19 September 2018

Elektron Technology plc

Half year results for the six months ended 31 July 2018

Elektron Technology plc (AIM: EKT, "Elektron" or the "Group"), the global technology group, has published its results for the six months ended 31 July 2018 ("H1 FY19" or the "Period")

Performance*

·    Group revenue: £15.9m (up 17%) (H1 FY18: £13.6m)

·    Bulgin revenues up 14%; Checkit revenues up 146%; EET revenues up 33%

·    Operating profit (including Checkit) of £1.4m (H1 FY18: £0.5m), up 180%

·    Operating profit from businesses excluding Checkit: £3.6m (up 29%) (H1 FY18: £2.8m)

·    Checkit losses lower at £2.2m (H1 FY18: £2.3m)

·    EET returned to breakeven

·    Sale of Queensgate Nano for initial consideration of £0.8m with up to a further £0.8m deferred consideration based on Queensgate Nano revenue performance of which £0.1m has been received since end of July

·    Net cash balances at £6.8m (31 July 2017: £2.1m; 31 January 2018: £5.2m)

·    Positive outlook for H2 and beyond

*   Figures for continuing operations, except where otherwise stated.

John Wilson, Chief Executive Officer of Elektron, said:

"Strong double digit sales growth during the first half of the year is representative of the continuing multi-year transformation of our business.  The Board retains its positive outlook for the medium to long term prospects of the Group."

 For further information:

The information communicated in this announcement is inside information for the purposes of Article 7 of Regulation 596/2014.

Notes to Editors:

Elektron conceives, designs and markets innovative products and services for business that connect, monitor and control. We have a multi skilled team of engineers, software and product line specialists based in Cambridge focused on the opportunities created by global growth in the following areas:

- Demand for ubiquitous power and data: Bulgin

- Real-time operations management using Internet of Things (IoT) technology: Checkit

- Screening for the effects of ageing on sight: Elektron Eye Technology

Chairman and Chief Executive Officer's statement

Overview

The Group's improved performance during the first six months of the year represents a continuation of the strong performance delivered in the last financial year as part of the multi-year transformation of the Elektron Group.  Bulgin continues to deliver organic sales growth, with class-leading margins, Checkit sales have more than doubled as the business has transitioned from start-up to scale-up mode and EET has eliminated its trading losses through sales growth.

Group EBITDA increased by 63% to £2.6m (H1 FY18: £1.6m), resulting in a near threefold increase in operating profit to £1.4m (H1 FY18: £0.5m).  Following the sale of Queensgate shortly after the year end,  which generated £0.8m of cash proceeds, and strong operating cash flow, the net cash position improved to £6.8m from £5.2m at 31 January 2018 (H1 FY18:£2.1m).

As a result of the sale of Queensgate, and Sheen in the prior year, the Group was carrying around £0.5m of excess overhead at the start of the year.  During the first half a headcount reduction initiative was implemented and completed to remove this overhead, the benefit of which will be felt in the second half and going forward.

Bulgin

Bulgin designs and manufactures niche, ruggedised products used in harsh environments in which a high degree of ingress protection is required. 

The first half of FY19 saw Bulgin sales of £14.3m, an increase of 14.4% over the prior year (H1 FY18: £12.5m), and record order intake levels which were 10% higher than the previous year, which was in itself up 20% over FY17.  The increase in sales and orders has been driven through successful implementation of Bulgin's growth strategy, with the Board expecting full year revenues to remain ahead of last year.

Bulgin has again achieved underlying margin improvement, with net operating margin of 25% (H1 FY18: 24%), benefiting from an operational gearing effect which also served to push up gross margin to 47% (H1 FY18: 46%).  In the period Bulgin experienced unprecedented demand for a number of products outstripping capacity and necessitating a short-term outsourcing initiative in Tunisia. Capacity in our Tunis facility is currently being increased through a combination of additional labour capacity and modest investment in machinery.  This will serve to improve margins further in the medium to long term. ROCE for Bulgin has increased to in excess of 150%.

In April, Bulgin announced a distribution partnership with Arrow Electronics Inc, the world's largest electronic component distributor.  Initial stocking orders of over $0.7m were received during H1 and these were delivered to Arrow in the first two months of the second half.

