Eleco plc
("Eleco" or "the Company" or "the Group")
Trading update
The Board of Eleco, the specialist provider of Building Systems and Software to the construction industry, issues a trading update for the year ended 30 June 2010 in advance of its Preliminary Results in September 2010.
Trading update
Eleco Group
Eleco anticipates that markedly improved profits from its Software operations will be more than offset by significantly greater than anticipated losses from its Building Systems operations, in particular from the precast concrete and timber frame businesses.
As a consequence the Group loss before non-recurring items and reorganisation costs is expected to be significantly worse than anticipated. However it is important to note that Eleco also anticipates that the Group loss after non-recurring items and reorganisation costs but before interest, tax and amortisation will be in line with expectations.
Group net bank indebtedness at 30 June 2010 was marginally lower at £1.9m, compared with net bank indebtedness at 31 December 2009 of £2.1m.
Software
The Group's Software operations continued to grow through the judicious expansion of its core software offerings and the reduction or removal of loss-making businesses. In the UK, Sweden and Germany it has benefited from modestly improving markets.
The Software Division is expected to report a marked improvement in its profitability in the year just ended.
Building Systems
The Building Systems Division has, in contrast, continued to experience adverse trading conditions which, in certain sectors, have continued their decline in recent months. As a consequence a further significant restructuring exercise in the fourth quarter with the objective of restoring profitability across the Division was initiated. The actions taken are referred to in greater detail below.
Bell & Webster Concrete, which is focussed almost entirely on the supply of rooms for custodial, student accommodation and hotel developments, faced the most severe conditions and intense competition. This business has continued to make a loss and is being fundamentally restructured to reflect a lower volume outlook for the foreseeable future. Milbury Concrete Systems which is focussed primarily on the agricultural, storage and retaining wall markets also restructured its operations onto a single site at Lydney and is now profitable.
Timber Engineering, in particular the connector plate businesses in the UK and South Africa, has been successful in winning new business and is well placed to serve a modestly improving market driven by housebuilding volumes. However, ETF, the timber frame manufacturer, suffered from low volumes throughout the year and was loss-making. It has now been restructured and is working with a more active customer base. Downer, the specialist cladding business, successfully and profitably addressed its changing market but the roofing business experienced lower volumes which necessitated significant restructuring of its operations to reduce its cost base and minimise losses.
The Building Systems Division is expected to report a significant loss in the year just ended.
Restructuring and cost reductions
The restructuring of the Group has followed the process set out in the interim statement, as follows:-
· The annual run rate of Central Group costs has been reduced by approximately £0.9m through salary reductions, reduced headcount and other cost savings
· Bell & Webster and Milbury have reduced the number of sites from which they operate, from 5 to 3, and Bell & Webster has fundamentally altered its structure and significantly reduced overhead costs
· Fred Newby, Deputy Chairman is focussed once again exclusively on the management of Bell & Webster, which is being restructured to become a more flexible, high quality producer of rooms with the aim of achieving profitability at much lower volumes
· Further restructuring and cost reduction has been undertaken at ETF, the timber frame, and roofing businesses and the roofing business is being relocated to enable it to offer a comprehensive and enhanced roofing offering from one site which will bring operational improvements in addition to cost reduction
· The sale of the German connector plate business EBP eliminates a business which made a loss of approximately £0.5m in the year just ended.
· Legal costs paid and accrued totalling approximately £1.0m in the year just ended relating to the copyrights of our German connector plate business. No further costs are anticipated following the successful sale of Eleco Bauprodukte GmbH ("EBP")
· A review of the Group's properties has identified opportunities to sell surplus freehold property and to cease certain leases, thus releasing capital, reducing long-term off balance sheet liabilities and reducing overheads. These are currently being implemented
· Following closure of the pension fund to any further benefit accrual in December 2009, the Board of Eleco is now engaging with the Pension Fund Trustees in the proactive management of the scheme liabilities and the Company has commenced discussions with the Pension Trustees based on a series of recommendations from KPMG.
The Company estimates that on an annualised basis Eleco has reduced its costs by more than £4.0m in the year ended 30 June 2010 compared with the prior year.
The Group will continue to implement cost reductions wherever possible to eliminate losses whilst also seeking to grow our profitable businesses. We will also strengthen our sales and marketing resources across the Group wherever this is commercially justifiable.
Eleco Bauprodukte
On 30 June 2010, the Group announced the completion of the sale of EBP, its German connector plate subsidiary, to MiTek Industries GmbH for a total consideration of £3.9million, the terms of which were agreed on 24 April 2010 but the completion of which could not take place until the settlement of certain related legal disputes had also been agreed between the parties. The net asset value of EBP was £0.1m and it made a loss of approximately £0.5m in the year just ended, of which approximately £0.3m was incurred in the period from 1 July 2009 to 24 April 2010.
The sale could not proceed until settlement of related legal disputes between the parties had also been achieved. Therefore, having regard to the complexity of the issues involved and the uncertain time that would elapse before the legal disputes were resolved, the parties agreed that the cash consideration of £3.9 million would be satisfied by the issue to the Group by MiTek of a £3.9 million Loan Note, which would be redeemable on 30 June 2010 and that the Loan Note would carry interest of £0.1m in respect of the period from 24 April 2010, until redemption, on the basis that the parties intended the transaction would be completed at some time in that period. The settlement of the related legal disputes took place on 30 June 2010 and the sale was completed that day.
The £3.9 million cash arising from the redemption of the Loan Note and the £0.1m in respect of the agreed interest due on the Mitek Loan Note in respect of the period from 24 April to 30 June 2010, was duly received on 30 June 2010. As a consequence, Group net bank indebtedness at 30 June 2010 was marginally lower at £1.9m, compared with net bank indebtedness at 31 December 2009 of £2.1m.
Outlook
Eleco is confident that the necessary and significant reduction in the cost base of its Building Systems operations achieved in the year just ended, together with the restructuring of these operations, and the introduction of detailed recovery plans will enhance considerably the Group's ability to compete in this currently difficult market sector. The Group is also encouraged by the resilience and growth shown by its Software operations over the last year.
Eleco will continue to invest in new products and profitable opportunities to expand operations should they arise. However, having regard to continued uncertainty in some markets, the strategy and recovery plans for the year ahead will continue to be driven primarily by cost savings, loss elimination and restructuring benefits and will be dependent to a lesser degree on top line growth.
The £3.9 million cash received from the sale of Eleco Bauprodukte reduced net group borrowings to approximately £1.9 million at the year end. Furthermore the full annualised benefit of the cost reductions across the Group of more than £4.0 million achieved in the year just ended will only be felt in the year ahead. As a consequence, Eleco is now much better placed to achieve its main objectives in the year ahead. These are to maintain its sound financial position, to restore its Building Systems businesses to profitability, to continue the growth of its Software operations and to rebuild shareholder value.
Enquiries:
Eleco plc
John Ketteley - Executive Chairman
Craig Slater - COO
+44 (0)1920 443830
Collins Stewart Europe Limited
Bruce Garrow
+44 (0)20 7523 8000