Final Results

Energy Technique Plc

("Energy Technique", "ETQ" or the "Company" or the "Group")

2015 Final Results

Headlines

· Sales increased by 12.6% over the previous year to £10.77 million;

· Operating profit of Diffusion increased by 23.6% over the previous year to £1.12 million;

· Group profit before tax increased by 19.6% over the previous year to £776,000;

· EPS growth of 61.7% over the previous year to 29.1 pence per share;

· Final dividend increased by 12.5% to 2.25 pence per share;

· Total dividends for the year increased by 36.4% to 3.75 pence per share;

· Further improvement in net cash to £1.38 million at 31 March 2015 and net assets to £2.22 million;

· High enquiry levels and order intakes produced strong start for the year ending 31 March 2016.

Chairman's statement

Introduction

I am very pleased to report a continuation of profit improvement for the year ended 31 March 2015. Sales increased by 12.6% over the previous year to £10.77 million, generating improved operating profit for the Company's trading business, Diffusion, to £1.12 million and of group profit before tax to £776,000. This is the fourth consecutive year of both sales and profit growth, representing another solid set of trading results ahead of management's expectations.

Fan coils provided the growth driver, attributed to a continuation of stronger UK fan coil market demand and to Diffusion's premium branded product offering. UK fan coil market demand started to improve two years ago and this continued for the year ended 31 March 2015. The number and size of commercial and high-end residential developments and refurbishments currently being carried out and planned by the leading property owning companies are providing ideal trading conditions for Diffusion.

Group trading performance

Sales in the year ended 31 March 2015 increased by 12.6% to £10.77 million (2014: £9.56 million). Fan coil sales of £8.74 million (2014: £7.45 million) achieved particularly strong sales growth of 17.3%, arising from a good balance of commercial and high-end residential projects. Sales of the smaller commercial heating range fell marginally to £1.52 million (2014: £1.65 million), consistent with continued difficult trading conditions on the UK high street.

Diffusion's operating profit increased by 23.6% to £1.12 million (2014: £906,000), representing an improved operating profit margin of 10.4% (2014: 9.5%), equivalent to a return on capital employed of 68.8% for the year. Notwithstanding downward market price pressures, gross profit margins remained stable at 34.2% (2014: 34.6%), due to lean manufacturing methods and a well-balanced sales mix.

Group profit before tax increased by 19.6% to £776,000 (2014: £649,000), after charging Central costs of £320,000 (2014: £210,000) and interest of £24,000 (2014: £47,000). Central costs increased in the year due to one-off costs of £90,000 incurred in pursuing a global franchising strategy. The taxation charge of £81,000 (2014: £143,000) represents non-cash deferred tax. EPS growth showed a very healthy increase of 61.7% to 29.1 pence per share. 

Diffusion's business model

The Company's trading subsidiary, Diffusion, enjoys a leading market position as a manufacturer of premium quality fan coils and commercial heating products to the UK commercial and high-end residential sectors, combined with a blue-chip client base, renowned brand and over 50 years trading experience. Diffusion and Energy Technique brands are recognised by the UK heating ventilation and air conditioning sector ("HVAC") as highly engineered, quality products providing leading edge performance and energy efficiency.

Diffusion's products are supplied into commercial offices, hotels, airports, retail outlets, schools, and high-end residential developments. Business risk is reduced by third-party M&A contractors installing Diffusion's products. Fan coils are supplied to developments of the major property owning companies, including Land Securities, Stanhope Properties, Grosvenor Estates and British Land. Commercial heating end users include Marks & Spencer, Sainsbury's, Tesco, New Look, Boots, ASDA, John Lewis, Fat Face, Lloyds Bank and TK Maxx.

Diffusion's management team has a demonstrable track record of success, working closely with designers, technicians, support staff and clients across all UK geographical locations to deliver bespoke HVAC solutions of the highest standard. Diffusion operates from a 30,000 sq. ft. facility in West Molesey, Surrey, ideally placed to serve its principal London and South East market by providing a highly valued just-in-time service.

Diffusion's operating performance

This is the fourth consecutive year of sales and profit growth, with fan coils providing the growth driver for the year ended 31 March 2015. Diffusion's experienced sales and marketing team exploited the continuation of improved UK fan coil market demand by achieving a 17.3% growth in fan coil sales. The recently launched ECO 270 fan coil range offering 25% energy savings for no additional capital cost gained further market traction. Agreement has been reached with the motor supplier to further protect the competitive advantage of this product with a five year extension to the existing exclusivity agreement, including wider geographical coverage.

