TIDMBRAM
RNS Number : 9724L
Brammer PLC
07 October 2016
THIS ANNOUNCEMENT AND THE INFORMATION CONTAINED HEREIN IS
RESTRICTED AND IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION,
DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, IN, INTO OR FROM THE
UNITED STATES, CANADA, AUSTRALIA, JAPAN, SOUTH AFRICA OR ANY OTHER
JURISDICTION IN WHICH THE SAME WOULD BE UNLAWFUL. PLEASE SEE THE
IMPORTANT NOTICE AT THE OF THIS ANNOUNCEMENT.
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION AS STIPULATED
UNDER THE MARKET ABUSE REGULATIONS (EU) NO. 596/2014.
7 October 2016
Brammer plc
("Brammer" or the "Group")
Update on Q3 Trading and Financial Position
Brammer, a pan-European distributor of industrial supplies and
services, today issues an update on the Group's trading and
financial position.
Key points
-- Group sales per working day ("SPWD") at constant
currency declined 2% in the quarter
-- UK SPWD was down 1% versus prior year, with
an improved Buck & Hickman performance
-- Bearing and Power Transmission SPWD down a further
6% in Q3 versus prior year
-- Stock reduction of GBP30 million achieved as
at 30 September at constant currency, in line
with plan
-- Declining sales and reduced levels of supplier
support have led to an operating loss in Q3;
accordingly, the Group does not expect to report
a pre-tax profit for the full year 2016
-- Business review to develop a detailed plan to
improve the operational and financial performance
of the Group remains on track; conclusions expected
in November 2016
-- Standby underwriting agreement entered into
with Investec for a rights issue (the "Rights
Issue") of up to GBP100 million, to be launched
no later than the announcement of the Group's
full year results for the year ending 31 December
2016 in Q1 2017
-- Discussions will be held with the Group's debt
providers to seek appropriate amendments to
the current facilities, including the operation
of certain financial covenants, to ensure the
Group has the appropriate level of committed
debt facilities for its medium term requirements
-- Medium term target capital structure of 1.0x
- 1.5x net debt to EBITDA
-- No final dividend will be proposed for the year
ending 31 December 2016
Meinie Oldersma, Chief Executive, said:
"I have been impressed by the market position and the expertise
and the quality of people the Group has built over the last few
years. However, an over-emphasis on expansion of the products and
services has resulted in a lack of focus on some of Brammer's core
key areas, whilst significantly increasing costs in other areas.
This is a good business, but it will require time to get that focus
back onto core products, with the effective processes to support
it.
In the near term, we are anticipating continuing decline in
sales in our more profitable core products, which, combined with
our drive to reduce levels of stock, has led to reduced levels of
supplier support and a significant impact on our margins. These
factors have led to an operating loss in the third quarter, and
accordingly we do not expect to report a pre-tax profit for the
full year 2016.
We are actively developing our plans to move the business
forward and there is a strong recognition within the business of
the need for change. The proposed rights issue will reduce the
Group's structural indebtedness significantly and provide the Group
with the appropriate capital structure to deliver this improved
performance."
Update on the Business Review
Meinie Oldersma joined the Group as Chief Executive Officer on 1
August 2016 and has spent the first 10 weeks reviewing the
business, visiting the Group's operations in the UK and overseas
and talking to customers, suppliers and employees, as well as
external stakeholders. The initial conclusions of this review are
being developed into a detailed business plan, to improve the
operational and financial performance of the business, with the
assistance of an external firm of strategic consultants. The
detailed conclusions of this review will be announced in November
2016, as previously indicated.
The preliminary themes that are emerging from this business
review are:
-- the Group has a unique European footprint
and a strong position in a number of geographic
markets;
-- a previous focus on top-line growth meant
that the Group lost focus in some of its
core products and markets;
-- the expansion of the product range has broadened
the Group's ability to make savings for
its customers, but it has introduced significant
complexity into the business and incremental
cost;
-- there is a need to bring greater clarity
to the Group's preferred sales channels,
for different types of products and customers,
to ensure that the Group can deliver cash
generative profitable growth; and
-- there is a need to improve the Group's core
business systems and processes, including
improved e-commerce capability over time.
