Interim Results

Molins PLC 02 September 2004 2 SEPTEMBER 2004 FOR IMMEDIATE RELEASE International Specialist Engineers Summary of results for the 6 months to 30 June 2004 6 months 6 months 12 months to 30 June to 30 June to 31 Dec 2004 2003 2003 (as restated)* (as restated)* Sales £57.7m £51.9m £121.8m Underlying operating (loss)/profit# £(0.2)m £5.3m £12.1m Exceptional items £(5.8)m - - (Loss)/profit before tax £(7.0)m £4.9m £10.9m (Loss)/profit after tax £(6.9)m £3.2m £7.3m Net debt £26.8m £8.3m £21.5m Underlying (loss)/earnings per share# Basic (loss)/earnings per share (5.3)p 18.6p 43.6p Dividend per share (38.3)p 17.0p 39.9p - 4.6p 12.6p * Restated for the impact of UITF Abstracts 17 & 38 on accounting for employee share schemes # Before goodwill amortisation, net pension credit & exceptional items Peter Byrom, Chairman, commented: 'As indicated in July, the Group results for the first half of the year are disappointing and reflect the sharp reversal in the performance of the Tobacco Machinery division. The strong order books in the Packaging Machinery division support a further improvement in its performance. Within the Tobacco Machinery division, the prospects for the scientific services businesses are improving. MTM and Sasib's operating performance will be significantly affected by the restructuring and the speed at which it can be implemented, as the businesses are positioned to re-establish their profitability.' Enquiries: Molins PLC Tel: 020 7638 9571 Peter Byrom, Chairman David Cowen, Group Finance Director Issued by: Citigate Dewe Rogerson Tel: 020 7638 9571 Margaret George CHAIRMAN'S STATEMENT As indicated in July, the Group results for the first half of the year are disappointing and reflect the sharp reversal in the performance of the Tobacco Machinery division. The short-term prospects for the Tobacco Machinery division have deteriorated significantly during the year. Together with the adverse impact of currency movements and a reduced contribution from rental income, this has resulted in an underlying operating loss for the Group in the half year. In response, a restructuring of the Tobacco Machinery division was announced in July. The scientific services businesses also experienced disappointing trading in the first half but have recently experienced some improvement. The performance of the Packaging Machinery division has been encouraging, with an increase in sales of 14% before currency movements and a significant increase in order book. Group sales in the six months to 30 June 2004, including Sasib S.p.A. which was acquired in August 2003, increased to £57.7m (2003: £51.9m). However, the Group incurred an underlying operating loss of £0.2m (2003: £5.3m profit), before goodwill amortisation of £0.5m, net pension credit of £nil and exceptional re-organisation costs of £4.0m. The underlying loss per share was 5.3p (2003: 18.6p earnings) and the basic loss per share was 38.3p, after total exceptional costs of £5.5m (net of tax). Tobacco Machinery The division, which comprises Molins Tobacco Machinery, Sasib and the scientific services businesses, reported sales of £36.6m in the period (2003: £32.8m) and an underlying operating loss of £0.9m (2003: £4.8m profit). • Molins Tobacco Machinery - sales £26.1m, operating profit £0.5m (2003 sales £24.3m, operating profit £3.1m) Sales of spare parts and services, which represent more than half of the sales of MTM, were maintained at similar levels to those in the first half of last year. Margins were also maintained. The division entered the year with strong original equipment and rebuild order books. In total, sales of original equipment and rebuilt machinery have been ahead of last year. However, margins are lower, reflecting pricing pressures and adverse currency movements, as well as cost overruns on some projects. During the first half of the year order intake for original equipment and rebuilt machinery has been lower than in the comparable period last year and lower than expected at the start of the year. In particular there has been a slow down in the investment plans of some of the US independent cigarette manufacturers. This, together with weakness in demand for equipment in other regions, has affected prospects for the full year. Sales of original equipment in the second half of the year are expected to be lower than in the comparable period last year. Molmac's order book for rebuilds will support a maintained level of sales in the second half, albeit at reduced margins, as described above. The manufacturing resources of the division, which had been geared to the increased activity levels through 2003 and planned growth for 2004, became under-utilised in the first six months of the year, resulting in operational inefficiencies and consequent reductions in profitability. In