Pittards plc

("Pittards", the "Group" or the "Company" )

Interim results for the six months ended 30 June 2021

 ("First Half" or "H1")

Positive trading momentum in First Half with improving order book

Continued growth in revenue and profitability

Interim Dividend declared

Pittards plc, the specialist producer of technically advanced leather and luxury leather goods for retailers, manufacturers and distributors, today announces its results for the six month trading period ended 30 June 2021.

Commenting on the results, Chairman,  Stephen Yapp, said:

"I am pleased to report that we are seeing gathering momentum in the Group's recovery. Profitability and cash flow for the First Half are in line with expectations and ahead of the second half of 2020. Our business model continues to evolve and during the period we invested £0.8m in new product equipment. The Group's entry into several new markets is showing positive returns.

As a measure of confidence in the improving performance and outlook for the business, the Directors are pleased to declare an interim dividend of 0.5p per share. We are looking forward to the next phase of profitable growth and reporting continued progress at the full year."

Highlights: Financial

·    Group revenues up 46% to £9.7 million (H1 2020: £6.6 million)

·    Gross margin of 28% (H1 2020: 17%)

·    EBITDA of £0.8 million positive (H1 2020: (negative £1.3m)) an improvement of £2.1m

·    Profit/(Loss) before taxation of £0.3 million (H1 2020: (£2.3 million Loss))

·    Net debt at Period-end reduced to £10.0 million (H1 2020: £11.3 million)

·    Earnings/Loss per share (basic) of 1.55 pence (H1 2020: (17.06 pence Loss))

·    Interim Dividend declared of 0.5 pence per share (H1 2020: Nil)

Highlights: Operational

·    Major capital investment of £0.8 million in new production equipment (now fully commissioned) to meet increasing demand

·    Sales Order Book at highest level for two years.

·    Increasingly diversified portfolio of products and markets; entry into several new markets showing positive returns

·    Successful implementation of The DWP's "Kickstart" Scheme

·    Ethiopian business showing increased activity in the finished products side with encouraging order book

·    Launch of new Tri Protex antimicrobial leather

Commenting on the outlook for the Full Year, Reg Hankey, Chief Executive said:

"There have been clear signs of a continued recovery in sales since the half year, evidenced by a progressively improving order book. We continue to see more opportunity than risk in the "new normal" that is emerging from the pandemic. As we head towards the end of the year we can build on our existing, agile, cash generative business model that is able to sustain a programme of modest investment as well as consistent returns for shareholders."

Overview

We were able to grow both sales and order book during the First Half period and improve profitability. Over 84% of our sales are exported down from 89% in 2019, as growth accelerated in the UK market. The national lock down in January 2021 and Brexit, resulted in slower logistics (international shipping market), travel and consequently operating the business remained more challenging than normal during the First Half.

We invested heavily in new production equipment in the First Half, in response to a growing, broader production range and the need to balance labour costs and improve delivery performance. This investment (£0.8m) impacted operational progress in the First Half as machinery was procured and installed but leaves us well placed to meet increasing customer demand efficiently and effectively.

Our operations in Ethiopia have not escaped the impact of COVID-19 but have adopted best practice for infection control and safety. We progressed our ability to mass produce finished footwear and we have maintained operations as normal, throughout the First Half.

The group continues to adopt a strict cash management policy, which has delivered improvements in fixed costs, particularly administrative costs and to a lesser extent inventory, notwithstanding challenges within the shipping market.

Strategic and operational review

Sales in the First Half were £9.7m, up 12% on the second half of 2020 (H2 2020: £8.6m) and up 46% on the corresponding six month period last year (H1 2020: £6.6m). Sales are being underpinned by an improving order book, which is also providing greater forward visibility. Our core customer base is recovering at a steady pace. New growth markets continue to develop, principally, the shoe sector, although automotive and mass transit interiors have yet to recover.

The First Half closed with a positive sales order book, ahead of the start of the year and the highest for two years. Golf, defence, cycling, speciality endurance gloves and sports in general continued to recover.

Underlying margins have maintained their positive momentum, despite a weaker dollar and rising material prices. We anticipate margins will now stabilise following significant investment in people and production equipment. With a more diversified portfolio of products and markets, the balance of the business continues to improve as we successfully manage the relationship between cost control and expanding our capabilities, whilst maintaining the quality of our offering.

Innovation remains central to what we do. We launched at the end of December a new Tri Protex antimicrobial leather and are developing a further product line for advanced fire-retardant leather into Rail applications.

Dividend

The board is also pleased to announce the Company's return to the Dividend List. As a measure of its confidence in the improving performance and outlook for the business, the Directors are declaring an interim dividend of 0.5p per share. The interim dividend will be paid by 25 November 2021 to shareholders on the register at close of business on 29 October 2021. The shares will go ex-dividend on 28 October 2021.

Outlook 

There have been clear signs of a continued recovery in sales since the half year, evidenced with a progressively improving order book. We are cautiously optimistic that the positive sales trend will continue for the remainder of the year.

Our management of cash in the First Half of the year gives us confidence to pay the interim dividend and that we can continue to progress well in the second half and improve our profitability.

Our Ethiopian business is showing increased activity in the finished product side and has recovered some ground from earlier in the year, with an encouraging order book to fulfil in the second half.

