Coronavirus Update

Michelmersh Brick Holdings PLC Final Results 2020

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Chairman's Statement

 

Introduction:

It is extremely gratifying to be able to report that your Company has successfully navigated a very challenging year, delivered a very commendable result and retained a strong financial position. After Covid-19 led to our manufacturing operations being suspended for most of April 2020, the Group worked tirelessly to get the business back up to speed in a safe manner. Whilst construction site activity also slowed in early spring due to Covid-19, by the beginning of May activity had picked up, which we experienced with customer orders and sales returning quickly.

 

Throughout the pre- and post-Covid-19 interruption, the Board has striven to uphold the Group's 'good corporate citizen' principles and sought to balance the Group's responsibilities to all stakeholders. The Group's financial resilience has allowed us to support and reward our staff, maintain responsibilities to customers and suppliers, return furlough monies drawn to HMRC and re-instate the dividend stream to shareholders.

 

Financial Highlights

 

 

 

2020

2019

yoy

Turnover (£m)

 

52.0

53.5

- 2.8%

Gross margin

41.3%

40.9%

+ 0.4%

Operating profit (£m)- underyling1

8.8

10.3

- 15.2%

Profit before tax (£m) underyling1

8.0

9.6

- 16.5%

EBITDA(£m) underyling1

 

12.3

13.6

- 9.8%

Basic EPS (pence) underyling1

6.28

8.41

- 25.3%

Dividend per share (pence)

2.50

1.15

+117.4%

Net cash /(debt) (£m)

0.7

(6.3)

 

Net cash generated by operations(£m)

12.9

16.6

- 22.5%

 

 

 

 

           

1Underlying excludes items regarded as exceptional and amortisation of intangibles

 

The Group has for some time operated on the basis that production output should be maximised and all product will be sold to a customer. Covid-19 regulations caused operations to cease in late March and production output was lost and, despite a strong performance once this recommenced, the Directors consider that output was negatively impacted by 6.5 million bricks. Despite the Group being able to return to production swiftly, the customer markets reopening lagged production output and this impacted deliveries. This led to a small reduction in turnover during the year.

 

Given the challenges, the Directors believe the overall financial results of the Group are impressive with turnover and volumes only 3% lower than the Group's strongest ever performance in 2019. Increased costs eroded earnings as Covid-19 related cleaning costs, continued IT development costs and unfavourable currency rates had an impact. This led to earnings metrics being below that achieved in 2019. However, the return to full capacity and operational performance in the second half of the year gives me confidence that the worst is over and the business is in a strong and stable position moving forward.  

 

Cash and Net Debt

The Group ended 2020 in a modest net cash position after opening the year with net debt of £6.3 million. Cash preservation measures were taken in the early part of the year in the face of Covid-19 but strong trading put the Group on a solid financial footing by the end of the year.

 

In the early stages of Covid-19, the financial backdrop held uncertainties and the Board took certain measures to protect the business - drawing down £3 million from existing bank facilities, accepting government support through furlough payments and deferring VAT payments, holding back capital projects, cancelling the final dividend in respect of 2019 and stress testing the business prospects. As trading recovered from early summer onwards, uncertainties receded and cash reserves recovered, which enabled the Group to reverse the measures taken by repaying furlough payments, schedule the repayment of deferred VAT payment and reinstate dividends. Moreover, the Group has made a voluntary prepayment of £10 million of bank debt as well as £3.3 million of scheduled repayments. The Group entered 2021 in a net cash position including substantial cash balances which, along with undrawn bank facilities, afford headroom against risk, the opportunity to invest and to pay a progressive dividend.

 

Dividend

As mentioned above, the Board reluctantly withdrew the final dividend in respect of 2019, but the business has now achieved the stability and cash resources to recommence dividend payments. The Board proposes a single dividend in respect of 2020 of 2.5 pence per ordinary share to shareholders on the register on 4 June 2021 which will be paid on 14 July 2021. The Company will again offer shareholders a scrip alternative to a cash dividend with a scrip election date of 23 June.

 

The dividend exceeds previous levels as a proportion of earnings in recognition of the withdrawal of the 2019 dividend.

 

Board and Employees

This year has seen an impressive response from the Group's staff to significant challenges both as individuals and in demonstrating significant and outstanding teamwork. Operational and financial outcomes owe much to their skill and commitment and on behalf of the shareholders and the Board, I would like to pass on my sincere thanks.