Bulgin now operates in a relatively cost-insensitive market and, whilst subject to distributor stocking and destocking cycles, has increased the number of end users during the last three years at a rate of 5% CAGR.  The number of end users is estimated to be in excess of 80,000. This has been achieved through a fourfold increase in addressable market during that period as a result of new product launches and supplemented by:

·    expansion and optimisation of the distribution channel;

·    substantially improved marketing collateral and product videos; and

·    incentivisation of the distribution sales force.

To facilitate further growth, by increasing the number of end users and adoption of a higher proportion of Bulgin's product portfolio by these end users, Bulgin has an aggressive rolling 24-month roadmap, with a target of eight to ten new product launches per year.

Bulgin has launched five new products during H1 FY19:

·    4000 series fibre connector - features a quick-turn coupling mechanism perfect for data applications across a wide variety of markets requiring fast, dustproof and watertight data through fibre connections;

·    Cat 6 ethernet connector -  a gold standard waterproof circular connector for use in a wide variety of end markets from general industrial through to marine;

·    X-Code M-series connector range - has a high degree of mechanical and electrical stability providing a cost effective and flexible connectivity solution across a wide spectrum of industries;

·    "Smart" programmable connector - a connector with memory, designed initially for the Agtech industry, but has a broad range of industrial uses; and

·    4000 series pole extension range- a compact and versatile connector suited to harsh environments where space is at a premium.

Historically, Bulgin's core market has been one of low growth and low profitability.  The strategic transformation of the Bulgin business has been designed to focus on exploiting growth markets through innovative new products to unlock higher levels of sales and margin growth.  The results for H1 FY19 demonstrate the continued successful execution of this.

Checkit

Checkit revenues increased to £0.4m, up 146% over the prior year, in line with the Board's expectations.  Losses of £2.2m were also in line with expectations, and were lower than prior year (H1 FY18: £2.3m).  Cash expenditure was £1.8m (H1 FY18: £1.7m), which includes capitalised development costs of £0.5m (H1 FY18: £0.3m). The increase in cash spend was a result of accelerating product development highlighted in the section below.

Contracted annualised recurring revenues at 31 July were £1.1m (31 July 2017: £0.5m), an increase of 120%.

Checkit provides real-time operations management for businesses that need to ensure reliable, efficient performance of front-line and field-based staff involved in service provision. This is an area where the adoption of technology has been generally slow to date. Checkit has the opportunity to seize a first mover advantage in its nascent market which is currently occupied by a large number of small players offering a variety of overlapping but non-identical niche services. Checkit aims to be a comprehensive operational system with an ambitious product roadmap (as set out further below).

Unlike paper-based checklists (which are still the norm in many service-based businesses), Checkit ensures the efficient execution of activities, providing top to bottom visibility of work as it happens.

In contrast to existing workflow and process management technologies, Checkit rapidly creates easy to use applications for those staff who are focused on scheduling and managing work together with the capability to integrate with sensors and the environment.

The result for customers is improved business performance through:

•        Revenue - from consistently delivering intended service experience and freeing up time to focus on customers.

•        Productivity - from automation and streamlining of front-line work and improving management efficiency.

•        Risk - from improved compliance, enforcement and visibility.

Market development

Since launch, Checkit's go-to-market focus has been on food service, initially in the UK, with customers including Center Parcs, Claridge's, Compass, Dishoom, George's Tradition, Jamie's Italian, John Lewis, Merlin Entertainments and Sodexo.   The strategy has focused on adoption by large/medium sized organisations with multiple sites, where Checkit's focus on operational consistency and visibility delivers value.  This trend is continuing, with pilots signed up in a range of major national retail and fast food franchise organisations.

Checkit has also developed a strong offering for smaller food service businesses to digitise the management of their food safety and other key management tasks.  We have recently entered an arrangement to better access this segment of the market through a partnership with Just Eat, whereby Just Eat will promote Checkit to its 20,000+ UK partners.  We are progressing streamlining the process to permit sign-up of these businesses through the use of eCommerce.

Checkit's vision extends well beyond food, to anywhere that people need to perform regular checks, tasks and workflows.  Regular room and facilities checks form a significant additional opportunity.  We have recently started a pilot roll-out in a major UK hotel chain to support quality and operational assurance.  We estimate that the global hotel chain opportunity for this kind of activity represents a further £400m annual opportunity and the facilities management sector at least another £300m in the UK and US alone.