We see more opportunity than risk in the "new normal" that is emerging from the pandemic. As we head towards the end of the year, we can build on our existing agile, cash generative business model, that is able to sustain a programme of modest investment, as well as consistent returns to attract and retain a long term investor base.

Overview

Key financial metrics were in line with our expectations. Recovery of demand was assisted by the Department for Work and Pensions (DWP) 'Kickstart Scheme'. This enabled us to address a rising order book, as we were able to increase our headcount above 2020 levels. Our re-shaped cost base enabled us to access sustained fixed cost reduction. In addition, our capital investment programme of £0.8m in plant equipment, principally a Vacuum Dryer and Hide Splitter for our key production volume resulted in our largest six monthly spend (excluding buildings) in over eight years. This investment has sowed the seeds for the second half and beyond to improve efficiency.

Profitability

Profit before tax in the First Half amounted to £0.3m, an improvement of £0.3m over the "breakeven" result for the second half of 2020. This was mostly due to increases in volume and margins combined with tight cost control. Gross margins rose to 28% (second half 2020: 24%) as capacity increased. Pure variable material margin ( defined as sales less variable material costs) have eased at the start of the second half, with raw material prices now weighing on our pure variable margins.  However, production investment and a better mix of business is expected to offset these effects to maintain our overall gross margins, along with higher production levels.

Financial support and banking facilities

We have made final furlough claims of £3k to the end of February 2021, and a repayment of £34k in March, resulting in a net repayment of £31k of furlough during the first quarter of 2021, meaning we were financial independent of furlough since October 2020.  No further furlough claims were made or are planned for 2021. We have established a team of 14 Kickstart staff, receiving funding from Kickstart (DWP) of £0.1m during the First Half. Our Coronavirus Business Interruption Loan Scheme (CBILS) of £1m, is repayable over five years and has reverted to commercial terms, with repayments made monthly through to 2026. We have not sought a new source of CBILS funding or any extension but have extended our standard bank facilities by £0.5m, to support First Half capital investment through a five year asset finance facility which was put in place during the First Half.

Cost control and productivity

Headcount has stabilised at 1,125 as at 30 June 2021, a rise from our 2020 year end, marking a return to recruitment to enable our capacity to respond to an increased level of demand as our markets recover. It is pleasing to report the successful implementation of the DWP's Kickstart Scheme which has lowered the average age of staff by seven years and rebalanced the shape of our production and sales-centric staff. Administrative staff now represent just four per cent of the total headcount, compared to eight per cent in 2019. We experienced increased haulage costs in the first half, due to delays and shortages in international shipping logistics.

Assets and currency

At the end of the First Half, net assets stood at £13.6m (December 2020: £13.9m), the small reduction due entirely to the devaluation of the Ethiopian BIRR on foreign subsidiary net assets. Net debt improved modestly by £0.1m to £10.0m (£10.1m: 31 December 2020), despite significant investment in production equipment amounting to £0.8m. We continue to hedge the US dollar to balance currency risks and have some cover through to March 2023.  Currency gains in the period were £0.2m due to the dollar being much weaker on average than our hedged position. The dollar to GBP exchange rate has since recovered to trade in line with our average hedged cover at $1.364. Facilities headroom at the half year, of £2.8m (31 December 2020: £3.3m).

Energy costs

In light of recent volatility in the energy markets, we confirm that we have adequate hedging in place for energy contracts through to September 2022, and these contracts are included in our forecasts. The financial stability of our suppliers are satisfactory and therefore the price instability in the wholesale gas market will not materially impact the group during 2021.

Working capital

Inventory levels reduced slightly to £14.97m (31 December 2020: £15.02m) at the half year.  Logistics, including getting product in and out the business, remain challenging as we had much higher levels of inventory in transit, masking the steady progress achieved in reducing older stock. Our current inventory levels are the lowest for nine years. Due to longer shipping times and challenge getting shipping slots we estimate that inventory was increased by £0.6m.

Our supplier average payment days rose to 64 days at the end of June (2020: 59 days). Our customer average days to pay rose also to 66 days (H1 2020: 61 days). The increase in debtor days was mostly almost entirely to a change in mix of customers.

Gearing

Our gearing was slightly higher at 74.1% (2020: 73.2%), due entirely to the devaluation of the Ethiopian BIRR affecting the net asset value of our Ethiopian businesses, otherwise gearing would have improved to 72.6%. The devaluation lowers the future operating costs relating to the supply of skins into the UK making up circa half our production volume.

Share buybacks

In July the company announced a share buyback program to enable market purchases to continue to build a sufficient level to meet existing LTIP obligations. To date the company has purchased 40,000 shares taking our treasury shareholding to 974,210, shares resulting in our current market value of our treasury shares being £613,752 based on the closing price on the 22 Sept 2021.

Second half of 2021

Our order book is sufficient to cover the remaining budgeted sales through to the end of the year. The stability of margins, a leaner cost base, our hedging strategy, new equipment and a re-energised team together give us greater confidence in the predictability of future earnings.

Note 6 - Availability of interim report

The interim report will be available at the Group's website, at www.pittards.com, in accordance with AIM rule 20.

Certain information contained in this announcement would have constituted inside information (as defined by Article 7 of Regulation (EU) No 596/2014) ("MAR") prior to its release as part of this announcement and is disclosed in accordance with the Company's obligations under Article 17 of MAR.

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