Following successful entry into the high-end residential sector, Diffusion had a well-balanced sales mix between its commercial and high-end residential sectors. Fan coils were supplied into a number of landmark developments and to over 350 different projects in total. Serving this high number of projects spread business risk and contributed to maintaining overall target selling margins.

Fan coils were supplied into the three current London skyline developments of the Shard, Cheesegrater and Walkie-Talkie, together with the high-end residential Riverlight development. Other major commercial developments included American Express, London Bridge Place, Nations House, Hyde Park Hayes and 207-211 Old Street. Other major high-end residential developments included the Shard (mixed commercial/residential), Holland Green and 1 Tower Bridge.

Commercial heating sales fell marginally on the previous year to £1.52 million. Sales of commercial heating products are suffering from weak demand from the UK high street. Despite this, Diffusion continued to serve its long list of blue-chip clients/end users, including Waitrose, Marks & Spencer, Boots, H&M, Superdry and Next.

Franchising Diffusion brand

Central costs include one-off costs of £90,000 incurred in pursuing franchises for overseas territories, where franchisees can capitalise on Diffusion's strong brand name, product innovation and engineering excellence. Heads of terms were reached with Unico Inc. of St Louis, Missouri to manufacture and distribute Diffusion fan coils in the USA, Canadian and Caribbean markets. In a complementary manner, Diffusion is to be appointed Unico's main sales representative in the UK for its small duct high velocity heating and cooling systems. Route to market plans and legal agreements are currently being drawn up. 

Cash flow and net cash

Net cash generated by operating activities increased by 10.1% to £863,000 (2014: £784,000). This was partially applied in funding capital expenditure of £264,000 and dividends paid of £84,000. Net cash growth during the year was £507,000 (2014: £283,000), resulting in an improved cash position at 31 March 2015 of £1.38 million (2014: £873,000). The Group remains soundly financed with this level of cash and net assets at 31 March 2015 of £2.22 million (2014: £1.60 million). Cash flow for the current year ending 31 March 2016 will benefit from a six month's rent free period on the West Molesey lease worth £96,000.

Capital expenditure

Further investment in the West Molesey manufacturing facility was incurred during the year to maintain Diffusion's competitive market position. Capital expenditure amounted to £264,000, with the largest projects comprising £118,000 on refurbishing and extending the office suites and £65,000 on a new brake press to upgrade metal punching and folding capability. Most of this capital expenditure was of a discretionary nature and the Board does not consider there is a requirement for any significant capital expenditure in the year ending 31 March 2016.

Dividends

The Board recommends payment of a final dividend of 2.25 pence per share, payable on 7 August 2015 to shareholders on the share register on 17 July 2015. The Company paid an interim dividend of 1.50 pence per share on 12 December 2014, taking total dividends for the year ended 31 March 2015 to 3.75 pence per share, an increase of 36.4% over the previous year.

Business strategy

On 26 February 2015, the Board announced it had resolved to offer the Company for sale by means of a formal sale process in accordance with Note 2 on Rule 2.6 of the City Code on Takeovers and Mergers. Whilst the Board believes the Company has a secure future as an independent business, the Board took this decision to seek to unlock and crystallise value for shareholders. The Company appointed Cavendish Corporate Finance LLP as financial adviser to conduct the sale process. Further announcements about the progress of this formal sale process will be made in due course.

Current trading and prospects

Whilst this formal sale process proceeds, the Board is managing the Company for further growth. Trading in the current year ending 31 March 2016 has started well, with sales in April and May in line with management's expectations. Enquiry levels are high and the order book is strong. Improved UK fan coil market demand that started two years ago is expected to continue for the year ending 31 March 2016 and beyond.

Walter K Goldsmith

Chairman

20 May 2015

Contacts:

Walter Goldsmith, Chairman, Energy Technique Plc: 020 8783 0033

Leigh Stimpson, CEO, Energy Technique Plc: 020 8783 0033

Ed Frisby/Scott Mathieson, finnCap Limited (Nominated Advisor): 020 7220 0500

Consolidated statement of comprehensive income

for the year ended 31 March 2015

There are no other recognised gains or losses other than as recorded in the Consolidated Statement of Comprehensive Income for the year.

Property costs of £334,000 (2014: £366,000) have been reclassified from cost of sales to administration expenses so as to report underlying gross profit margins. There is no impact on reported operating profit.

Consolidated statement of financial position

at 31 March 2015

Consolidated statement of changes in equity

for the year ended 31 March 2015

Consolidated cash flow statement

for the year ended 31 March 2015

Notes

1. Adoption of new and revised standards

Standards and Interpretations effective in the current period

There were no new Standards adopted by the Group that have a material impact on the Group in the current period.

Standards and Interpretations in issue not early adopted

At the date of authorisation of these financial statements, there are no new Standards, Interpretations and Amendments that will have a material impact on the financial statements of the Group.

