A small revenue reduction and larger EBIT decline were the headline features in H118 trading. There were some visible customer and input pricing headwinds, but also some positive underlying performances and further progress with operational improvements. The net debt increase was consistent with historic seasonal patterns, although for different reasons, and the interim dividend was in line with previously rebased guidance. We have reduced our group EBIT margin expectations by 40-50bp, resulting in 5-6% EPS reductions in all three forecast years.
Exhibit 1: Epwin Group interim and divisional splits
£m |
H1 |
H2 |
2017 |
H1 |
|
% change y-o-y H118 |
Group revenue |
149.9 |
148.4 |
298.3 |
142.4 |
|
-5.0% |
Extrusion & Moulding |
91.5 |
92.1 |
183.6 |
88.5 |
|
-3.3% |
Fabrication & Distribution |
58.4 |
56.3 |
114.7 |
53.9 |
|
-7.6% |
Group operating profit |
11.1 |
11.2 |
22.3 |
7.1 |
|
-36.0% |
Extrusion & Moulding |
10.9 |
10.6 |
21.5 |
7.7 |
|
-29.4% |
Fabrication & Distribution |
1.1 |
1.3 |
2.4 |
0.3 |
|
-72.7% |
Group costs |
(0.9) |
(0.7) |
(1.6) |
(0.9) |
|
|
Extrusion & Moulding (E&M): Primarily PVC-based window profile systems, roofline and rainwater goods extrusion activities with wood composite decking products and glass reinforced plastic building products also in the portfolio.
Considering that volumes to E&M’s hitherto largest customer have contracted sharply (as SIG’s building plastics depots were sold to competitor GAP in August last year), the headline revenue decline in this division was not as great as we feared. While the net impact is difficult to quantify (direct sales lost were £6.8m, partly mitigated by retained specification work in some cases), a broadly flat underlying outturn appears likely even after a reduced rate of profile pull-through by the former Entu business (see below). There were clearly pockets of strength with volumes up for Optima (+22%), Stormking (+18%) and in rainwater goods (+10%), although some of this may have been due to order phasing. Implicitly, other window systems and building products lines were relatively flat compared to these highlights. The ‘GAP effect’ was most noticeable in roofline goods (volume -18%), which saw modest growth otherwise. There will have been some benefit from price increase – though our sense is that this was fairly narrow and mostly achieved in window systems – but this was insufficient to recover materials cost inflation in the period and this accounted for approximately two-thirds of the £3.2m y-o-y E&M EBIT decline. Some pricing catch-up is to be expected in H2. The division continues to take steps to improve operational performance and, once the exit from the Macclesfield site is complete by the year-end, profile extrusion operations will focused in three ongoing factories at Telford, Tamworth and Scunthorpe. Epwin is also planning for a new warehouse at Telford, potentially consolidating four other smaller locations. In addition, we are encouraged by ongoing new product investment including a suited range extension into complementary aluminium products and new decking lines.
Fabrication & Distribution (F&D): Downstream manufacture of glass sealed units and finished windows and doors (using profiles from E&M), and multi-channel (including own branches) B2B distribution of these and other group finished products.
Epwin sold its Indigo Products window fabrication business at the end of FY17; Entu had been its largest customer but entered administration four months earlier. (The acquirer now purchases window profiles and other low-maintenance building products from the E&M division under a three-year supply agreement.) There would also have been a smaller GAP/SIG impact on divisional revenues here and, together with a more focused glass sealed unit business, these effects more than explain the majority of the revenue decline in the first half. The acquisition of Amicus (a 15-branch distribution business) at the beginning of March partly offset those downward revenue pressures contributing £5.7m gross revenue – more like £4m on a net basis at group level – and £0.1m EBIT in the period. F&D’s other c 75 existing distribution branches generated l-f-l revenue progress of c 2%. This 90-outlet network is managed on a regional basis and retains independent brand trading names that have a value in their respective local markets. As in E&M, fabrication operations have also seen footprint changes:
■
Glass sealed units: manufacturing consolidated onto the Northampton site in FY17.
■
Window fabrication: will be solely undertaken at the Telford and Paignton sites from FY19 following the expected closure of Cardiff by the end of FY18.
Some momentum will be taken into the second half of 2018, with an implied Amicus revenue run rate of c £16m annualised (gross basis) and the y-o-y effects of business losses with Entu and GAP/SIG should begin to diminish are the year progresses. Nevertheless, market demand remains patchy and consequently we expect competitive trading conditions to persist.
Small H1 cash outflow, with different drivers
Epwin ended H118 with £28.6m net debt, an increase of £3.5m from the beginning of the year. A seasonal increase is normal for the company and others in the UK building materials space. However, we note that the composition of the uplift differed from the usual pattern.
Due to H2 trading bias and an H1 working capital build-up to support that, in the past Epwin has typically seen broadly flat (ie modestly positive or negative) free cash flow in the first six months of the year and a strong cash inflow in H2. This variation is amplified at the net cash flow level owing to dividend payment patterns. In H118, Epwin’s working capital movement was modestly positive instead of a material outflow and this more than compensated for the reduction in EBITDA generating operating cash flow of £11.4m, up £3m y-o-y. This was counterbalanced by higher capex to support footprint consolidation, leaving free cash flow (FCF) in line with the prior year at £3m. Hence, the headline debt movement reflected this FCF less the FY17 final dividend payment.
Cash outlook: Management has previously flagged a greater than usual H2 EBIT weighting, which equates to 38:62 in our revised model. In the areas highlighted above, we would be surprised if H1 working capital net gains did not partly unwind in H2. Lower capex spend is also likely as the factory consolidation programme proceeds, although we have allowed for some exceptional cash costs also. Overall, we expect Epwin to end FY18 with net debt in line with the £25m seen at the end of the prior year. Beyond this, we project net cash inflows of c £6m in FY19, followed by c £7m in FY20 but additional Telford warehouse capex may also need to be factored in at some points.