Adoption of the product within large national and multinational companies normally follows a three stage process and each stage may take up to 6 months:

Stage 1: Single site pilot

Stage 2: Up to 10 sites pilot

Stage 3: Full roll out

In addition to the Stage 1 opportunity with the hotel chain mentioned above Checkit currently has Stage 1 pilots planned with a major UK supermarket, a multinational petrol station chain and a global pharmaceutical company.

Checkit has accelerated its US launch with business development activities underway and a number of promising projects in discussion.  The Board estimates that the UK and US food service markets together represent a potential market of £1.2 billion annually, with the US representing £1 billion of this.  Additionally we are seeing interest from mainland Europe, with potential projects identified in France and Germany.

Checkit product development

Checkit continues to invest in its products on initiatives that support market development and respond to customer feedback.   The sea change this year is the creation of a new version of our Work Management app that will run on a wider range of devices and provide enhanced check types and workflow capabilities. This is currently undergoing beta trials. When fully launched the new Checkit system will be able to operate externally (i.e. it will not need to be located within buildings that are equipped with wifi). As a result its market will expand substantially. We are currently engaged in a market sizing exercise.

Other key developments that support these initiatives this year are:

-      Internationalisation of software and hardware to support global expansion;

-      Development of out-of-the-box KPIs for businesses using Checkit Operational Intelligence dashboards to improve visibility and analysis for management;

-      Location based capabilities to support applications beyond the kitchen in facilities and hotel management; and

-      Enhancements to sensor network hardware to simplify installation, reduce hardware requirements for customer sites and improve remote support.

Checkit is continually capturing large quantities of data.  Our strategy is to look for ways to leverage that data set, our industry knowledge and AI technologies to develop insights and added value services that will further improve efficiency and business insights for our clients.  Examples of R&D topics include recognising performance issues with different types of equipment and predicting failures, identifying unusual and potentially problematic or even fraudulent user behaviour, and predicting future unit performance and business issues early.

Planning has already started for the next phase of the product roadmap which next year will bring many further new exciting features for the benefit of our growing base of existing and prospective customers.

Elektron Eye Technology (EET)

A strong H1 performance for EET resulted in sales of £1.2m; an increase of 33% over the prior year (H1 FY18: £0.9m) helped by a much improved distribution channel and the pulling forward of scheduled orders by a large distributor. It is expected that year to date performance, combined with a strong order book, will result in full-year growth over the prior year (although the second half is not expected to be as strong as first half performance), as the benefit of management changes made in H1 FY18 begin to take effect.  Sales growth and lower overhead have resulted in the elimination of losses in EET.

As previously reported, new leadership has focused on the professionalising of sales and marketing activity over the last twelve months. This has enabled the steady expansion of the distribution channel with new partners signed up in France (Henson) and Australia (MPS II) during the period. In addition, registration of the Henson 9000 product has now been achieved in Brazil, as interest in the product increases in Latin America, whilst relationships are also being built with China, a market in which the MPS II has particular potential as a sales enablement tool for businesses in the fast-growing vitamins, minerals and nutritional herbal supplements (VMHS) space.

Alongside this strategic channel expansion programme, EET is working on further enhancing the clinical reputation of its products. The Henson 9000 has been a market leader in the UK since its release in 2014 where it dominates the optometry sector. Its use in research studies at Manchester Royal Eye Hospital and in a multi-centre project in India, both set up this year, will serve to strengthen its reputation internationally and support our partners' sales activities as the business continues its drive for greater market share away from its home market.

Brexit

The Group's established Brexit Committee continues to monitor developments in respect of the ongoing Brexit negotiations. As a precautionary measure it is evaluating a number of contingency plans in respect of its  logistics  and supply chain in consultation with its customers and suppliers in the event of a 'no deal' Brexit.

Outlook

The second half of the year has started well, in line with the Board's expectations.  Bulgin maintains record levels of order intake driven by end customer demand. Checkit has a strong UK pipeline and has been launched in the US, ahead of plan.  In addition, EET continues to outpace the prior year.  The Board retains its positive outlook for the second half and in delivering results in line with recently upgraded market expectations for the full year. The medium and long-term indicators and prospects of the Group remain positive. 

Keith Daley

Chairman

John Wilson

Chief Executive Officer

18 September 2018

Consolidated statement of comprehensive income

unaudited interim results to 31 July 2018

The accompanying notes form an integral part of this consolidated interim financial information.

*See Note 5.

Consolidated balance sheet

unaudited at 31 July 2018

The accompanying notes form an integral part of this consolidated interim financial information.

