Snorkel Investment Update

RNS Number : 1939S

Tanfield Group PLC

21 June 2018

 

Tanfield Group Plc

("Tanfield" or the "Company")

Snorkel Investment Update

The Board of Tanfield (the "Board") is pleased to update the market on its investment in Snorkel International Holdings LLC ("Snorkel"), the aerial work platform business.

Investment Background

·     Tanfield is a 49% shareholder in the equity of Snorkel following the joint venture between Tanfield Group Plc and Xtreme Manufacturing LLC ("Xtreme"), a Company owned by Don Ahern of Ahern Rentals Inc ("Ahern"), relating to Snorkel, in October 2013.

·     The carrying value of Tanfield's interest, as set out in the Company's 2017 Report and Financial Statements and subsequent updates to the market, is £36.3 million. This value was retained on the balance sheet as no alternative basis of valuation had presented itself.

·     A range of possible realisable values was given by the directors in the 2017 Report and Financial Statements, with the lower-end indicative value of $29 million and the higher-end indicative value of $52 million. The lower end valuation is underpinned by the contractual adjusted preferred interest and preferred return value of $25.3m that is to be paid prior to Xtreme being able to exercise its call option over the 49 percent interest.

·     The trigger event for Tanfield to request payment of the calculated realisation value of the preferred interest holding in Snorkel is dependent upon Snorkel achieving an annualised trailing EBITDA of $25 million in any 12 month period prior to 30 September 2018.

·     Based upon the Board's understanding of the trading performance of Snorkel to date, the Board are of the view that this trigger threshold will not be achieved by that date.

·     After 30 September 2018, based on the prognosis that the above trigger event will not be met, Tanfield's ability to request payment of the calculated realisation value (which is the basis of the £36.3 million balance sheet value) will come to an end. Tanfield will remain a 49% shareholder but any calculation of investment value becomes uncertain and the return is likely to be significantly less than the current carrying value.

·     After the payment of the adjusted preferred interest Xtreme has a call option to purchase Tanfield's 49 per cent interest at a price which is calculated using a formula based around a 5.5 times multiple of the EBITDA in the 12 months prior to the exercise of the option.

·     Snorkel has indicated to the Board that it expects Xtreme will cause SKL Holdings to exercise its call option at the earliest opportunity, in October 2018.

·     Following a material increase in selling, general and administrative ("SGA") costs of 34% when comparing Q1 2017 with Q1 2018, (or a 21% increase when comparing the 2017 quarterly average with Q1 2018) - an increase that the Board only recently became aware of when it received the Q1 2018 results - the Board has reassessed the lower-end indicative value of its interest in Snorkel as being the $25.3m preferred interest and preferred return values. The Board adds that, based on the most recent financial information received, this value is now likely to be the realisable value if the call option is exercised in October 2018.

·     The Board is unaware why Snorkel have only now decided to invest in key resources and functions which it is told by Snorkel will ensure the business is in a position to grow further and perform better in the long term.

·     In the event that the call option is exercised in October 2018, the Board will need to assess the Company's position and, if necessary, take appropriate advice.

Business Update

Tanfield continues to own 49% of Snorkel, which it has held since the joint venture was formed between Tanfield Group Plc and Xtreme Manufacturing LLC in October 2013. Snorkel's sales in the first quarter of 2018 were $44.5m (Q1 2017: $34.9m), an increase of 28% in comparison to the same period in 2017, with an operating loss, excluding depreciation, of $0.2m (Q1 2017: $0.4m profit). In 2017 Snorkel achieved full year sales growth of 27%, very similar to the 28% achieved in the first quarter of 2018 and therefore, assuming this trend of growth continues for the remainder of the year (which the Board is not able to assess), sales in 2018 could reach approximately $210m (2017: $166m). The Board has not been provided with any information that allows them to validate this number but feel it appropriate to express the level of sales growth that appears likely based on the current trend. In comparison, sales in 2014, the first full year following the transaction taking place, were only $85.3m and therefore if the current trend of sales growth continues for the remainder of the year, sales growth of around 150% may be achieved from the 2014 year end to the 2018 year end.

As reported in the Snorkel investment update on 10 April 2018, there was an increase in selling, general and administrative costs at the end of 2017, up from an average of $4.6m per quarter for the first 9 months of the year to $5.5m in the final quarter. The Board was informed that $0.5m of this increase was a year-end adjustment to correct an error made by Snorkel where costs should have been apportioned during the course of the year, resulting in the $0.5m adjustment being required. Therefore the average quarterly selling, general and administrative costs during the full year became $4.8m

Below is a summary of the 2017 consolidated operating statement that was reported to shareholders on 10 April 2018 so that they could better understand the impact of the variances that occurred in the in the fourth quarter of 2017:

	Mar-17	Jun-17	Sep-17	Dec-17	2017 Year
	$ 000's	$ 000's	$ 000's	$ 000's	$ 000's
Net sales	34,878	44,870	44,316	41,746	165,811
Cost of goods sold	30,097	39,084	38,464	37,183	144,828
Gross profit	4,781	5,786	5,852	4,563	20,983
	13.7%	12.9%	13.2%	10.9%	12.7%
Selling, general & administrative costs	4,355	4,715	4,730	5,545	19,345
Operating profit/(loss) excl depreciation	426	1,071	1,122	(982)	1,638

The following is a summary of the first quarter of 2018 consolidated operating statement, comparing it to the same period in 2017 and also to the average quarterly values for the 2017 full year:

	2017 Quarter 1	2017 Quarterly Average	2018 Quarter 1
	$ 000's	$ 000's	$ 000's
Net sales	34,878	41,453	44,535
Cost of goods sold	30,097	36,207	38,924
Gross profit	4,781	5,246	5,611
	13.7%	12.7%	12.7%
Selling, general & administrative costs	4,355	4,836	5,849
Operating profit/(loss) excl depreciation	426	410	(238)

The Tanfield Board has been informed by Snorkel that some of the recent increase in SGA costs is a result of the following:

·     an expansion of the product development team

·     the establishment of an R&D centre

·     a new VP of engineering

·     the new VP of engineering building his team

·     8 new products either released or soon to be released, which resulted in the costs of the development being written off

·     an expansion of the China sourcing office

·     the development of a Chinese manufacturing company selling in to China

·     additional costs to support the factory and sales in the Chinese market

·     a new Chief Manufacturing Officer

·     the cost of new lean manufacturing techniques recently introduced

·     changes in foreign currency rates

Based upon information provided to the Company by Snorkel, this is a material increase in Snorkel's SGA costs in the first quarter of 2018, following a smaller increase that occurred in the fourth quarter of 2017. Tanfield has also very recently been informed by Snorkel that it believes that Xtreme will seek to exercise its call option to acquire Tanfield's 49% interest in Snorkel at the earliest opportunity, i.e. in October 2018. Therefore, the increase in SGA costs during the last 2 quarters, which the Board assumes is going to continue for the next 2 quarters, will in all likelihood eliminate any positive EBITDA during the period used to calculate the option price (which is calculated using a formula based around a 5.5 times multiple of the EBITDA in the 12 months prior to the exercise of the option). The impact of Snorkel's decision to increase these costs, at the point that they have chosen to, has therefore led the Board to reassess the lower-end indicative value placed on its interest in Snorkel from $29m to $25.3m.

Snorkel has informed Tanfield that these additional costs and resources will ensure that the business is in a position to grow further and perform better in the long term. The Board has not yet received explanations as to why these key resources and functions were not invested in far earlier, immediately following the transaction in October 2013. Had these investments been made at the outset of the relationship, they would likely now be having a positive impact on the value of Tanfield's investment. However, due to the timing of the resources and functions only now being introduced, any uplift to profitability will accrue to Xtreme and to the detriment of the value of Tanfield's investment, as in the short term, these resources and functions will be a cost to the business. The Board infers that it may be possible that the working capital made available to Snorkel in the early years of the contract was insufficient for them to be able to carry out the investment at an earlier stage and maximise market opportunities. In summary, the Board believes that while this investment will add value to Snorkel in the long term, it will reduce the value received by Tanfield for its interest if Xtreme exercises its call option in October 2018.

Sales of $44.5m in the first quarter of 2018 is a very similar level of sales as that achieved in the second and third quarter of 2017, which was achieved without a material increase in SGA costs, and saw Snorkel achieve an operating profit excluding depreciation of $1.1m in both quarters compared to a loss of $0.2m in the first quarter of 2018. This highlights the impact the additional costs are having on the current profitability of Snorkel when compared to previous periods. Using the average SGA costs for 2017 as a comparison, the last 2 quarters SGA costs have been reported as being $0.7m and $1m more than the average of $4.8m. If it is assumed that the more recent increase of $1m continues for the next 2 quarters, the overall increase in costs could be $3.7m for the year to September 2018.

The premise of the agreement that Tanfield entered into with Xtreme was that sufficient working capital and resources would be provided to Snorkel to maximise its ability to generate significant returns in the future for Tanfield's investors, which Xtreme believed could be exceptional when stimulated with the right set of internal and external forces. In 2013, prior to Xtreme entering into the agreements, it stated that it was their belief that they were uniquely positioned to greatly enhance Snorkel's credibility through the direct and significant involvement of Ahern affiliates in Snorkel's future operations, combined with a desire to provide it with sufficient working capital to return it to solvency.

The Board of Tanfield has sought and is continuing to seek advice in order to clearly define the effect of the contract on Tanfield's investment and will update shareholders further as additional information comes to light.

Some of the information provided in this announcement is inferred by the Board of Tanfield based on information that has been presented by Snorkel.

For further information:

Tanfield Group Plc

Daryn Robinson                                                                              020 7220 1666 

WH Ireland Limited - Nominated Advisor / Broker

James Joyce / Alex Bond                                                              020 7220 1666

The information contained within this announcement is deemed by the Company to constitute inside information under the Market Abuse Regulation (EU) No. 596/2014.

 

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