In variable market conditions, Low & Bonar achieved underlying revenue growth boosted by translation effects on a reported basis. Underlying EBIT showed year-on-year progress despite a net drag from exogenous macro factors (ie favourable FX and adverse input cost movements); better volumes and improved operating efficiencies contributed to this outturn. Working capital outflows were greater than normal during the first half but are expected to unwind during H2. The company continues to invest in capacity, capability and new product development.
Exhibit 1: Low & Bonar interim and divisional splits
£m |
H116 |
H216 |
FY16 |
H117 |
|
Reported |
CER |
Volume |
% change |
% change |
% change |
Group revenue |
180.6 |
221.6 |
402.2 |
210.3 |
|
16.4% |
4.6% |
3% |
Building & Industrial |
31.8 |
41.6 |
73.4 |
40.9 |
|
28.6% |
14.2% |
13% |
Civil Engineering |
39.5 |
51.3 |
90.8 |
45.8 |
|
15.9% |
5.0% |
9% |
Coated Technical Textiles |
60.1 |
71.9 |
132.0 |
66.5 |
|
10.6% |
-0.2% |
-6% |
Interiors & Transport |
49.2 |
56.8 |
106.0 |
57.1 |
|
16.1% |
3.8% |
4% |
|
|
|
|
|
|
|
|
|
Group EBIT – reported (post SBP) |
13.3 |
21.4 |
34.7 |
15.5 |
|
16.5% |
3.3% |
|
Building & Industrial |
4.5 |
6.4 |
10.9 |
6.0 |
|
33.3% |
17.6% |
|
Civil Engineering |
1.0 |
`3.2 |
4.2 |
0.0 |
|
-100.0% |
-100.0% |
|
Coated Technical Textiles |
3.5 |
5.2 |
8.7 |
4.9 |
|
40.0% |
32.4% |
|
Interiors & Transport |
7.3 |
9.8 |
17.1 |
7.9 |
|
8.2% |
-3.7% |
|
Unallocated central costs |
-3.0 |
-3.2 |
-6.2 |
-3.3 |
|
|
|
|
Building & Industrial
Technical textiles, mats, composites, systems and screens for a range of applications
Building & Industrial (B&I) was the standout performer, driven by volume progression with building (especially roofing-related) markets in North America and cabin air filtration carrier media both showing healthy year-on-year gains. This gave a slightly more favourable product mix than the prior year and it also achieved some pass through of rising input prices. As a consequence of these features, this business unit overall achieved a 50bp margin increase (to 14.7%). Walflor (acquired in January 2017) contributed £0.4m revenue and £0.1m to EBIT in the period. Agricultural film lines (crop and greenhouse covers) have experienced production problems in recent periods and management has decided to dispose of this business and its Lokeren site. The expected completion date is September so there will be a limited impact on FY17 results; the business generates annualised revenue of c £20m and negligible profitability. Gross proceeds of c €7m/£6.1m (£5.1m net) are to be used to reduce group debt.
Civil Engineering
Geotextiles and construction fibres contributing to groundworks integrity in infrastructure projects
Since acquiring Texiplast in FY13, this business unit has sought to increase its presence in the more technical, project-oriented specification segments but has struggled for momentum in relatively lacklustre markets. Latterly, greater emphasis has been placed on creating closer relationships with customers, specifiers and contractors. Volumes were indeed more encouraging in H1 and enquiries arising from higher-margin specification projects are understood to have been good. However, the phasing of these projects is H2 weighted. In the more competitive transactional or stock lines it has been more difficult to pass through input cost increases and, taken together, this resulted in an adverse product mix in H1 and a break-even reported position. It is anticipated that these effects will reverse in H2 – through both mix and pricing – to generate a better H2 profit performance. That said, the likely full year outturn is probably not up to earlier expectations in our view.
Coated Technical Textiles
Specialist coated woven carrier fabrics for a range of primarily outdoor applications
A reassuringly strong result from Coated Technical Textiles (CTT) confirmed that the regained manufacturing stability seen in H216 was sustained. The slightly counterintuitive combination of lower volume and improved profitability reflected better product mix, some pass through of rising input costs and re-embedded operating efficiencies. Consequently, CTT saw much improved profitability and, including FX translation benefits also, the business unit was a significant contributor to the uplift in underlying group EBIT. A higher proportion of tensile architectural membrane project work should have been beneficial for both manufacturing (ie longer volume runs) and margin. This business unit is still restoring customer goodwill from production problems a year earlier. In the trailer side-curtain market indications are understood to be positive for overall demand and management’s expectation is for a continuing recovery in volume in this segment in H2.