Current trading
SPWD at constant currency Q1 Growth Q2 Growth H1 Q3 Q3
Growth Growth GBP'000
By geography:
UK (7)% (5)% (6)% (1)% 1,044
Germany 3% (1)% 1% (2)% 495
France 3% 1% 2% (2)% 346
Nordic (21)% (13)% (17)% (13)% 147
Other territories 2% -% 1% (3)% 764
--------------------------- --------- --------- -------- ------- --------
Total Group (3)% (3)% (3)% (2)% 2,795
By product:
Bearings and Power
Transmission (5)% (10)% (8)% (6)% 1,260
T&GM (3)% 1% (1)% 7% 639
Other 1% 5% 3% (3)% 896
--------------------------- --------- --------- -------- ------- --------
Total Group (3)% (3)% (3)% (2)% 2,795
--------------------------- --------- --------- -------- ------- --------
By customer:
Key Accounts -% (1)% -% 2% 1,652
Base Business (6)% (5)% (6)% (8)% 1,143
Total Group (3)% (3)% (3)% (2)% 2,795
--------------------------- --------- --------- -------- ------- --------
We expected Q3 to see an improvement on the first half and a
small improvement on last year, due to the actions taken to refocus
the business on our core sales and increase the sales force in the
UK. However, overall SPWD declined by 2%, five percentage points
below our expectations. As announced in our interims, SPWD for July
was in line with last year. However, this has been followed by a
decline of 5% in August and a decline of 2% in September.
Within the overall Group decline, the UK showed signs of
improvement in reversing the sales trend. Overall for the quarter
SPWD was down 1% versus prior year. This was the best quarterly
performance versus prior year since Q2 2015. Within that there were
three consecutive months of growth for Buck & Hickman up year
on year by 0.4% in July, 2% in August, and 6% in September, which
followed on from an average year on year decline of 15% in the
first half. However, the improved Buck & Hickman performance
was more than offset by continued weakness in the Brammer UK
business.
Germany was down 2% in Q3 in SPWD versus prior year, with a weak
September, down 6%. France continued the volatile pattern of the
first half, with a 7% decline in July, followed by a 9% increase in
August, followed by a 3% decline in September, to leave the quarter
as a whole down 2%.
In the Nordics, the start-up of a large tools and general
maintenance contract in Norway was not sufficient to offset the
continued decline in the OEM business and the losses in the Swedish
MRO business, where the costs of investing in the branch network
and new distribution centre are not covered by the current volumes.
Order intake in Q3 was low, and we expect that the loss for the
second half will be greater than the first half. Whilst we believe
that the route to returning the business to profitability is to
grow the MRO and Tools and General Maintenance ("T&GM")
business, we are thoroughly reviewing our plans and will be
assessing the carrying value of the business as part of the normal
year end process.
In Other Territories, Q3 SPWD was down 3%. Spain in particular
weakened through the quarter, with year on year changes of +4% in
July, +2% in August but a decline of 4% in September.
Looking at the trends for the business through Q3, it is clear
that our revenue expectations for the full year will not be
achieved, and we are now anticipating these to be c. 5% below
previous expectations.
Within the overall sales, the decline in Bearings and Power
Transmission is the most marked, and we have consequently reduced
our forecasts for Bearing sales for the full year. The reduced
forecast level of sales and the stock reduction programme means our
purchases for the year will be significantly down year on year.
Given the tiered nature of our rebates the impact on our margin is
more significant. In the first half, the impact of rebates was to
reduce our gross margin percentage year on year by 0.8 percentage
points and we now expect the impact for the year as a whole will be
to reduce the Group gross margin percentage by approximately 2
percentage points.
Sales to Key Accounts increased by 2% in the period whilst in
contrast the Base business declined by 8%. As previously noted, we
are refocusing our sales efforts back to the Base business.
Revenue from direct and indirect sales at customer sites with
vending machines now accounts for 11% of our total revenues, and
these customers grew by 13% in the quarter, a significantly higher
growth rate than any other group of customers. However, whilst
vending continues to be a good driver of top-line growth, given the
cash investment the programme requires, and the current
profitability of the model due to incremental costs involved, we
have reduced the rate of roll out of vending machines and the sales
resource dedicated to the programme, whilst at the same time
increased the profitability hurdles for agreeing to install
machines. We are now targeting that as a minimum for a machine to
be installed it needs to make a positive contribution from direct
sales alone within 12 months, excluding the benefit of indirect
sales. At the end of the period we had an installed base of 1,945
machines, up 135 machines from the 1,810 installed at the end of
Q2.
