Following the sale of the analytical services labs business, the group has restructured into two divisions: packaging machinery which supplies automated product processing, handling, cartoning and robotic end-of-line packing machinery and systems from its operations in the UK, Netherlands, Canada and Singapore; and instrumentation & tobacco machinery which includes the group’s tobacco machinery activities along with the quality control, testing and analytics instrumentation business which has customers in both the tobacco and other consumer goods industries. Molins has now released its interim results for the year ending 2015.
Overall revenues increased year on year as a £2.9M fall in instrumentation and tobacco machinery sales was more than offset by a £3.5M increase in packaging machinery revenue. Unfortunately cost of sales also increased to give a gross profit some £1M lower than in the first half of last year. Admin expenses did fall, however, but the pension scheme expense increased to give a pre-tax profit before discontinued operations of £400K, a decline of £600K. We then see a £3.5M loss on a disposal and a related £1.3M impairment of goodwill associated with the disposal (the goodwill should probably have been impaired prior to this in my view) to give a loss for the half year of £5.3M, a deterioration of £5.1M year on year. Those “non-underlying” expenses relate mainly to the admin costs of the pension scheme but some £100K of re-organisation costs were also recorded.
When compared to the end point of last year, total assets fell by £14.1M driven by a £5.5M fall in cash, a £4.3M decline in receivables, a £3.2M decrease in property, plant and equipment and a £1.5M fall in deferred tax assets, partially offset by a £1.2M increase in inventories. Total liabilities also fell during the year due to a £7M fall in the pension liability, a £3.7M decline in borrowings and a £1.4M decrease in payables. The end result is a net tangible asset level of £8.6M, a fall of £1.6M over the past six months.
Before movements in working capital, cash profits fell by £500K to £2.3M but a much smaller increase in inventories than last time meant that cash from operations improved year on year as a broadly flat working capital position along with a £900K payment to the pension scheme and £900K used in the discontinued operations meant that net cash from operations stood at just £400K, an improvement of £4M year on year. In fact, when development costs (which are operating costs really) of £1.2M are taken into account, there was a negative operational cash flow here so after capital expenditure and the acquisition of some IP, the cash outflow before financing stood at £1.2M. Imprudently the group spent £600K on dividends and also paid back some £3.6M in loans to give a cash outflow for the period of £5.4M and a cash level at the six month stage of £4.3M.
The operating profit in the packaging machinery division was £1.1M, an increase of £1M year on year. All parts of the division performed ahead of the same period of last year with continued improvements in margins expected in the second half of the year. These results were supported by moves to create a standardised range of products, as well as an ongoing focus on innovative engineering and applications skills. The group saw increased orders from its multinational and regional customers in most parts of the world with expansion in Asia and increasing activity in South America, supported by the existing infrastructure in Brazil. With a strong order book in place for delivery in the second half of the year, the division is well placed to continue to progress and the group are looking for further operational efficiencies, aided by the development of the standardised product range.
The operating profit at the instrumentation and tobacco machinery division was £300K, a fall of £1.3M when compared to the first half of last year. As anticipated, market conditions in the tobacco sector continued to be challenging. Activity levels declined in most geographic regions, particularly in Europe and South East Asia along with the larger multinational customers. The strength of sterling also adversely impacted the division and the performance of the tobacco machinery part of the division remained under pressure. The impact of these conditions on the instrumentation activities only started to be felt in Q1 2015, with order intake and sales falling in the period, although immediate order prospects were are a little more encouraging. Measures have been taken across the division to reduce operating costs and defer expenditure where appropriate which will continue into the second half.
Product developments were continued across the division. Alto, the 10,000 per minute cigarette making machine, successfully completed field trials in the first half of the year and field trials for Optima, the new cigarette packing machine, will start later in the year. These two major initiatives, with others to develop ancillary equipment, mean that the division will have completed a significant programme of development, enabling it to supply a complete make-pack cigarette production line of equipment in a range of speeds. This also means that that the business is positioned to compete in a larger proportion of the market. The group also continued to enhance the product range of the instrumentation business to support both the market leading position in the tobacco sector and an expansion into new sectors. The purchase of the intellectual property for non-invasive thermometry measurement equipment will assist the initiatives to increase their presence in the nutrition sector.
At the end of May the group sold the trade and assets of Arista Labs Inc for proceeds of just £300K, which were less than the costs of £400K. This represented a loss on disposal of net assets (including goodwill) of £4.7M which shows the need for the group to get rid of the division which made a trading loss of £900K during the period. This is clearly a poor price but hopefully now the drag of this business is not being felt, the performance of the company stands a better chance of improvement.
Going forward, management do not expect any significant change in the trading environment in the second half of the year and they remain on course to meet market expectations. As in previous years, the full year trading performance will be significantly weighted to the second half, however.
Although still problematic, the pension deficit did fall during the period with the UK scheme improving by £6.7M and the US scheme improving by £500K. The UK scheme is subject to a formal triennial actuarial valuation at the end of June with the deficit recovery plan being formally reassessed following its completion. The current level of deficit funding is £1.8M per annum which is pretty onerous for a company of this size.
As the interim dividend was kept the same, the shares now yield 7.2% and this is expected to remain the same for the full year. This is a stonking yield but whether it is sustainable, of course, is an important consideration. At the period end, net debt stood at £3.9M compared to £2.1M at the end of last year.
Overall these results were probably in line with expectations as the outperformance of the packaging machinery business was offset by a poor performance at the tobacco machinery division. Profits fell year on year, not aided by the loss from the Arista labs sale, although there was also an underlying fall in profit. Net assets also fell and although operating cash flow increased, this was due to a better control on working capital this year and the underlying cash profits were actually down and there was no free cash during the period. Going forward, there is expected to be further margin improvement at the packaging machinery division in the second half of the year and the Arista sale should remove that drag on the business so I can see a scenario where profits improve going forward, although that will depend on the tobacco machinery division. The dividend yield of 7.2% is also a real incentive but I am not sure whether the turnaround is completely underway yet.
The share price chart does not look good…