Final Results

RNS Number : 3923S

Swallowfield PLC

09 September 2010

Swallowfield Plc

Preliminary Results for the year ended 30 June 2010

Swallowfield plc, the full service provider to global brands and leading retailers in the cosmetics, toiletries and household goods sector, announces its results for the year ended 30 June 2010

HIGHLIGHTS

· Revenues increased by 6.8% to £52.4m (2009: £49.1m)

· Earnings before interest, taxation, depreciation and amortisation £2.6m (2009: £2.9m)

· Earnings per share 8.2p (2009: 9.6p, 9.7p basic)

· Final dividend proposed 4.1p (2009:4.1p) per share making a total for the year of 6.3p (2009:5.9p)

OUTLOOK

· Order book up 14% at 1 September compared with the same period last year

· Revenue up 6.1% in the first 8 weeks of the new financial year

· Strong balance sheet to support some worsening of the payment cycle

· Global strategy to compensate for subdued UK consumer spend

· Continue to widen geographic spread and develop new client relationships

· Positive expectations for the coming year

Ian Mackinnon Chief Executive commented:

"Swallowfield has performed robustly against an exceptionally tough background of customer uncertainty and rising input costs resulting in a difficult market. We have continued to drive organic revenue growth by providing current customers with high levels of quality, service and innovation, together with cost effective products and this has enabled us to counteract this challenging scenario and maintain a solid level of profitability.

Our strategy, focused on improving shareholder value, continues to be to grow revenues in excess of the market and to increase our profitability both in terms of return on capital employed and return on sales. Our targets in this respect are unaltered, although we recognise under the current economic circumstances that this might take a little longer than originally hoped for.

We expect the overall UK market background to continue to be adverse for another couple of years but, in anticipation of this, we are investing significant efforts in expanding our business outside of the UK, whilst capitalising to some degree on the more favourable climate for manufacturing in the UK.

Overall, our expectations for the 2011 financial year remain positive and unchanged from those discussed six months ago."

For further information please contact:
Swallowfield plc
Ian Mackinnon	Chief Executive Officer	01823 662 241
Mark Warren	Group Finance Director	01823 662 241

Barrie Newton	Smith & Williamson Corporate Finance	0117 376 2213
Nick Reeve	Smith & Williamson Corporate Finance	0117 376 2213
Alan Bulmer	Performance Communications	0117 907 6514
Liam Herbert	JBP Public Relations	0117 907 3400

Notes to Editors:

Swallowfield plc is a market leader in the development, formulation and supply of cosmetics, toiletries and related household products to the own label and branded sectors. We pride ourselves on being a customer orientated, innovative, flexible and responsive company and combine high quality, competitive products with strong customer service - developing close partnerships with our customers and an in depth knowledge of their requirements.

Market and Economic Background

The financial year started during a deep recession caused by a severe credit tightening, resulting in destocking across the economy and an added focus on the payment cycle, and ended with the economy showing signs of a return to growth. Disposable income of the UK consumer now faces a squeeze as decreases in Government spending and increases in taxation begin to bite and our view remains that things will yet get somewhat worse before they begin to improve. We remain more positive about the global market consumer and, for some time, have planned to grow direct exports whilst recognising that many of the products we sell to UK customers are indirectly exported.

Our primary market, the personal care sector, has, with some exceptions, held up well in volume terms over the last two years. This is not the case for retail prices which have been reduced as retailers seek to retain volumes by discounting and undertaking significant levels of promotional activity. As expected, there does not appear to have been an appreciable move from brands to own-label within the UK - a market that already has above average levels of own-label penetration - as brands have responded to maintain share by also undertaking promotional activity.

Business Review

Earnings per share was 8.2p (2009: 9.6p on a like for like basis) per share reflecting the tough economic background discussed above and the delayed shipments mentioned in our trading update of 14 June 2010. These delayed shipments were due to customers rescheduling committed orders from within our year end to the start of the new trading year and a number of issues arising from our component supply base. These issues have continued for longer than anticipated but we expect resolution during the current half year.