response to these conditions, a re-organisation of the division is being implemented to match the new expectations of activity and to reduce the cost base. The engineering, sales and marketing activities of Molmac, the Group's UK rebuild business, are being merged with those at Saunderton, the division's centre of operations. Activities will be focused on the rebuilding and upgrading of MK9 cigarette making machinery and ancillary equipment. The activities at Saunderton will be restructured, with the continued progressive transfer of parts manufacturing to Molins sro in Plzen, Czech Republic. Saunderton will remain as the centre for parts distribution and the assembly of the Passim cigarette maker, the PM5 filter maker and the Concord handling systems. Molins sro is being expanded further, continuing its phased development over the last two years. The business is becoming increasingly engaged in the building of MK9 machines and ancillary equipment, in conjunction with the Molmac rebuild programme. Its capabilities and capacity are being expanded to increase the range of parts made and the building of machine modules. Molins sro is also becoming increasingly involved in the manufacture of parts and the assembly of packaging machines for the Group's packaging machinery businesses. In addition, Molins do Brasil and Molins Richmond are being re-organised to match the current requirements of the division, including the transfer of the last remaining manufacturing activity in Richmond, Virginia to Saunderton and the Czech Republic. Both businesses remain key parts of Molins' worldwide sales and service network. The Kunming Molins joint venture in China, of which Molins owns 48%, has been closed. With significant changes in the Chinese tobacco industry, through consolidation and modernisation, demand for rebuilt machinery has declined and this led to the shareholders' collective decision to close the operation. It is expected that all costs of closure will be met by the joint venture company without any cash call from Molins. The joint venture company reported a loss attributable to Molins of £0.3m in 2003. The spares and service facility in Shanghai is unaffected by the re-organisation. The service and distribution facilities of Molins Far East in Singapore are being developed to service the increased levels of business in the Asia Pacific region. Rental income from surplus property at the Saunderton site reduced from £0.5m in the first six months of 2003 to less than £0.1m in the first half of this year. Occupancy levels remain low. • Sasib - sales £4.4m, operating loss £1.5m Sasib, acquired in August 2003, has performed disappointingly. Its order book was poor as it entered the year. There were good levels of original equipment orders in the early months of the year but recent order receipts have been low. Spare parts order intake and sales have decreased, which has significantly impacted profits. Sales in the second half are expected to be considerably higher than in the first half as the business delivers the orders received early in the year. Activity progresses in respect of the re-organisation of the business. An appraisal of its product range resulted in the July announcement to suspend the development of the Fenix packing machine owing to insufficient market opportunities. • Scientific Services - sales £6.1m, operating profit £0.1m (2003 sales £8.5m, operating profit £1.7m) Both of the scientific services businesses, Cerulean and Arista Laboratories, have performed less well than in the corresponding period last year. Sales in the period were 28% lower at £6.1m, although order intake has run at higher levels than sales and both businesses entered the second half with higher order books than at the start of the year. Cerulean has been in the product acceptance stage of its new instrumentation range, MC(2), throughout the first half of the year and this has continued to affect the performance of the business. This phase is now largely complete and the business is starting to sell the new product range to its lead customers. Merger activity amongst Cerulean's customer base has also impacted on order levels over the last eighteen months. The business reduced its cost base in the early part of the year and the benefits of this, together with a recently increased order intake, are expected to result in an improved performance in the second half of the year compared with the first half. Arista Laboratories has enjoyed considerable growth since Molins acquired the business in 2002. It has established itself as a leading independent smoke constituent analytical testing facility and has broadened its customer base whilst extending its range of testing capabilities. In the first half of 2004, however, an expected order for a series of tests