Consolidated statement of changes in equity

unaudited interim results to 31 July 2018

The own shares are held by the Elektron Technology 2012 Employee Benefit Trust.

The accompanying notes form an integral part of this consolidated interim financial information.

Consolidated statement of cash flows

unaudited interim results to 31 July 2018

The accompanying notes form an integral part of this consolidated interim financial information.

Notes to the unaudited interim results

to 31 July 2018

1. Accounting policies

The interim financial information has been prepared on the basis of International Financial Reporting Standards (IFRS) as adopted by the European Union. Full details of accounting policies are included in the Annual Report for the year ended 31 January 2018. Fixed annual charges are apportioned to the interim period on the basis of time elapsed. Other expenses are accrued in accordance with the same principles used in the preparation of the annual accounts.

The Group has not applied IAS 34 "Interim Financial Reporting", which is not mandatory for UK groups, in the preparation of these interim financial statements.

2. Segmental reporting - continuing operations

Revenues

Operating profit/(loss) before non-recurring or special items

Operating profit/(loss)

3. Non-recurring or special items

Non-recurring or special items are disclosed separately to improve visibility of the underlying business performance.

Management has defined such items as restructuring, site closure costs, acquisition costs and other non-recurring items incurred outside the normal course of business.

4. Taxation

The tax charge on profit from continuing operations before taxation has been estimated at £0.3m (31July 2017: £0.2m; 31 January 2018: £0.8m).

5. Discontinued operations

Discontinued operations in the prior full and half-year results comprise the Agar, Carnation, Wallace, Digitron, Titman Tip Tools, Sheen Instruments and Elektron Medical brands together with Queensgate Nano which was sold subsequent to 31 January 2018 on 15 February 2018. The prior year balances have been restated where required.

Queensgate Nano

The results of the Queensgate Nano discontinued operation, which have been included in the consolidated statement of comprehensive income, were as follows:

During the year, Queensgate Nano used less than £0.1m (H1 FY18: £0.4m) of the Group's net operating cash flows, paid less than £0.1m (H1 FY18: £0.1m) in respect of investing activities and paid less than £0.1m (H1 FY18: less than £0.1m) in respect of financing activities.

Details of the disposal of Queensgate Nano are set out below:

Under the terms of the sale the Group has the right to receive up to a further £0.8m based on Queensgate Nano's sales revenues achieving certain targets in the twelve months after completion, of which £0.1m was received in August 2018.

6. Earnings per share

Earnings per share (EPS) is the amount of post-tax profit attributable to each share (excluding those held in the Employee Benefit Trust or by the Company). Basic EPS measures are calculated as the Group profit for the period attributable to equity shareholders divided by the weighted average number of shares in issue during the period. Diluted EPS takes into account the dilutive effect of all outstanding share options priced below the market price, in arriving at the number of shares used in its calculation. Both of these measures are also presented on an adjusted basis, to remove the effects of non-recurring or special items. The note below demonstrates how this calculation has been performed.

The calculation of the basic, adjusted and diluted earnings per share is based on the following data:

7. Cautionary statement

This interim financial information has been prepared only for the shareholders of Elektron as a whole and its sole purpose and use is to assist shareholders to exercise their governance rights. Elektron and its Directors and employees are not responsible for any other purpose or use or to any other person in relation to this report.

The report contains indications of likely future developments and other forward-looking statements that are subject to risk factors associated with, among other things, the economic and business circumstances occurring from time to time in the countries, sectors and business segments in which the Group operates. Key risks and their mitigation have not changed materially in the period from those disclosed on pages 21 to 24 of the annual financial statements for the year ended 31 January 2018.

These and other factors could adversely affect the Group's results, strategy and prospects. Forward-looking statements involve risks, uncertainties and assumptions. They relate to events and/or depend on circumstances in the future which could cause actual results and outcomes to differ materially from those currently anticipated. No obligation is assumed to update any forward-looking statements, whether as a result of new information, future events or otherwise.

8. Other information

The financial information in this statement does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006. The financial information in respect of the year ended 31 January 2018 has been extracted from the statutory accounts, which have been filed with the Registrar of Companies. The Independent auditor's report on those accounts was unqualified and did not contain a statement under Sections 498(2) or 498(3) of the Companies Act 2006.

Copies of the interim results are available to download from the Group's website, www.elektron-technology.com.