 

The Board is also undergoing a period of change with the addition of two new non-executive directors within the year. Paula Hay-Plumb joined at the 2020 AGM and is already ensconced as Chair of the Audit Committee and contributing to the effectiveness of the Board. In November, Tony Morris was appointed bringing energy and experience that will help the Group explore and develop commercial opportunities. I welcome them to the business.

 

The role of Company Secretary has been transferred to a professional third-party corporate entity, Prism Cosec, adding front-line expertise and guidance to the Board.

 

We will, however, be losing two long established members of the Board in 2021 as Bob Carlton-Porter and Stephen Morgan step away from the Company at the forthcoming AGM, having served 17 and 11 years respectively. On a personal note, and on behalf of shareholders, can I extend my thanks to them for their contribution and support which have helped to make Michelmersh the Company it is today through a period of remarkable growth. They will be hugely missed and I wish them well.

 

The CFO role has been filled following a rigorous and wide-ranging recruitment process. The new appointee, Ryan Mahoney, will join us following our 2021 AGM in early June, bringing significant financial and operational experience. His expertise will help the business secure continued growth and we look forward to working with him.

 

Ryan joins from Avon Rubber, the FTSE 250 defence engineering and manufacturing group where he has been Deputy Chief Financial Officer since April 2018. Prior to that, Ryan had been Group Financial Controller for Unite Students, the FTSE 250 property group, since November 2015, and before then held other senior finance roles within the business. Prior to joining Unite, Ryan worked for KPMG for 9 years in both audit and advisory roles. Ryan is both a qualified accountant and a member of the ICAEW.

 

OUTLOOK

Michelmersh is operating in a sector that is currently buoyant and supported by government incentives. As such, it is well placed to capitalise on the UK and Benelux markets with its strong brands, well-invested operational structure and sound financial footing. We are still conscious that Covid-19 continues to cause a level of uncertainty, whilst the UK and Europe are both getting used to post-Brexit conditions. However, the Group has had a good start to 2021 and I remain confident that the Company can look forward to continued growth and prosperity with the longer-term market fundamentals in our favour.

 

Martin Warner

Chairman 

30 March 2021
 

 

Chief Executives' Report

 

The first quarter of 2020 showed a promising start to the year up until the Group's manufacturing activities were suspended due to Covid-19. All factories undertook the process of a safe, phased shut-down of kilns and manufacturing operations ceased as home working continued where possible for administrative staff. During a four-week shutdown, skeleton staff ensured on-site safety and conducted critical maintenance duties, and health and safety teams liaised with operational staff to develop Covid-19 secure safe operating procedures ("SOPs") in preparation for the return to work. The intention from operational teams was to return to a safe workplace as soon as possible in order to protect the business and the workforce's livelihood.

 

Return to work commenced towards the end of April on a phased basis as new SOPs were implemented. At this stage, some operations were expected to be scaled back with two sites not scheduled to achieve full capacity until all restrictions were lifted. It was not long, however, before development of systems and structures allowed full capacity to be achieved at all plants.

 

The closure of operations meant that the Group lost output of 9.5 million units. Strenuous efforts were made to recover lost units and by the end of December 2020, the Group's UK output was only 6.5 million units behind the level of output achieved in the whole of 2019. Following the return to operations in April 2020, the business experienced minimal Covid-19 related absence for the remainder of the period thanks in no small part to the commitment of employees in following the SOPs. There was, however, a spike in Covid-19 infections and isolations at the beginning of 2021 following the Christmas break, affecting a small number of employees relatively severely. The absences have reduced significantly in recent weeks and overall have not had a dramatic effect on operations. The business continues to operate under the established SOPs and deep-cleaning routines.

 

The impact of Covid-19 on deliveries to customers was greater than on manufacturing output as elements of the market were slower to re-open operations. At the low point, UK despatch volumes were down by 14 million units, however there was pent-up demand in a buoyant construction sector that was released through the second half of the year. By the close of the year, units despatched were only 7.4 million units less than in 2019, in itself a very successful year.

 

The Group met the objectives set at the half year by converting the strong order book into sales throughout H2, managing down our debt and returning to a progressive dividend stream.

 

Energy costs in 2020 were relatively benign as world energy markets were depressed. This compensated for some additional health and safety and cleaning costs related to Covid-19. Despite lower volumes in what is a business with heavy fixed costs, gross margins were slightly ahead of the levels seen in 2019. The UK results also benefitted from a strong rebound in performance from Carlton Brick after disruptions in 2019 brought on by integration of new investment in plant.