did not materialise and this has resulted in a sharp reduction in sales and profitability compared with the same period last year. Arista's performance is expected to improve in the second half of the year. Re-organisation The re-organisation described above is expected to result in some 250 redundancies across the Tobacco Machinery businesses and to date 100 people have left the division. The cost of rationalisation and redundancies is estimated at £3.5m before tax credits, of which £0.7m was provided at 30 June 2004 as an exceptional cost. With the restructuring of the business and the changes to the market, inventories have also been written down and £1.4m has been taken as an exceptional charge. The costs incurred in the development of the Fenix packing line in the first six months of the year, amounting to £1.9m, have been taken as exceptional. Purchased goodwill has been increased by £1.4m in respect of the carrying value of costs incurred on this project prior to acquisition. In addition, the write down of the Chinese joint venture has resulted in a non-operating exceptional charge of £1.8m. It is expected that these measures will reduce costs by approximately £5m per annum. Packaging Machinery The division has experienced a considerably increased level of order intake this year compared with the same period last year. This improved position resulted in a 10% increase in sales in the first six months of 2004 to £21.1m and a 14% increase before adverse currency movements. The division has also continued to focus on improving its operational efficiency. Operating profit increased from £0.5m to £0.7m, after incurring re-organisation costs of £0.2m. Molins ITCM has benefited from a drive to expand its breadth of multi-national customers and this was reflected in improved sales and profitability in the period. The business entered the second half of the year with a strong order book. Both Langen and Langenpac have benefited from an increase in demand for larger projects, with an increasing emphasis on systems integration capabilities. Whilst this did not translate into an increase in sales in the first half of the year, both businesses have considerably higher order books than at the same time last year and this is expected to result in higher sales in the second half. Sandiacre Rose Forgrove traded largely in line with the previous year, with the European market remaining quite soft and the weakness of the US dollar reducing margins on increased sales in North America. The business has taken a number of steps to reduce its costs to offset the impact of the adverse US dollar movement. Cerulean Packing experienced very low machine sales in the first six months of the year but order intake has improved recently. The division is benefiting from its programme of product development and links with a diverse range of customers, in what remains a challenging market. Overall, the improvement in performance is expected to be sustained in the second half. Cash Group net debt at 30 June 2004 was £26.8m, compared with £21.5m at the end of 2003. Operating cash outflow in the period was £1.0m, which includes re-organisation payments of £0.9m. In addition, capital expenditure was £2.3m, including investment in Sasib's new premises, and interest and taxation payments totalled £1.1m. Dividends of £1.4m were paid in the period. Board changes The following board changes took effect from 28 June 2004. Dick Hunter was appointed to the Board as an executive director. He is Managing Director of Molins Tobacco Machinery, including Sasib S.p.A. Adam Robson was appointed to the Board as an executive director. He is Managing Director of Molins Packaging Machinery and is also responsible for the Group's scientific services businesses. Dr Amar Sabberwal retired from the Board. IFRS Preparation for the implementation of the International Financial Reporting Standards is ongoing. The overall impact on the profit and loss account is still being assessed. The main impact on the Group is expected to relate to the required restatement of the balance sheet in 2005, to reflect inter-alia the capitalisation of product development expenditure and a change in accounting for the Group's pension schemes. Dividend In view of the results for the first half of the year, the Board has decided not to pay an interim dividend this year. The recommendation for the final dividend will depend on the final outcome for this year and the trading prospects in the early months of 2005. Outlook The strong order books in the Packaging Machinery division support a further improvement in its performance. Within the Tobacco Machinery division, the prospects for the scientific services businesses are improving. MTM and Sasib's operating performance will be significantly affected by the restructuring