The most significant effect of the recession has been to make it extremely difficult to pass on raw material and component cost increases. These cost increases have resulted from the fall in the value of Sterling over the last two years and increases in underlying raw material and component costs. We still believe these to be one off movements in cost and are in the process of passing these on. We are also continuing to drive costs out through our established continuous improvement process.

Our strategy of providing current customers with high levels of quality, service and innovation together with cost effective products continues to reap rewards. This, together with increased sales development efforts, has had a positive impact on revenues. During the year we made our first sales directly into India and have now received orders for sales directly into South Africa. At the same time our business in the Middle East is showing positive signs of growth.

Net Debt and Cash Flow

As expected, net debt increased from £3.4m to £4.3m due to an increase in working capital necessary to support increased business volumes and higher than normal stock levels due to the carry over of orders into the first quarter of this trading year. The credit squeeze has also resulted in a limited number of customers extending their payment terms without our being able to offset this by altering payment terms with our suppliers. We expect a further slight worsening in the terms of trade before this begins to level off.

Net financing costs of £0.2m (2009: 0.2m) comprised interest expense of £0.1m (2009 £0.1m) and pension scheme finance charges £0.1m (2009 £0.1m).

Capital expenditure was £1.0m which was £0.2m below depreciation. We expect an increase in capital expenditure as items deferred from 2010, such as the new manufacturing room, are paid for in the coming year. Over a three year cycle we expect capital expenditure to be broadly in line with depreciation and amortisation.

The tax charge is below standard UK rate due to prior year adjustments. This trading year there are no factors that are expected to fundamentally affect tax charges compared to the standard UK rate.

China

Our business in China continues to go from strength-to-strength. The investment we made with our partners in China has provided us with good access to a low cost manufacturing source with improved control over quality and lead-times. This business was profitable during the first year of investment and our £0.05m investment for 10% of the company yielded a dividend of £0.02m. We intend to increase our stake in this attractive opportunity to 19.0% in the coming months.

At the same time as sourcing finished goods and components from China, we are currently working with one of our partners to become a supplier of UK manufactured aerosol products into China. This is an interesting, albeit longer-term, opportunity.

Czech Republic

The operation in the Czech Republic has progressed well in terms of output, quality and efficiency levels. For the year as a whole, the operation was profitable and we are seeing encouraging signs of increased business levels for the current year.

During the year we transferred one of the Group's lipstick lines from the UK to the Czech Republic - the last planned equipment transfer. The operation now has the capability to fill fragrances, tube products, liquid products and a full complement of colour cosmetics with the exception of wood clenched pencils.

This facility has become a vital part of our future capacity plans and we are examining ways to grow this business and extend its capacity and capability. We believe we can take greater advantage of the footprint we have established in Central Europe.

Properties

We continue to market the excess property that we have at Bideford for sale or to let. There are tentative signs that interest levels may be returning following the dearth of viewings in the previous 12 months.

We continue to consider opportunities to upgrade our main manufacturing site at Wellington to ensure the long-term future of the business. In the long-run we believe this would be greatly helped by relocating to new factory premises within Wellington, but this is likely to take several years and will require additional investment.

Progress Against Strategy

As discussed last year, our strategic aims are to improve the underlying profitability of the group, as measured by return on sales and return on capital employed at the same time as growing revenues in excess of the underlying market.

We have made progress on a number of fronts related to the four key steps necessary to achieve our strategic objectives:

Widening our geographic footprint

The New York sales support office was opened in June 2010 and is beginning to work more closely with existing customers and, at the same time, has made early contact with potential new customers. The French sales support office has continued to develop and has won new business during the year. Our efforts in South Africa and the Middle East are beginning to show real signs of progress. We are exploring ways to utilise the facilities we have in the Czech Republic and China to develop our business in these regions.

Broadening our product technologies

The new manufacturing room for Wellington is under construction and equipment will be delivered in October 2010; we aim to commence production from this room in December 2010. We have a programme to upgrade other selected manufacturing rooms over the next few years in order to keep at the forefront of this vital part of our business. Our plans to enhance our capabilities in the manufacture of creams and lotions are progressing and two new manufacturing vessels will be delivered to Bideford in October 2010.

We have filled our first sun care aerosol products and are working with product technology partners to significantly enhance our capabilities in this area.

