Molins has now released its preliminary results for the year ending 2014.
Revenues fell across all business sectors with the £9.8M decline in tobacco machinery sales being particularly disappointing. The decline in costs of sales was not enough to prevent gross profit slipping by £3.3M to £25.3M. Distribution expenses increased somewhat but admin expenses were down before a £1.6M impairment of goodwill meant that operating profits fell by £4M to just £600K. A fall in pension scheme interest costs was offset by an increased tax charge to give a full year loss of £300K, a £3.8M reversal on 2013.
When compared to last year, total assets increased by £500K driven by a £3.4M growth in tax assets, a £1.7M increase in receivables and a £500K growth in intangible assets, offset by a £5.2M decline in cash levels. Liabilities were also up, however, with the big hit coming from a £15M increase in pension liabilities and a £2.1M growth in borrowings, somewhat offset by smaller reductions in some other liabilities. The end result is a bit of a calamitous decline in net tangible assets of £15.1M to leave the group at just £10.2M.
Before movements in working capital, cash profits fell by £2.7M to £4.7M. Adverse movements in all aspects of working capital eroded this down to £1M which was wiped out by the £1M tax charge and £500K in restructuring costs to give an operational cash outflow of £500K, a £4.6M adverse swing when compared to 2013. The group then spent £2.1M on tangible assets and development costs were £3.1M so that before financing, the cash outflow had widened to £5.3M. This was improved somewhat by new borrowings, offset by the dividends paid so that for the year there was a net outflow of £5M compared to the £2.3M inflow last time. The group had a total of £9.8M of cash left at the end of this year, though, which provides a bit of a buffer.
Underlying operating profit at the Scientific Services division increased by £700K to £1.8M. Sales of quality control instruments and analytics machinery were strong, although there was a marginal decline year on year with last year benefiting from a large one-off project. Demand from the largest market, China, continued to be strong as was demand for aftersales projects where a favourable product mix meant profits increased when compared to last year. Sales of a recently developed machine for the testing of e-cigarettes also contributed favourably to the performance of the business. The group continues to develop products for non-tobacco applications including tube packing, carton testing and enzyme sampling and the business is well placed to develop sales in these newer areas. The business entered the year with a slightly lower order book than at the end of last year which, combined with competitive pressures means that management expects trading to be challenging in the year ahead.
Sales in the analytical services lab decreased year on year with no regulatory testing requirements for tobacco products in the US, although progress was made in developing activity in Canada and in the testing of e-cigarettes. During the first half of the year, costs were reduced in this area given the continued delay and uncertainty over the FDA’s intention regarding its proposed new testing regime for tobacco products. After a review of this part of the business, it was decided that goodwill was impaired to the tune of £1.6M.
Underling operating profit in the Packaging Machinery business grew by £300K to £1.8M. Order intake in the year was strong across both the UK and overseas based businesses with progress across most geographic regions and a broader customer base, particularly in the pharmaceutical and healthcare sectors. The newly established sales and service operation in Asia performed well and helped drive a three-fold increase in orders in this region. The division’s margins improved year on year despite the under-utilisation of available resources in the early part of the year. Progress continues to be made with developing a supply chain in lower cost territories and the group is making increasing use of the manufacturing and assembly facility in the Czech Republic. While the ongoing challenge in deploying resources efficiently will be apparent in the coming year, the division entered 2015 with an order book significantly higher than at the same point of 2014 and performance is expected to continue to improve.
Underling operating losses at the Tobacco Machinery business were £200K, a negative swing of £3.1M when compare to the previous year. After a promising start to the year with good order prospects, trading conditions toughened considerably with the closure of a number of large cigarette factories by the multinational manufacturers. As well as this slowdown in activity across all regions, sales were impacted by geopolitical concerns in the Middle East and Eastern Europe which led to anticipated orders not materialising with the division’s performance also being adversely affected by the termination of an order from the Middle East received in 2012. The division did secure an order towards the end of the year from a major customer in North Africa but this was at a particularly competitive price. Sales of aftermarket products also fell due to the general slowdown which has prompted management to cut employee numbers by 8%.
Despite the difficult market, the division continued with the development of two new products. The production trial of Alto, a 10,000 unit per minute cigarette making machine is nearing completion and Optima, the new cigarette packing machine, which is being developed in collaboration with the Packaging Machinery division, will be available for production trials later in the year. The division entered 2015 with a lower order book than in the previous year and management do not expect to see any material improvement in market conditions in the short term.
Going forward, management expect to complete a strategic review of the analytical services operation in the US during the first half of the year, which will probably lead to more non-recurring costs and with the challenging market for tobacco machinery related activities, the focus will be on cost control and product development. Despite the lower order book, management seem to expect a weighting to the second half of the year.
As if all the other problems weren’t enough, the group also seems to be struggling with its pension scheme. Due to falls in interest rates, the pension liabilities have increased considerably but this could just be a temporary issues. At the last specific funding valuation of the UK scheme in 2012, a deficit of £53M was identified though. A deficit recovery plan was agreed which commits the company to paying £1.7M per annum and at this rate, the estimated recovery date will be 2030! The recovery payments increase by 2.1% per annum and this has the potential to cause a real drag on the company’s depleted earnings.
Net debt at the end of the year stood at £2.1M compared to a net cash position of £5.2M at the end point of 2013. The final dividend of 3p was maintained which means the shares are trading on a yield of 4.5%, although the sustainability of this dividend has to be called into question. Overall this was clearly a difficult year for the group. The packaging machinery division seems to be performing quite well, probably due to a focus on non-tobacco products, but the other two divisions are in a pretty poor state. The dithering of the US authorities over the testing regime is continuing to cause problems and the tobacco industry as a whole seems to be in real problems at the moment. I can’t see that this is a good investment at this time despite the 10% fall in share price today.
On the 10th April it was announced that Avril Palmer-Baunack is stepping down as Chairman of the group having been with the company since 2010 in order to concentrate on her executive chairman role at BCA Marketplace. She will be replaced be the senior independent director, Phil Moorhouse.
On the 24th April the group released an AGM trading update. The board’s trading expectations for 2015 remain unchanged. Against a tough trading backdrop, the Tobacco Machinery division’s performance is in line with last year. Trading at the Scientific Services division is more challenging than expected with the strength of Sterling against the Euro and the tobacco sector challenges affecting performance whilst trading in the Packaging Machinery division is ahead of last year and prospects remain strong. A mixed update then but not really much to get excited about.
On the 1st June the group announced that it had reached an agreement with Enthalpy Analytical, an affiliate of Montrose Environmental, for the sale of its US based analytical services lab, Arista, for a cash consideration of £300K which represents a loss on disposal of £3.5M, including a £1.3M goodwill write-off. Arista incurred an operating loss of £2M in 2014 and strangely Molins will subsidise the cost of the property lease of the lab for a further 18 months at a cost of £400K. In other news, trading in the rest of the scientific services division is more challenging than expected with tobacco sector conditions remaining difficult but the board expects the underlying trading performance of the group in the year will be slightly ahead of current expectations because the packaging machinery division is trading ahead of last year.
So, this seems like a pretty poor deal, with the group clearly desperate to get rid of Arista but the comment about trading being slightly ahead of expectations is encouraging. There probably is not enough to encourage me to buy yet at this point, however.