Overall the Group recorded an operating loss in Q3 and
accordingly the Group does not now expect to report a pre-tax
profit for the full year 2016.
Reduction in stock levels
At the start of the year, we implemented a stock reduction
programme to reduce the Group's inventory levels by GBP30 million
by the end of Q3. This programme has been successfully implemented
with the target reduction of GBP30 million at constant currency
being achieved as at 30 September. For the balance of the year, we
expect inventory to remain around current levels, with further
reductions in overstock, largely in bearings, offset by selective
increases in products where stock levels are below optimum
levels.
Capital structure and Standby Rights Issue
The Group's EUR120 million revolving credit facility and $175
million USPP Note Agreement both include a net debt to EBITDA
covenant of not greater than 3.0x and an interest cover covenant of
not less than 4.5x.
Although net debt as at 30 June 2016 was GBP107.7 million
(resulting in a net debt to EBITDA ratio of 2.8x), the Group
typically experiences a material working capital outflow between
reporting periods, which, in the current year, has resulted in the
Group's average net debt (which excludes debt factoring) being
approximately GBP50 million - GBP60 million higher than at period
ends. The intra-period working capital movement is funded by
drawings under the Group's revolving credit facility and the use of
non-recourse debtor factoring.
Despite the initiatives in 2016 to reduce the level of stock and
reduce the capex investment in Vending, the difficult trading
environment and the weakening of sterling means that it is likely
that, unless amended or waived, one or both of the Group's
financial covenants will be breached at the next testing date of 31
December 2016.
The Board has concluded that in any event it is in the best
interests of the Group to reduce its structural indebtedness
significantly and that the appropriate leverage target for the
Group over the medium term is a net debt to EBITDA ratio of 1.0x -
1.5x. As a result, the Board intends to undertake a Rights Issue to
raise up to GBP100 million, conditional on the Group securing
appropriate covenant amendments and committed debt facilities for
its medium term requirements. The Rights Issue is expected to be
launched by no later than the announcement of the Group's results
for the year ending 31 December 2016 in Q1 2017. The Rights Issue
has been fully underwritten on a standby basis by Investec. The
standby agreement contains certain representations and warranties,
undertakings, conditions, and termination rights (including
relating to completion of documentation and due diligence) and is
subject to Investec's review of the Group's new business plan.
The Group has maintained an active dialogue with its banks and
loan note holder and will be notifying the banks providing its
revolving credit facility and its loan note holder of the matters
described in this announcement. Brammer will seek necessary
amendments and/or waivers to its current facilities, to ensure that
the Group remains in compliance with the terms of its debt
facilities and to reflect the Group's intention to strengthen its
capital structure through the Rights Issue.
Dividend
In view of the Group's anticipated performance for 2016 and the
focus on cash generation and debt reduction, the Board currently
intends not to propose a final dividend for the year ending 31
December 2016. The Board will determine the appropriate future
dividend policy for the Group in conjunction with the business
review and proposed equity fund raising.
The person responsible for arranging for the release of this
announcement on behalf of Brammer is Duncan Magrath.
Enquiries:
Brammer Via Hudson Sandler
Meinie Oldersma, Group Chief Executive Tel: 020 7796 4133
Duncan Magrath, Finance Director
Investec Bank plc Tel: 020 7597 4000
Chris Treneman
James Rudd
Henry Reast
Peel Hunt LLP Tel: 020 7418 8900
Mike Bell
Matthew Brooke-Hitching
Hudson Sandler: Tel: 020 7796 4133
Andrew Hayes
Cat Valentine
Cautionary statements
This announcement has been prepared for and is addressed only to
our shareholders as a whole and should not be relied on by any
other party or for any other purpose. Brammer, its directors,
employees, agents or advisers do not accept or assume
responsibility to any other person to whom this announcement is
shown or into whose hands it may come and any such responsibility
or liability is expressly disclaimed. This announcement may contain
forward-looking statements and the financial information is
unaudited. Any forward-looking statement has been made by the
directors in good faith based on the information available to them
up to the time of approval of this announcement and should be
treated with caution due to the inherent uncertainties, including
both economic and business risk factors, underlying such
forward-looking information. To the extent that this announcement
contains any statement dealing with any time after the date of its
preparation, such statement is merely predictive and speculative as
it relates to events and circumstances which are yet to occur and
therefore the facts stated and views expressed may change. Brammer
undertakes no obligation to update these forward-looking
statements.