Driving competitive improvements in our cost structure

Total manageable overheads represented 25.6% of sales during the year compared with 26.1% in the previous year. This reduction was achieved despite some investment in overheads to enable the business to grow.

Driving Growth

Our drive to increase revenues has shown some success. Revenue increased by 6.8% over the prior year, despite the rephased orders noted above, and the order book at 1 September was 14% above that recorded at the same time last year providing a good start to financial year 2011

Further development of our marketing strategy has been undertaken with new presentational material being created including a much improved pencil presentation format. Our sales team has undergone a repositioning such that we now go to market as a single customer facing business, with all sales staff selling the broad product capability we have. The result of this, together with an increase in prospecting for new customers has resulted in an increase in enquiry levels.

Business conditions over the last two years have not been helpful for our short-term objectives. Our effort to drive organic revenue growth has largely offset the worst of the recessionary impact and we believe our approach of increasing revenues is the right one for the future, even if this is not immediately translated into increased profitability. We remain convinced that our strategy is sound and will deliver increasing profitability in the long-term.

People

During the year a number of employees undertook training, resulting in 89 being awarded level 2 NVQ and 49 being awarded level 3 NVQ. In the last three years, a total of 359 employees have been trained to a minimum of level 2 NVQ. It is important that we continue to invest in our people, particularly given the shortage of trained scientists and engineers in the UK.

Management Incentives

The Long-term Incentive Plan developed last year was implemented during the year and the first awards have been made based on achieving hurdle levels of post tax EPS. Participation in the LTIP will be at the discretion of the Remuneration Committee with awards being based on a percentage of the participant's base annual salary at the date the recommendation is made. The vesting of the awards will be subject to the achievement of exacting performance targets to be determined by the Remuneration Committee in respect of each plan cycle, which will comprise not less than three consecutive financial years.

Board Composition

During the last 12 months the nomination committee has been undertaking a search to find a further non-executive Director with relevant industry experience to complement the skills of the current Board. We were pleased to announce on 29 July 2010 that this search was successful and announced the appointment of Franklin Berrebi as an independent non-executive director.

Franklin, a French national, brings a wealth of international experience in the consumer goods market having spent 33 years with L'Oreal, latterly as the Managing Director of L'Oreal Consumer Goods Europe. Since retiring from L'Oreal in 2004 Franklin has worked with AXA Private Equity on the Board of a number of companies including home care company Spotless Group.

Dividends

The Board is recommending a final dividend of 4.1p (2009: 4.1p) per share which, taken together with the interim dividend of 2.2p (2009: 1.8p) per share, makes an annual dividend of 6.3p (2009: 5.9p) per share, representing an annual increase of 7%. If approved at the Annual General meeting, the final dividend will be paid on 26 November 2010 to shareholders on the register on 12 November 2010. The Shares will go ex-dividend on 10 November 2010.

Our dividend policy remains the same as discussed last year, namely that we will retain a dividend cover of 1.5 times normalised post-tax earnings. The dividend cover during the financial year we are reporting on is 1.3 times. This is lower than our stated policy, but takes into account the reduction in profits due to the shipment delays discussed in the business review.

Outlook

Revenue in the first 8 weeks of the new financial year was 6.1% higher than for the financial year we are reporting on. At the same time, our order book stood at £16.9m - a 14% increase on the same time last year. These taken together give us cause for cautious optimism for the coming year.

We expect average raw material and component costs for the coming year to be a little higher than in financial year 2010. This will be mitigated by cost avoidance strategies and by passing these increases on to customers as appropriate. Overhead costs remain under control and we are seeing limited inflationary forces within our directly controllable cost base.

We expect to increase our investment in manufacturing equipment in the present year to support our strategic plans to broaden product technologies and drive growth.

The ground work that we have undertaken over the last few years to build our reputation and sales base, is showing signs of success, although we recognise we have more to do. We expect the overall UK market background to continue to be adverse for another couple of years but, in anticipation of this, we are investing significant efforts in growing our business outside of the UK, whilst capitalising, to some degree, on the more favourable climate for manufacturing in the UK.

Overall, our expectations for the 2011 financial year remain positive and unchanged from those discussed six months ago.