 

During the course of 2020, the Group completed the supply to several inspiring schemes which achieved BREEAM "excellent" sustainability ratings. Other notable projects included Hobb House Court in London, Victoria House in Leeds, Clockworks in Manchester and University College London Hospital to name but a few. The Group strategy of ensuring a well-balanced forward order book continues from previous years into 2021 and Q1 order intake remains robust. 

 

Despite the disruption from Covid-19 and with many staff homeworking, the Group was able to build momentum through H2 on a number of key initiatives. The Group's newly formed Sustainability Steering Committee successfully implemented a Net Zero road map and the IT department went live with the implementation of the new Salesforce software. We are the first brick manufacturer to partner the industry's Supply Chain Sustainability School. We also met our Pledge 100 target of donating 100k bricks to key NVQ colleges around the UK to help train our future bricklayers.

 

As we look around at the UK vernacular we see many examples of brick applications, proudly standing after hundreds of years. We know that our products are natural, thermally efficient, durable and can be recycled, boasting huge longevity with a minimal environmental footprint. In this context it is clear that the overall carbon emissions spread through every year of the brick's service life is extremely low. With a lifecycle at least two and half times that of environmental product declarations (60 years), zero in-use emissions due to no maintenance, brick is by far the most sustainable, long term choice. As Britain's Brick Specialists, we will continue to inspire beautiful, comfortable, safe and sustainable architecture that will enhance our built environment for generations to come.

 

Floren

Belgium has suffered the impact of Covid-19 more than most and their recovery is likely to lag behind the UK. Despite this, Floren has performed very well with output in the year similar to 2019. Despite a slight reduction in turnover as markets were affected, net contribution to the Group improved for the year after only contributing 10 months post acquisition in 2019. The business has undergone an extended winter shutdown in which new investment has been made to improve efficiency and reduce risk of breakdown.

 

The vendors of Floren remained in place as general managers post acquisition by Michelmersh in February 2019 and helped deliver two years of above expected contribution. They have now moved on to new ventures and we thank them for their contribution and wish them well. After notifying us that they intended to leave the business, a new general manager was recruited and has been in place since the autumn and a new management team has been developed. We look forward to continued progress from our Belgian business.

 

Staff development

During the year, the role of the intermediate management board of Associate Directors was broadened with new members and a wider remit. As the Group develops, this forum extends responsibilities, rewards key individuals and strengthens the management structure of the Group. This board includes expertise from a range of disciplines that controls and directs day-to-day operations.

 

2020 was a year that saw companies across the world face challenges that could never have been imagined or foreseen a year before. The impact, not just on businesses, but on individuals and their wellbeing, cannot be underestimated. As a company we felt it was of paramount importance that our staff continued to feel safe and supported throughout the pandemic. Following the reopening of all our sites, and adhering to all government guidelines, we engaged an external company to provide deep cleaning of all our offices and public areas every week and have continued this throughout the lockdown.

 

We organised a mental health and wellbeing awareness week for all staff raising the importance of having recognised breaks and stepping away from our work stations and taking time for ourselves.  During this week, regular emails and bulletins were sent out with tips and advice on how to help improve our wellbeing and mental health.  All staff also had the option of completing an online survey enabling them to provide feedback on how they felt the Group could improve wellbeing within the workplace.

 

Our commitment to ensure our core values are upheld and adhered to remains unwavering and we will continue to model this at all levels to ensure all our staff are treated with integrity and respect. Despite the unprecedented challenges faced as a Group last year we believe we have shown that we live out our values and not only support our staff practically but also recognise and appreciate them and reward where possible. It was pleasing to note that eight members of staff celebrated between 25-50 years' service with the business during 2020.

 

We would also like to take this opportunity to thank both Stephen Morgan and Bob Carlton-Porter for their commitment and hard work over the years. Their input and dedication have been hugely appreciated. We look forward to welcoming our new CFO Ryan Mahoney to the Board and, with Stephen's assistance, we will ensure a smooth transition as we progress with our strategic aims for H2 and beyond 2021. 

 

Land Assets

During the year, preparations were completed that enabled the Group to commence construction of the road that bisects the quarry at Telford. Contractors broke ground late in 2020 and are expected to complete the project in summer 2021. The existing public road prevents access to the remaining clay mineral on the site that supports brick manufacturing for decades to come. A long-term, detailed extraction and land remediation plan is in place that delivers mineral to the brick manufacturing business and releases land for alternative use.

 

In January 2021, the option agreement for mineral in land adjacent to the Michelmersh brickworks at Romsey was exercised securing minerals for at least 15 years brickmaking on the site.

