392 (2,838) GROUP CASH FLOW STATEMENT for the year ended 30 September 2003 __________________________________________________________________________________________________________________ Notes to the cash flow statement 2002 Cashflow Exchange 2003 £'000 £'000 £'000 £'000 A. Analysis of net debt Cash at bank and in hand 7,194 2,445 (243) 9,396 Bank overdraft (4,190) 4,190 - - 3,004 6,635 (243) 9,396 Short term investment in Chinese Government bonds 1,500 23 (83) 1,440 Short term borrowing (19,281) 18,590 (124) (815) Long term loans - (19,842) - (19,842) Net debt (14,777) 5,406 (450) (9,821) 2003 2002 £'000 £'000 B. Reconciliation of net cash flow to movement in net debt Increase/(decrease) in cash 6,635 (2,338) Increase in short term investments 23 312 Decrease in short term borrowing 18,590 11,569 Issue costs on new long term loans 158 - Long term loans (20,000) - Change in net debt resulting from cash flows 5,406 9,543 Exchange differences (450) (647) Movement in net debt 4,956 8,896 Net debt at start of period (14,777) (23,673) Net debt at end of period (9,821) (14,777) OTHER STATEMENTS for the year ended 30 September 2003 __________________________________________________________________________________________________________________ 2003 2002 £'000 £'000 Statement of total recognised gains and losses Loss attributable to shareholders (7,303) (4,104) Currency translation differences on foreign currency net investments (910) (1,509) Total recognised gains and losses relating to the period (8,213) (5,613) Prior year adjustment - (2,400) Total gains and losses recognised since previous annual report (8,213) (8,013) Reconciliation of movements in shareholders' funds Loss attributable to shareholders (7,303) (4,104) Currency translation differences on foreign currency net investments (910) (1,509) Net deduction from shareholders' funds (8,213) (5,613) Opening shareholders' funds 61,057 66,670 Closing shareholders' funds 52,844 61,057 NOTES for the year ended 30 September 2003 _________________________________________________________________________________________________________________ SEGMENTAL ANALYSIS 2003 2002 £'000 £'000 Analysis of turnover by geographical destination United Kingdom 70,859 74,940 Continental Europe 61,635 56,283 Americas 24,664 29,130 Rest of World 19,034 20,227 176,192 180,580 Turnover Profit/(loss) before Net operating interest and tax assets 2003 2002 2002 2002 2002 2002 £'000 £'000 £'000 £'000 £'000 £'000 Geographical analysis by origin United Kingdom 135,652 135,527 (895) (1,878) 46,418 56,483 Continental Europe 3,765 3,895 233 233 933 1,121 Americas 24,675 28,835 (1,258) (855) 12,338 14,892 Rest of World 12,100 12,323 2,520 2,713 4,872 6,925 176,192 180,580 600 213 64,561 79,421 Exceptional items and goodwill amortisation - - (6,040) (2,924) - - Non operating assets - - - - (5,337) (12,176) 176,192 180,580 (5,440) (2,711) 59,224 67,245 Turnover originating in the United Kingdom includes £64,973,000 of sales to overseas destinations (2002: £63,842,000). £5,699,000 (2002: £2,442,000) of the exceptional items and goodwill amortisation arise in the UK, £251,000 (2002: £344,000) arise in the Americas and £90,000 (2002: £138,000) arise in the Rest of the World. Turnover Profit/(loss) before Net operating assets interest and tax 2003 2002 2003 2002 2003 2002 £'000 £'000 £'000 £'000 £'000 £'000 Analysis by activity Foils & laminates 106,679 107,406 4,155 4,677 41,671 48,545 Metallised paper 26,421 26,594 (387) (978) 6,309 7,464 Converted products 43,092 46,580 (793) (1,031) 16,581 23,412 Central costs - - (2,375) (2,455) - - 176,192 180,580 600 213 64,561 79,421 Exceptional items and goodwill amortisation - - (6,040) (2,924) - - Non operating assets - - - - (5,337) (12,176) 176,192 180,580 (5,440) (2,711) 59,224 67,245 Net operating assets comprise total assets excluding goodwill and investments, less liabilities and exclude dividends, taxation, minority interests and all assets and liabilities of a financing nature. £657,000 (2002: £1,525,000) of the exceptional items and goodwill amortisation relate to the Foils and Laminates division, £nil (2002: £413,000) relate to the Metallised Paper division, £5,383,000 (2002: £736,000) relate to the Converted Products division and £nil (2002: £250,000) are Central costs. NOTES (cont'd) __________________________________________________________________________________________________________________ OPERATING LOSS 2003 2002 £'000 £'000 Exceptional items charged against operating loss comprise Restructuring of operating businesses 378 2,324 Cost of major interruptions to production - 383 Impairment of tangible assets 5,215 - Other - 166 5,593 2,873 EARNINGS PER SHARE 2003 2002 pence £'000 pence £'000 Earnings per share are based on Loss attributable to shareholders (22.0) (7,303) (12.3) (4,104) Add exceptional items 16.8 5,593 7.5 2,478 Add goodwill amortisation 1.4 447 1.3 446 Less tax relief - - (1.0) (325) Adjusted loss attributable to (3.8) (1,263) (4.5) (1,505) ordinary shareholders Basic weighted average number of 33,262,578 33,262,578 ordinary shares BASIS OF PREPARATION The accounts have been prepared on the basis of the accounting policies set out in the Group's Annual Report and Accounts for the year ended 30 September 2002. PUBLICATION OF ABRIDGED ACCOUNTS The preliminary announcement figures for the year ended 30 September 2003 and the comparative figures for the year ended 30 September 2002 are an abridged version of the Group's statutory accounts which carry an unqualified audit report and do not contain a statement under S237 (2) or (3) of the Companies Act 1985. The Group's audited statutory accounts for the year ended 30 September 2003 will be filed in due course with the Registrar of Companies. The Group's audited statutory accounts for the year ended 30 September 2002 have been filed with the Registrar of Companies. The Annual Report and Accounts for the year ended 30 September 2003 will be posted to shareholders by 23 December 2003 prior to the Annual General Meeting on 28 January 2003. Copies of the Annual Report and Accounts will be available to members of the public from 23 December 2003 at the Group's registered office at Second Avenue, Poynton Industrial Estate, Poynton, Cheshire SK12 1ND. 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