Group Statement of Comprehensive Income

For the year ended 30 June 2010


		2010	2009
Continuing operations	Notes	£'000	£'000

Revenue	5	52,449	49,129
Cost of sales		(45,800)	(42,830)
Gross profit		6,649	6,299
Commercial and administrative costs		(5,301)	(4,777)
Operating profit before exceptional operating items		1,348	1,522
Exceptional operating items	6	-	26
Operating profit		1,348	1,548
Finance income		18	-
Finance costs		(186)	(209)
Profit before taxation	6	1,180	1,339
Taxation	7	(259)	(245)
Profit for the year		921	1,094
Other comprehensive income:
Exchange differences on translating foreign operations		(2)	(46)
Other comprehensive income for the year		(2)	(46)
Total comprehensive income for the year		919	1,048


Profit attributable to:
Equity shareholders		921	1,094

Total comprehensive income attributable to:
Equity shareholders		919	1,048


Earnings per share
- basic and diluted	8	8.2p	9.7p

Dividend
Paid in year (£000's) Paid in year (pence per share)		712 6.3	664 5.9
Proposed (£000's) Proposed (pence per share)		464 4.1	462 4.1

Group Statement of Financial Position

As at 30 June 2010

	2010	2009
	£'000	£'000
ASSETS
Non-current assets
Property, plant and equipment	11,057	11,307
Intangible assets	84	101
Deferred tax assets	59	143
Investments	46	46
	11,246	11,597
Current assets
Inventories	8,538	6,218
Trade and other receivables	12,072	11,132
Cash and cash equivalents	532	473
	21,142	17,823
Assets held for sale	167	167
Total current assets	21,309	17,990

Total assets	32,555	29,587

LIABILITIES
Current liabilities
Trade and other payables	(12,283)	(10,298)
Interest-bearing loans and borrowings	(3,856)	(2,357)
Current tax payable	(41)	(294)
Total current liabilities	(16,180)	(12,949)

Non-current liabilities
Interest-bearing loans and borrowings	(1,008)	(1,471)
Post retirement benefit obligations	(2,407)	(2,450)
Deferred tax liabilities	-	(1)
Total non-current liabilities	(3,415)	(3,922)

Total liabilities	(19,595)	(16,871)

Net assets	12,960	12,716

EQUITY
Share capital	566	563
Share premium	3,830	3,796
Exchange reserve	(2)	-
Retained earnings	8,566	8,357
Total equity	12,960	12,716

Group Statement of Changes in Equity

As at 30 June 2010

	Share Capital	Share Premium	Exchange Reserve	Retained Earnings	Total Equity
Group	£'000	£'000	£'000	£'000	£'000
Balance at 1 July 2009	563	3,796	-	8,357	12,716
Dividends	-	-	-	(712)	(712)
Issue of share capital	3	34	-	-	37
Transactions with owners	3	34	-	(712)	(675)
Profit for the year	-	-	-	921	921
Other comprehensive income:
Exchange difference on translating foreign operations	-	-	(2)	-	(2)
Total comprehensive income for the year	-	-	(2)	921	919
Balance as at 30 June 2010	566	3,830	(2)	8,566	12,960

	Share Capital	Share Premium	Exchange Reserve	Retained Earnings	Total Equity
Group	£'000	£'000	£'000	£'000	£'000
Balance at 1 July 2008	563	3,796	46	7,927	12,332
Dividends	-	-	-	(664)	(664)
Transactions with owners	-	-	-	(664)	(664)
Profit for the year	-	-	-	1,094	1,094
Other comprehensive income:
Exchange difference on translating foreign operations	-	-	(46)	-	(46)
Total comprehensive income for the year	-	-	(46)	1,094	1,048
Balance as at 30 June 2009	563	3,796	-	8,357	12,716

Group Cash Flow Statement

For the year ended 30 June 2010

	2010	2009
	£'000	£'000
Cash flows from operating activities
Profit before taxation	1,180	1,339
Depreciation	1,202	1,246
Amortisation	41	69
Loss on disposal of property, plant and equipment	9	11
Impairment of property, plant and equipment	-	4
Finance income	(18)	-
Finance costs	186	209
(Increase) / decrease in inventories	(2,320)	330
Increase in trade and other receivables	(940)	(1,563)
Increase in trade and other payables Contributions to defined benefit plans Current service cost	1,812 (357) 225	244 (416) 224
Cash generated from operations	1,020	1,697

