Pressure Technologies Plc - Full Year Update
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Pressure Technologies plc
("Pressure Technologies" or the "Group")
FULL YEAR TRADING UPDATE
Pressure Technologies (AIM: PRES), the specialist engineering group, provides a trading update for the year to 3 October 2020.
Whilst the Covid-19 pandemic has brought significant challenges to our markets and operations over the course of the financial year, the Group continues to make good progress against strategic priorities. The investments made since 2019 have underpinned growing diversification and sustainability in both divisions this year, evidenced by new customer acquisitions and new market development. However, tougher trading conditions, Covid-19 disruption and the previously announced deferral of revenue and profit for a defence contract into FY21 resulted in a reduction in Group revenue for the year to approximately £25 million (2019: £28.3 million) and overall the Group is expected to deliver an adjusted(1) operating loss for the year (2019: £2.2 million profit).
CHESTERFIELD SPECIAL CYLINDERS
The Chesterfield Special Cylinders ("CSC") division delivered revenue of approximately £11 million (2019: £13.9 million) and is expected to break even at the adjusted operating profit level. The phasing of major defence contracts resulted in significantly lower revenue in the year, driving lower overall gross margin performance, which was further compounded by the previously announced deferral of revenue on a defence contract from Q4 FY20 into Q1 FY21.
The diversification of end markets in CSC continues to reduce the historical dependence on the oil and gas sector and over the year, CSC secured major contracts with established UK and export defence customers and won a second major contract to supply nitrogen storage solutions for UK nuclear power customer EDF Energy, as previously announced. Good progress also continues to be made in the rapidly developing hydrogen energy market. Three contracts for transport refuelling high-pressure storage were successfully completed over the past two years for customers including ITM Power and Haskel, with three further projects currently in production.
As expected, following a strong start to the year, CSC's Integrity Management services were heavily impacted by Covid-19 travel restrictions from March 2020 onwards, causing disruption to ongoing overseas projects and the deferral of several UK deployments. Despite these challenges, strong growth was delivered for the fifth consecutive year, driven by in-situ inspection and recertification projects for the UK submarine and surface vessel fleets.
PRECISION MACHINED COMPONENTS
Despite very challenging trading conditions in the oil and gas market during the second half of the year, the Precision Machined Components ("PMC") division delivered full-year revenue of approximately £14 million (2019: £14.4 million), but is expected to make an operating loss, driven by lower than expected gross margins, as poor operational performance in the first half of the year failed to improve in the second half.
A depressed oil price has resulted in continued disruption and uncertainty for our oil and gas OEM customers and the deferral of project spend. Consequently, order intake in the second half fell sharply and the divisional order book at the start of FY21 was less than half the pre-pandemic value six months earlier. Significantly higher indirect costs and depreciation following two years of growth investment were not fully offset by the proactive steps taken early in the second half of the year to limit the impact of trading conditions on the division. These actions included closure of the persistently loss-making Quadscot operation, management restructuring and the implementation of other cost saving and cash preservation measures, whilst seeking to protect core capability. Whilst the consolidation of the Quadscot operation and order book into our Roota facility through the peak of Covid-19 disruption took longer than expected and adversely impacted divisional margins and customer delivery schedules, this transition has now resulted in a lower cost base and increased utilisation of capacity across the remaining sites.
Further progress was made during the year with diversifying the customer base and extending our range of precision machined components for specialised oil and gas applications. This includes long-term strategic supply agreements being signed or under negotiation with key OEM customers, demonstrating their confidence in PMC's products and service levels as they seek to consolidate their approved supplier lists. The investment in new production management systems and the use of data to drive production scheduling and customer reporting is starting to deliver improvements, most notably to on-time delivery performance with key customers. The investment in production engineering capability and new advanced machining centres have also helped deliver significant time and cost savings in the production of familiar and new component designs, which will contribute to improved margins and competitiveness through shorter lead times.