Interiors & Transportation
Leading provider of technical non-woven carpet-backing materials, branded as Colback
Revenue rose in line with volume; with mix considered to have been a neutral factor it seems likely that higher input costs were largely absorbed and perhaps partially offset by operating efficiencies, especially in China. The divisional EBIT margin came in at 13.8%; this was 100bp below the prior year and stated as being within a normal, sustainable range. That said, Interiors & Transportation (I&T) has typically reported higher H2 margins and we expect the FY17 level to be above the H117 level. Interiors (ie commercial flooring backing materials) is the dominant sub-segment and in H1 itself demand in North America and China has remained strong. China has also seen rising export sales such that the Changzhou greenfield plant commissioned in H116 is now running at full capacity. Consequently, construction of phase II (a second manufacturing line) is now underway, as previously flagged, and is expected to be commissioned in early 2018. The Transportation sub-segment has been less buoyant; this has been attributed to a combination of marque specific-issues as well as some platform changes though we suspect that underlying European demand has been patchy. Nevertheless, with input cost pressures easing and continuing momentum in Interiors this business unit looks set to again deliver a good H2 profit contribution.
H1 cash outflow expected to reverse in H2
Low & Bonar normally experiences an increase in working capital during its first half trading period, primarily reflecting the pattern of demand in the building and construction markets that it addresses. This effect was apparent again in H117 and to a slightly greater extent than in the prior year. Reported net debt at the end of May was £149m, up from £111m at the end of FY16 (and compared to c £140m a year earlier). Of the £38m increase in H1, the majority reflected underlying cash flow items with just over £2m due to FX translation effects.
At the trading level, the c £3m EBITDA uplift (to £24.7m) was substantially absorbed by c £2m higher working capital outflow (to £27.8m), being the primary components of the c £4m overall operating cash outflow. There was a £2-3m impact on working capital from rising input prices though we believe that the primary difference compared to H116 was due to the pattern of demand for civil engineering projects leading to higher than normal inventory levels in that business unit.
Below this, interest and cash tax outflows together matched the prior year level albeit with a different mix with beneficial debt refinancing (in H216) and rising profit/rising tax effects offsetting each other. As expected, business investment continued at relatively high levels in H1 with I&T’s China phase II project boosting capex to £12.8m (vs depreciation £8.0m) and the implementation of a new ERP system (in Europe initially) costing a further £2.2m. M&A transactions (ie the acquisition of Walflor for £2.9m and initial grass yarns disposal proceeds of £1.5m) resulted in a small net cash outflow in the period while rising dividend cash payments reflected previously declared payouts.
Cash outlook: Management’s expectation is for net debt to reduce to the 1.8x to 2.0x EBITDA range by the end of FY17 (compared to a company-defined c 2.5x on a trailing 12-month basis at the interim stage). Our model indicates an outturn at the upper end of this range and, in monetary terms, this equates to net debt of c £118m. The major elements of this expected H2 cash inflow are:
■
Seasonal EBIT uptick – our estimates are consistent with the split of profitability seen in the last two years, with just under 40% coming in H1 and just over 60% in H2. As mentioned before, this H2 bias is most pronounced in B&I and Civil Engineering but is also a feature of I&T profit performance.
■
Seasonal WC inflow – management has stated that it expects substantially all of the H1 outflow to reverse in H2 with normal trading effects and some project-specific shipments. Our model factors in a full year outflow of £3.5m compared to the £27.8m outflow seen in H1.
■
Ongoing investment – as referenced above, the construction and equipment cost of the second phase of Low & Bonar’s Changzhou facility will substantially fall into H217 and the roll-out of the company’s new ERP system will be ongoing. Consequently, we assume that total FY17 fixed investment will be £35m (unchanged), split c £31m capex and c £4m on intangibles. This requires a c £20m capital outlay in H2.
Taking account of all items (including pension deficit recovery cash in line with the prior year) we anticipate that Low & Bonar will be broadly free cash flow neutral overall in FY17. Below this, c £10m dividend payments will be substantially offset by net M&A proceeds (ie c £3m Walflor consideration less proceeds from grass yarns of £3m and Lokeren/agro-textiles £5.1m net) to leave a small underlying outflow for the year overall. Further out, we are currently projecting c £19m free cash generation in each of the following two years or c £8m at the net level, suggesting a modest rate of net debt reduction. Management is understood to be actively considering potential acquisitions; any new transactions will need to be incorporated into the above cash flow profile.