Finance expense paid	(97)	(151)
Taxation paid	(259)	(260)
Net cash flow from operating activities	664	1,286

Cash flow from investing activities
Finance income received	18	-
Purchase of property, plant and equipment	(960)	(1,438)
Purchase of intangible assets	(24)	(75)
Purchase of investment	-	(46)
Net cash outflow from investing activities	(966)	(1,559)

Cash flow from financing activities
Proceeds from share issue	37	-
Proceeds from new loans	1,396	611
Repayment of loans	(463)	(568)
Dividends paid	(712)	(664)
Net cash flow from financing activities	258	(621)

Net decrease in cash and cash equivalents	(44)	(894)

Cash and cash equivalents at beginning of year	(1,312)	(418)

Cash and cash equivalents at end of year	(1,356)	(1,312)

Cash and cash equivalents consist of:
Cash	532	473
Overdraft	(1,888)	(1,785)
Cash and cash equivalents at end of year	(1,356)	(1,312)

NOTES:

1. Statutory Accounts

The financial information does not constitute statutory accounts as defined in section 435 of the Companies Act 2006, but has been extracted from the statutory accounts for the year ended 30 June 2010 on which an unqualified audit report has been issued and which will be delivered to the Registrar following their adoption at the Annual General Meeting.

The statutory accounts for the financial year ended 30 June 2009 have been delivered to the Registrar of Companies with an unqualified audit report and did not contain a statement under section 498 of the Companies Act 2006.

Copies of the 2010 Annual Report and Accounts will be posted to shareholders with the notice of the Annual General Meeting. Further copies may be obtained by contacting the Company Secretary at Swallowfield plc, Swallowfield House, Station Road, Wellington, Somerset, TA21 8NL. An electronic copy will be available, at the same time, on the Group's web site (www.swallowfield.com).

2. Basis of Preparation

The Group has prepared its consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS) and also in accordance with IFRS issued by the International Accounting Standards Board. These financial statements have been prepared under the historical cost convention, modified to include the revaluation of certain non-current assets and financial instruments. IAS 1 Presentation of Financial Statements (revised 2007) requires presentation of a comparative statement of financial position as at the beginning of the first comparative period, in some circumstances. Management considers that this is not necessary this year because the 2008 Statement of Financial Position is the same as that previously published.

The consolidated financial statements are presented in sterling and all values are rounded to the nearest thousand (£'000) except where otherwise indicated.

3. Basis of Consolidation

The Group financial statements consolidate the financial statements of the Company and its subsidiary undertakings and include the net assets of subsidiary undertakings. The results and net assets of undertakings acquired or disposed of during a financial year are included in the Group Statement of Comprehensive Income and Group Statement of Financial Position from the effective date of acquisition or to the effective date of disposal. Subsidiary undertakings have been consolidated using the purchase method of accounting. In accordance with the exemptions given by section 408 of the Companies Act 2006, the Company has not presented its own Statement of Comprehensive Income.

4. Accounting Policies

The principal accounting policies which apply in preparing the financial statements for the year ended 30 June 2010 are consistent with those disclosed in the Group's audited accounts for the year ended 30 June 2009.

5. Segmental Analysis

The Group operates in one reportable segment as all sales, purchasing, production and operational decisions are taken based on the overall Group operating performance. The results of this segment are as reported through the Group Statement of Comprehensive Income, Group Statement of Financial Position and Group cash flow statement.

The distribution of the Group's external revenue by destination is shown below:

	2010 £'000	2009 £'000
UK	42,603	39,420
Other European Union countries	8,896	9,161
Rest of the World	950	548
	52,449	49,129

In the year ended 30 June 2010, the Group had two customers that exceeded 10% of total revenues, being 24% and 14% respectively.