The current trading performance and medium-term outlook of our OEM customers regarding the depressed oil and gas market has driven an impairment review of the goodwill and other intangible assets of the PMC division as they relate to Al-Met, Quadscot, Roota and Martract subsidiaries, acquired by the Group between 2010 and 2016. Lower than previously considered growth rates and higher risk-factored discount rates applied to future cash flows have resulted in a non-cash exceptional impairment to goodwill and other intangible assets of approximately £14 million, which will be reflected in the FY20 Group results.
BANKING AND NET DEBT
We remain in constructive and supportive dialogue with Lloyds Bank regarding the amendment and extension of the Group's Revolving Credit Facility (RCF).
On 3 October 2020, total net borrowings (excluding right of use assets) reduced to £6.4 million (28 September 2019: £11.4 million). The Group's £12.0 million RCF was drawn at £6.8 million (28 September 2019: £10.8 million). Cash and cash equivalents increased to £3.4 million (28 September 2019: £2.2 million) taking net RCF debt down to £3.4 million (28 September 2019: £8.6 million). Finance leases on 3 October 2020 increased slightly to £3.0 million (28 September 2019: £2.8 million). The right of use asset debt recognised in the year under IFRS 16 as leases totalled £1.1 million at the year end.
The significant reduction in total net borrowings was driven principally by the receipt in February 2020 of a £2.1 million prepayment of the Greenlane Renewables Inc. Promissory Note with associated interest and the receipt in July 2020 of £2.6 million from the sale of our shareholding in Greenlane Renewables Inc. Receipt of the outstanding Promissory Note balance of £3.1 million is expected in the second half of FY21.
STRATEGY AND OUTLOOK
The Group's strategy remains focused on the diversification, continued development and organic growth of both divisions.
CSC has a strong order book going into FY21, with high-margin projects, including the defence contract deferred from FY20, weighted to the first half of the year. We will continue to drive the operational improvements that underpin margin growth from established defence and industrial contracts, while strengthening our capability and readiness for further growth in Integrity Management services. Periodic inspection regimes will require product revalidations as current travel restrictions are lifted and the Group expects to see continued growth in Integrity Management services in defence, nuclear power generation and hydrogen energy sectors, where risk management and asset availability are paramount.
Hydrogen energy storage remains an area of strategic focus and significant future growth potential for the Group. The progress already made in this rapidly developing market is expected to continue as governments increasingly acknowledge the role of hydrogen in the overall energy mix, with its contribution to meeting net zero carbon targets in transportation and in decarbonising industry. In addition to the transport refuelling station projects successfully completed or currently in production, CSC has a strong pipeline of opportunities with new and existing partners, including the previously announced five-year framework agreement with Shell Hydrogen for their European refuelling stations. These opportunities are supported by the ongoing development of products and services to reduce through-life cost and risk for the operators of static and mobile hydrogen storage.
In PMC, our priority remains to stabilise and protect the consolidated operations, complete operational improvements and maintain service levels for our growing base of OEM customers, as we seek to conserve cash and recover profitability. As we anticipate at least a further year of challenging trading conditions in a depressed oil and gas market, we continue to appraise opportunities for our specialist engineering capability in other sectors.
Chris Walters, Chief Executive of Pressure Technologies commented:
" Despite challenging trading conditions, we have continued to make strategic progress through FY20 with increased diversification of the customer base in both divisions.
Recent major contract wins and the further growth in Integrity Management services have strengthened the outlook for CSC. I am also really encouraged by the progress made in the rapidly developing hydrogen energy sector, where our successful development of products and services for high-pressure hydrogen storage has been followed by new projects and a growing pipeline of opportunities. A focus on decarbonisation by governments worldwide is establishing hydrogen firmly in the global energy mix and I expect to see this sector become an increasingly significant part of the Group's business over the next few years.
Depressed oil and gas markets and slower than expected turnaround of operational performance have impacted the PMC division and the outlook remains uncertain. Management actions are focused on maintaining customer service levels and completing operational improvements, while preserving cash and protecting the capabilities built over the past two years.
With further UK-wide lockdown restrictions announced in the last week, Covid-19 continues to impact our target markets, our operations and our people. I would like to thank all our employees for their continued hard work and commitment through these challenging times.