and the speed at which it can be implemented, as the businesses are positioned to re-establish their profitability. Peter Byrom Chairman 2 September 2004 Group profit and loss account 6 months to 30 June 2004 6 months 12 months to 30 June to 31 Dec Before 2003 2003 Notes exceptional Exceptional (as (as items items Total restated) restated) £m £m £m £m £m (Notes 2, 3) Turnover - continuing operations 1 57.7 - 57.7 51.9 121.8 Operating (loss)/profit - continuing operations 1, 4 (0.7) (4.0) (4.7) 5.0 11.4 - (1.8) (1.8) - - Non-operating exceptional item Net interest payable (0.5) - (0.5) (0.1) (0.5) (Loss)/profit on ordinary activities before taxation (1.2) (5.8) (7.0) 4.9 10.9 Taxation (0.2) 0.3 0.1 (1.7) (3.6) (Loss)/profit for the period (1.4) (5.5) (6.9) 3.2 7.3 Dividends (including non-equity) - - - (0.9) (2.3) Retained (loss)/profit for the period (1.4) (5.5) (6.9) 2.3 5.0 Underlying (loss)/earnings per ordinary share 8 (5.3)p 18.6p 43.6p Basic (loss)/earnings per ordinary share 8 (7.9)p (30.4)p (38.3)p 17.0p 39.9p Diluted (loss)/earnings per ordinary share (7.9)p (30.4)p (38.3)p 15.6p 36.0p Dividend per ordinary share - 4.6p 12.6p Group balance sheet 30 June 30 June 31 Dec Notes 2004 2003 2003 (as restated) (as restated) £m £m £m Fixed assets Intangible assets - goodwill 9 16.0 10.3 14.8 Tangible assets 23.3 21.2 22.6 Investments 4 - 1.9 1.8 39.3 33.4 39.2 Current assets Stocks 40.0 28.6 40.3 Debtors - due within one year 28.5 22.4 37.0 Debtors - due after more than one year 10 25.6 26.1 28.1 Cash and short-term bank deposits 5.4 3.9 7.0 99.5 81.0 112.4 Creditors - amounts falling due within one year Borrowings (3.0) (1.0) (4.0) Other creditors (38.1) (30.7) (46.0) Proposed dividend - (0.8) (1.4) (41.1) (32.5) (51.4) Net current assets 58.4 48.5 61.0 Total assets less current liabilities 97.7 81.9 100.2 Creditors - amounts falling due after more than one year Borrowings (29.2) (11.2) (24.5) Provisions for liabilities and charges (11.8) (7.8) (11.7) Net assets 56.7 62.9 64.0 Capital and reserves Called up share capital 5.9 5.9 5.9 Share premium account 25.9 25.8 25.9 Revaluation reserve 5.6 5.7 5.6 Capital redemption reserve 3.9 3.9 3.9 Profit and loss account 4 18.4 24.1 25.8 Investment in own shares 4 (3.0) (2.5) (3.1) Shareholders' funds (including £0.9m of non-equity interests) 56.7 62.9 64.0 Group cash flow statement 6 months 6 months 12 months to 30 June to 30 June to 31 Dec 2004 2003 2003 £m £m £m Net cash (outflow)/inflow from operating activities (1.0) 0.9 5.6 Returns on investments and servicing of finance Net interest paid (0.5) (0.1) (0.5) Preference dividend paid - - (0.1) Taxation (0.6) (0.8) (3.3) Capital expenditure (net of sale proceeds) (2.3) (2.1) (4.2) Acquisitions and disposals Purchase of businesses - (0.5) (7.1) Net overdrafts acquired with business - - (2.2) Net cash outflow from acquisitions and disposals - (0.5) (9.3) Equity dividends paid (1.4) (1.3) (2.1) Net cash outflow before financing (5.8) (3.9) (13.9) Financing Issue of new shares - - 0.1 Purchase of own shares for LTIP - - (0.5) Debt due after more than one year: increase in borrowings 5.5 6.2 17.8 Net cash inflow from financing 5.5 6.2 17.4 (Decrease)/increase in cash in the period (0.3) 2.3 3.5 Closing net debt (26.8) (8.3) (21.5) Statement of total recognised gains and losses 6 months to 30 June 6 months 12 months Note 2004 to 30 June to 31 Dec 2003 2003 (as restated) (as restated) £m £m £m (Loss)/profit for the period (6.9) 3.2 7.3 Currency translation movements arising on foreign currency net investments (0.4) 0.8 (0.8) Total recognised gains and losses in the period (7.3) 4.0 6.5 Prior period adjustment 4 (0.3) - - Total recognised gains and losses since the last Annual Report and Accounts (7.6) 4.0 6.5 Reconciliation of operating (loss)/profit to net cash flow from operating activities 6 months 12 months 6 months to 30 June to 31 Dec to 30 June 2003 2003 2004 (as restated) (as restated) £m £m £m Operating (loss)/profit (4.7) 5.0 11.4 Exceptional items included in operating loss 4.0 - - Amortisation of goodwill 0.5 0.3 0.7 Depreciation 1.4 1.2 2.5 Other movements - 0.3 1.4 Movements in exceptional items Cash movements on exceptional restructuring and rationalisation provisions (0.9) - (0.1) Working capital movements: - stocks (3.5) (4.2) (6.0) - debtors 8.9 (1.1) (3.3) - creditors and other provisions (6.7) (0.6) (1.0) Net cash (outflow)/inflow from operating activities (1.0) 0.9 5.6 Cash flows from exceptional items excluding tax effect (0.9) - (0.1) Other cash flows (0.1) 0.9 5.7 Net cash (outflow)/inflow from operating activities (1.0) 0.9 5.6 Reconciliation of net cash flow to movement in net debt 6 months 6 months 12 months to 30 June to 30 June to 31 Dec 2004 2003 2003 £m £m £m (Decrease)/increase in cash in the period (0.3) 2.3 3.5 Cash