6. Profit before taxation	2010	2009
	£'000	£'000
(a) This is stated after charging/(crediting):
Depreciation of property, plant and equipment:
Purchased assets	1,202	1,246
Amortisation of intangible assets	41	69
Impairment of property, plant and equipment	-	4
Research and development	765	771
Foreign exchange losses / (gains)	112	(29)
Operating leases:
Hire of plant and machinery	92	107
Rent of buildings	531	553
Loss on disposal of plant and equipment	9	11
Auditors' remuneration:
Audit services	37	37
Non-audit services	23	41

(b) Exceptional operating items

Reorganisation	-	(26)
	-	(26)

Exceptional operating items in 2009 related to the release of redundancy provisions that were no longer required.

(c) Earnings before interest, tax, depreciation and amortisation ("EBITDA")
Operating profit	1,348	1,548
Depreciation of property, plant and equipment	1,202	1,246
Amortisation of intangible assets	41	69
Impairment of property, plant and equipment	-	4
Loss on disposal of property, plant and equipment (excluding exceptional items)	9	11
EBITDA	2,600	2,878
Exceptional operating items	-	(26)
EBITDA before exceptional operating items	2,600	2,852

7. Taxation	2010	2009
	£'000	£'000
(a) Analysis of tax charge in the year
UK corporation tax:
on profit for the year	317	433
adjustment in respect of previous years	(141)	-
Total current tax charge	176	433

Deferred tax:

Origination and reversal of temporary differences:
current year charge prior year charge on profit for the year	(62) 100 -	- - (6)
property not giving rise to temporary differences	-	(114)
Losses utilised / (available) in subsidiary	45	(68)
Total deferred tax	83	(188)

Tax charge	259	245

(b) Factors affecting total tax charge for the year
The tax assessed on the profit before taxation for the year is lower than the standard rate of UK corporation tax of 28.0% (2009: 28.0%). The differences are reconciled below:
	2010	2009
	£'000	£'000
Profit before taxation	1,180	1,339
Tax at the applicable rate of 28.0% (2009: 28.0%)	330	375
Effect of:
Expenses not deductible for tax purposes	(6)	3
Capital allowances for the year in excess of depreciation	63	(11)
Other temporary differences	(11)	10
Deferred tax movement	(62)	-
Adjustment in respect of previous years	(141)	(40)
Adjustment to deferred tax in previous years	100	(114)
Differences between UK and overseas tax rates	(14)	22
Actual tax charge	259	245

8. Earnings per Share

(a) Basic and diluted	2010	2009
	£'000	£'000
Profit for the year	921	1,094
Basic weighted average number of ordinary shares in issue during the year	11,290,800	11,256,416
Dilutive potential ordinary shares - executive share options	-	4,799
	11,290,800	11,261,215
Basic earnings per share	8.2p	9.7p
Diluted earnings per share	8.2p	9.7p

(b) Adjusted earnings per share	2010	2009
	£'000	£'000
Basic and diluted
Profit for the year	921	1,094
Less: Exceptional items	-	(26)
Notional tax charge on exceptional items	-	7
Adjusted profit before exceptional items	921	1,075
Basic weighted average number of ordinary shares in issue during the year	11,290,800	11,256,416
Dilutive potential ordinary shares - executive share options	-	4,799
	11,290,800	11,261,215
Adjusted earnings per share	8.2p	9.6p
Adjusted diluted earnings per share	8.2p	9.6p

The issue of awards under the Long Term Incentive Plan do not have a significant impact

on the calculation of diluted earnings per share

9. Note to Group Cash Flow Statement

(a) Reconciliation of cash and cash equivalents to movement in net debt:

	2010	2009
	£'000	£'000
Decrease in cash and cash equivalents	(44)	(894)
Net cash inflow from increase in borrowings	(933)	(43)
Change in net debt resulting from cash flows	(977)	(937)
Net debt at 1 July	(3,355)	(2,418)
Net debt at 30 June	(4,332)	(3,355)

(b) Analysis of net debt
	1 July 2009 £'000	Cashflow £'000	30 June 2010 £'000
Cash at bank and in hand	473	59	532
Bank overdraft	(1,785)	(103)	(1,888)
	(1,312)	(44)	(1,356)
Borrowings due within one year	(572)	(1,396)	(1,968)
Borrowings due after one year	(1,471)	463	(1,008)
Total	(3,355)	(977)	(4,332)