This announcement contains forward-looking statements that are
based on current expectations or beliefs, as well as assumptions
about future events. These forward-looking statements can be
identified by the fact that they do not relate only to historical
or current facts. Forward-looking statements often use words such
as anticipate, target, expect, estimate, intend, plan, goal,
believe, will, may, should, would, could, is confident, or other
words of similar meaning. Undue reliance should not be placed on
any such statements because they speak only as at the date of this
document and, by their very nature, they are subject to known and
unknown risks and uncertainties and can be affected by other
factors that could cause actual results, and Brammer's plans and
objectives, to differ materially from those expressed or implied in
the forward-looking statements.
There are a number of factors which could cause actual results
to differ materially from those expressed or implied in
forward-looking statements. Among the factors that could cause
actual results to differ materially from those described in the
forward-looking statements are; increased competition, the loss of
or damage to one or more key customer relationships, changes to
customer ordering patterns, delays in obtaining customer approvals
for price level changes, the failure of one or more key suppliers,
the outcome of business or industry restructuring, the outcome of
any litigation, changes in economic conditions, currency
fluctuations, changes in interest and tax rates, changes in raw
material or energy market prices, changes in laws, regulations or
regulatory policies, developments in legal or public policy
doctrines, technological developments, the failure to retain key
management, or the key timing and success of future acquisition
opportunities or major investment projects.
Brammer undertakes no obligation to revise or update any
forward-looking statement contained within this announcement,
regardless of whether those statements are affected as a result of
new information, future events or otherwise, save as required by
law and regulation.
No statement in this announcement is intended as a profit
forecast and no statement in this announcement should be
interpreted to mean that underlying operating profit for the
current or future financial years would necessarily be above a
minimum level, or match or exceed the historical published
underlying operating profit or set a minimum level of underlying
operating profit.
Investec Bank plc, which is both authorised in the United
Kingdom by the Prudential Regulation Authority and regulated by the
Financial Conduct Authority and the Prudential Regulation
Authority, is acting exclusively for Brammer and no-one else in
connection with the Rights Issue and will not regard any other
person (whether or not a recipient of this announcement) its client
and will not be responsible to anyone other than Brammer for
providing the protections afforded to its clients or for providing
advice in connection with the Rights Issue referred to in this
announcement or any other transaction, arrangement or matter
referred to in this announcement.
This announcement has been issued by Brammer and is the sole
responsibility of Brammer. No representation or warranty, express
or implied, is or will be made as to, or in relation to, and no
responsibility or liability is or will be accepted by Investec Bank
plc or by any of its affiliates or agents as to, or in relation to,
the accuracy or completeness of this announcement or any other
written or oral information made available to or publicly available
to any interested party or its advisers, and any liability
therefore is expressly disclaimed.
Important notice
This announcement does not constitute or form part of, and
should not be construed as, any offer, invitation or recommendation
to purchase, sell or subscribe for any securities in any
jurisdiction and neither the issue of the information nor anything
contained herein shall form the basis of or be relied upon in
connection with, or act as an inducement to enter into, any
investment activity. This announcement and the information
contained herein do not constitute an offer of securities in the
United States. The securities referred to in this announcement have
not been and will not be registered under the U.S. Securities Act
of 1933, as amended (the "Securities Act"), and may not be offered
or sold in the United States absent registration under the
Securities Act or pursuant to an exemption from, or a transaction
not subject to, such registration requirements. The Group has not
registered and does not intend to register the offering of any
securities in the United States or to conduct a public offering of
any securities in the United States.
-ENDS-
This information is provided by RNS
The company news service from the London Stock Exchange
END
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