 

Plant and machinery

As with other aspects of the business, Covid-19 impacted our approach in the year. Investment in plant was deferred initially in order to preserve cash resources, and once operations recommenced after the shutdown, concentration was directed towards recovery of output and health and safety measures.

 

The business will now turn its attention to projects that address our goals of expansion of capacity, reduction in labour and energy input costs and de-risking processes. The recent budget provides an incentive to invest surplus cash if the project returns are attractive.

 

Charity

Our commitment to our Corporate and Social Responsibility (CSR) is never seen as just a 'tick box' exercise. It is an area of our business that we believe in strongly, as mirrored in our Company core values. During 2020 we once again contributed to charities across the country donating funds, food products, children's toys, resources and a wealth of clay products to various charities and institutions across the UK.

 

Due to the huge impact the pandemic has had on so many people some of the charities we consistently donated money to were MIND's emergency COVID crisis fund, NHS Sussex to help support the amazing work of our NHS and The Trussell Trust which runs local foodbanks across the UK.

 

At the end of 2020 we introduced a new initiative to be launched in 2021 where staff can nominate two charities that will be Michelmersh's key charities for the year and we will not only donate funds but also look to raise the profile of the chosen charities through our social media platforms.

 

Outlook

We remain well placed in a market that is both performing well and has positive, longer-term fundamentals. Challenges over imports and reduced UK manufacturing capacity suggest that demand for our products will remain strong and the first quarter of 2021 has been encouraging with a strong order intake and KPIs ahead of expectations despite some poor weather.

 

A new range of challenges presents itself in 2021 alongside some traditional ones. The manner in which the staff responded positively in the face of Covid-19 gives us confidence that all challenges will be met with the same ingenuity and commitment. We remain resolute and excited about the prospects for the Group for the remainder of 2021 and beyond.

 

 

Frank Hanna, Peter Sharp

Joint Chief Executives

30 March 2021

 

 

 

 

Consolidated Income Statement

For the year ended 31 December 2020

 

 

2020

2019

 

 

 

£'000

£'000

 

Revenue

 

52,044

53,523

 

Cost of sales

 

(30,525)

(31,618)

 

 

Gross profit

 

 

21,519

 

21,905

 

 

 

 

 

 

 

 

 

Administrative expenses

 

(12,840)

(11,754)

 

Amortisation of intangibles

 

(1,170)

(1,166)

 

 

 

(14,010)

(12,920)

 

Other income

 

75

224

 

 

 

 

 

 

 

Exceptional item - Bargain purchase1

 

-

2,422

 

  - acquisition costs2

 

-

(566)

 

 

 

 

 

 

Operating profit

 

7,584

11,065

 

Finance costs

 

(713)

(698)

 

 

Profit before taxation

 

 

6,871

 

10,367

 

Taxation

 

(1,938)

(1,763)

 

 

 

 

 

 

Profit for the financial year

 

4,933

8,604

 

 

 

 

 

 

Basic earnings per share

 

5.27 p

9.41 p

 

Diluted earnings per share

 

4.95 p

9.19 p

 

 

 

 

Exceptional Items

1 Bargain purchase; represents the excess of the fair value of assets less liabilities acquired over the consideration payable for the acquisition of Floren in February 2019.

2 Costs relating to the acquisition of Floren.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2020

 

 

 

2020

2019

 

 

£'000

£'000

Profit for the financial year

 

4,933

8,604

 

Other comprehensive income/(expense)

 

 

 

Items which may subsequently be classified to profit and loss

 

 

 

Currency movements

 

66

67

Items which will not subsequently be classified to profit and loss

 

 

 

Revaluation surplus of property, plant and equipment

 

1,571

801

Revaluation deficit of property, plant and equipment

 

(3,710)

(10)

Deferred tax on movement

 

280

(134)

 

 

(1,793)

724

 

Total comprehensive income for the year

 

 

3,140

 

 

9,328

 

 

 

 

Consolidated Balance Sheet

As at 31 December 2020

 

 

 

 

2020

2019

 

 

£'000

£'000

Assets

 

 

 

Non-current assets

 

 

 

Intangible assets

 

21,420

22,590

Property, plant and equipment

 

60,948

65,348

 

 

82,368

87,938

 

 

 

 

Current assets

 

 

 

Inventories

 

10,046

9,761

Trade and other receivables

 

11,189

8,567

Cash and cash equivalents

 

12,243

15,140

Total current assets

 

33,478

33,468

 

Total assets

 

 