inflow from increase in debt and lease financing (5.5) (6.2) (17.8) Change in net debt resulting from cash flows (5.8) (3.9) (14.3) Net debt acquired with business - - (2.9) Translation movements 0.5 0.3 0.4 Movement in net debt in the period (5.3) (3.6) (16.8) Opening net debt (21.5) (4.7) (4.7) Closing net debt (26.8) (8.3) (21.5) Reconciliation of movements in shareholders' funds 6 months to 30 June 6 months 12 months Note 2004 to 30 June to 31 Dec 2003 2003 (as restated) (as restated) £m £m £m Opening shareholders' funds - as previously reported 66.0 61.6 61.6 Prior period adjustment 4 (2.0) (1.9) (1.9) Opening shareholders' funds - as restated 64.0 59.7 59.7 (Loss)/profit for the period (6.9) 3.2 7.3 Dividends - (0.9) (2.3) Currency translation movements arising on foreign currency net investments (0.4) 0.9 (0.8) Issue of new shares - - 0.1 Net (decrease)/increase in shareholders' funds (7.3) 3.2 4.3 Closing shareholders' funds 56.7 62.9 64.0 Notes 1 Segmental analysis Turnover Operating (loss)/profit 6 months 12 months 6 months 6 months 12 months 6 months to 30 June to 31 Dec to 30 June to 30 June to 30 June 2003 2003 2004 2003 to 31 Dec 2004 (as (as £m £m 2003 £m restated) restated) £m £m £m By activity: Continuing operations Tobacco Machinery 36.6 32.8 82.7 (0.9) 4.3 9.4 - trading - - - - 0.5 1.1 - property rental income 36.6 32.8 82.7 (0.9) 4.8 10.5 Tobacco Machinery 21.1 19.1 39.1 0.7 0.5 1.6 Packaging Machinery 57.7 51.9 121.8 (0.2) 5.3 12.1 Goodwill (Tobacco Machinery businesses) (0.5) (0.3) (0.7) Operating (loss)/profit before exceptional items (0.7) 5.0 11.4 Exceptional items (4.0) - - Operating (loss)/profit (4.7) 5.0 11.4 2 The exceptional items of £4.0m included within the operating loss arise from the re-organisation of the Tobacco Machinery businesses, and comprises costs and provisions of £1.9m relating to the suspension of the development of the Sasib Fenix packaging machine, £1.4m relating to the write down of inventory and £0.7m of redundancy and re-organisation costs incurred to 30 June 2004. 3 The non-operating exceptional item of £1.8m relates to the write off of the investment held in the Kunming Molins joint venture company in China, which closed in June 2004. 4 The interim financial statements have been prepared on the basis of the accounting policies set out in the Group's 2003 financial statements except that the Group has implemented revised UITF Abstract 17 (Employee share schemes) and UITF Abstract 38 (Accounting for ESOP trusts). As a result of implementing these new standards, the results for 30 June 2003 and 31 December 2003 have been restated and the Company's investment in own shares (LTIP) has been reclassified from Investments to Reserves. The effect of these changes has been to reduce Investments and Shareholders' funds by £1.8m at 30 June 2003 (£2.0m at 31 December 2003) and to reduce operating profit by £nil at 30 June 2003 (£0.1m at 31 December 2003). 5 The financial information for the half year has not been audited, although the auditor has carried out an independent review. 6 The results for the full year 2003 have been extracted from the Group's full accounts for that year which included an unqualified audit report and have been filed with the Registrar of Companies. 7 The Group continues to account for pensions under SSAP 24 Accounting for pension costs. A formal valuation of the UK pension fund was carried out at 30 June 2003 and its assumptions have been applied in the financial statements, updated to reflect conditions at 1 January 2004. The net pension credit for the six months to 30 June 2004 was £nil (30 June 2003: £nil). 8 Loss)/earnings per ordinary share is based upon (loss)/ profit after taxation less preference dividend and on a weighted average of 18,011,767 shares in issue during the period (30 June 2003: 18,063,745). Underlying (loss)/earnings per ordinary share is calculated before the charge for goodwill amortisation, net pension credit and exceptional items. 9 A revision to the fair values of the assets of Sasib S.p.A., acquired on 29 August 2003, has been made totalling £1.7m. These reflect the write down of the Fenix prototype included in stocks of £1.4m and additional stock provisions of £0.3m. 10 Debtors due after more than one year include pension fund prepayments of £24.4m (31 December 2003: £24.4m). The average US dollar exchange rate for the period to 30 June 2004 was US$1.82 (30 June 2003: US$1.61) and the rate at 30 June 2004 was US$1.81 (30 June 2003: US$1.65). The rate at 31 December 2003 was US$1.79. The average euro exchange rate for the period to 30 June 2004 was €1.48 (30 June 2003: €1.46) and the rate at 30 June This information is provided by RNS The company news service from the London Stock Exchange

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