115,846

 

121,406

 

 

 

 

Liabilities

 

 

 

Current liabilities

 

 

 

Trade and other payables

 

12,049

9,889

Lease liabilities

 

530

542

Interest bearing borrowings

 

986

3,414

Corporation tax payable

 

240

882

Total current liabilities

 

13,805

14,727

 

 

 

 

Non-current liabilities

 

 

 

Interest bearing borrowings

 

10,487

18,036

Lease liabilities

 

240

673

Deferred tax liabilities

 

11,663

11,866

 

 

22,390

30,575

 

 

 

 

Total liabilities

 

36,195

45,303

 

 

 

 

Net assets

 

79,651

76,103

 

 

 

 

Equity attributable to equity holders

 

 

 

Share capital

 

18,789

18,498

Share premium account

 

15,827

15,545

Other reserves

 

21,581

23,192

Retained earnings

 

23,454

18,868

Total equity

 

79,651

76,103

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of changes in equity

For the year ended 31 December 2020

 

 

Share Capital

Other reserves

Share premium

Retained earnings

Total

 

£'000

£'000

£'000

£'000

£'000

As at 1 January 2019

17,297

21,788

11,643

13,066

63,794

Profit for the year

-

-

-

8,604

8,604

Revaluation deficit

-

(10)

-

-

(10)

Revaluation surplus

-

801

-

-

801

Deferred taxation on revaluation

-

(134)

-

-

(134)

Currency difference

-

-

-

67

67

Total comprehensive income

-

657

-

8,671

9,328

Share based payment

-

765

-

-

765

Shares issued during the year

1,201

-

3,902

-

5,103

Transfer to retained earnings

-

(18)

-

18

-

Dividend paid

-

-

-

(2,887)

(2,887)

At 31 December 2019

18,498

23,192

15,545

18,868

76,103

Profit for the year

-

-

-

4,933

4,933

Revaluation deficit

-

(3,710)

-

-

(3,710)

Revaluation surplus

-

1,571

-

-

1,571

Deferred taxation on revaluation

-

280

-

-

280

Currency difference

-

66

-

-

66

Total comprehensive income

-

(1,793)

-

4,933

3,140

Transfer between reserves

-

67

-

(67)

-

Share based payment

-

1,099

-

-

1,099

Shares issued during the year

44

-

86

-

129

Released on maturity of options

200

(983)

-

783

-

Dividend paid

47

-

196

(1,064)

(821)

At 31 December 2020

18,789

21,581

15,827

23,454

79,651

             

 

 

 

 

Consolidated Statement of cash flows

For the year ended 31 December 2020

 

 

 

 

2020

2019

 

 

£'000

£'000

Cash flows from operating activities

 

 

 

Profit before taxation

 

6,871

10,368

Loss/ (profit) on disposal of fixed assets

 

119

247

Finance expense

 

713

698

Depreciation

 

3,544

3,313

Amortisation

 

1,170

1,165

Bargain purchase

 

-

(2,422)

Share based payment charge

 

899

765

Cash flow from operations before changes in working capital

 

13,316

14,134

(Increase) / decrease in inventories

 

(234)

822

(Increase) / decrease in receivables

 

(2,422)

37

Increase in payables

 

2,223

1,629

Net cash generated by operations

 

12,883

16,622

Taxation paid

 

(2,501)

(2,105)

Net cash generated by operating activities

 

10,382

14,517

Cash flows from investing activities

 

 

 

Purchase of subsidiary undertaking net of cash acquired

 

-

(6,202)

Purchase of property, plant and equipment

 

(1,241)

(2,412)

Net cash used in investing activities

 

(1,241)

(8,614)

Cash flows from financing activities

 

 

 

Proceeds of loan drawdown

 

3,000

5,100

Adjustment in respect of IFRS16

 

(656)

(646)

Repayment of interest bearing liabilities

 

(12,977)

(1,990)

Interest paid

 

(713)

(698)

Proceeds of share issue

 

129

4,704

Dividend paid

 

(821)

(2,488)

Net cash (used in)/generated by financing activities

 

(12,038)

3,982

Net (decrease)/increase/ in cash and cash equivalents

 

(2,897)

9,885

Cash and cash equivalents at the beginning of the year

 

15,140

5,255

Cash and cash equivalents at the end of the year

 

12,243

15,140

 

 

 

 

Cash and cash equivalents comprise:

 

 

 

Cash at bank and in hand

 

12,243

15,140

Bank overdraft

 

-

-

 

 

12,243

15,140