2. Significant accounting policies

Statement of compliance

The financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union.

Basis of preparation

The financial statements have been prepared on the historic cost basis.

Basis of consolidation

The Group financial statements consolidate the accounts of the Company and its subsidiary undertaking, which are all made up to 31 March each year.

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and similar allowances.

Revenue from the sale of goods and services is recognised when all of the following conditions are satisfied:

· the Group has transferred to the buyer the significant risks and rewards of ownership;

· the Group retains neither continuing management involvement to the degree usually associated with ownership, nor effective control over the goods and services sold;

· the amount of revenue can be measured reliably;

· it is probable that the economic benefits associated with the transaction will flow to the entity; and

· the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Interest revenue

Interest revenue is recognised on a receipts basis.

Operating leases

Payments under operating leases are charged to the Statement of Comprehensive Income on a straight-line basis over the life of the lease. 

Research and development expenditure

Research expenditure is written off as incurred. Development expenditure is generally written off as incurred unless it meets the recognition criteria of an intangible asset, as defined by International Accounting Standard 38 (Intangible Assets), in which case it would be recognised as an asset of the Group.

Foreign currencies

Monetary assets and liabilities denominated in foreign currencies are translated into sterling at the closing rate of exchange and differences taken to the Statement of Comprehensive Income. Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction.

Borrowing costs

Borrowing costs are recognised in the Statement of Comprehensive Income on a paid basis.

Retirement benefit costs

A number of the Group's permanent employees are members of personal pension plans, which are defined contribution schemes (money purchase). Contributions to these schemes are recognised as an expense when employees have rendered services entitling them to the contributions.

Taxation

No corporation tax arises on the results for the year because of the availability of losses brought forward.

Full provision is made for deferred taxation, using the liability method without discounting, to take account of the temporary differences between the incidence of income and expenditure for taxation and accounting purposes. Deferred tax assets are recognised to the extent that they are considered recoverable in the foreseeable future. Any changes in the deferred tax asset are recognised immediately in the Statement of Comprehensive Income.

Goodwill

Goodwill represents the excess of the cost of acquisitions over the fair value of the identifiable assets acquired (including intangible assets of the acquired business) at the date of acquisition. Goodwill is recognised as an asset and assessed for impairment at least annually. Any impairment is recognised immediately in the Statement of Comprehensive Income. The Directors consider that goodwill has an infinite useful life.

In accordance with the transitional rules of IFRSs, goodwill that has been written off to reserves cannot be restated or recycled, either on transition or at any later date. On the subsequent disposal or termination of a previously acquired business, the profit or loss on disposal or termination is calculated after charging goodwill previously taken to reserves.

Plant and equipment

Plant and equipment is stated at cost less accumulated depreciation and impairment charges.

Depreciation is provided on the cost of plant and equipment on a straight-line basis to write them down to estimated realisable value over their estimated useful lives as follows:

Rate

Plant and equipment between 10% and 33% per annum

Inventories

Inventories are valued at the lower of cost and net realisable value, using the First In First Out (FIFO) cost basis, with due allowance made for obsolete and slow moving items. For work in progress and finished goods, cost consists of direct materials, labour and appropriate works overheads.

Financial assets

Trade receivables and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as receivables, which are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.

Financial liabilities and equity instruments issued by the Group

Debt and equity instruments are classified as either financial liabilities or as equity instruments in accordance with the substance of the contractual arrangement.

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recorded as the proceeds received, net of direct issue costs.

Provisions

A provision has been made to cover the onerous liabilities of employers' national insurance and pension contributions on annual payments made under a permanent health insurance policy. The provision is measured at the present value of the expenditures expected to settle the obligation using pre-tax rates that reflects current market assessments of the time value of money and the risks specific to the obligations.

Share based payments

The Company operates an EMI share option scheme for Executive Directors and certain other executives. The options can normally be exercised based on time periods ranging from between 2 years and 10 years from the date of grant. Options are forfeited if an employee leaves the Group. The fair values of the options are calculated using a Black-Scholes option pricing model.

3. Basis of preparation of financial statements

The financial information set out above does not constitute statutory financial statements for the year ended 31 March 2015 or 2014 but is derived from those financial statements. Statutory financial statements for the year ended 31 March 2014 have been delivered to the Registrar of Companies. Statutory financial statements for the year ended 31 March 2015 were approved by the Board of Directors on 20 May 2015, are audited and will be delivered to the Registrar of Companies following the Annual General Meeting on 9 July 2015.

The Company's auditors, Milsted Langdon LLP, have reported on the 2015 and 2014 financial statements and those reports were:

(i) Not qualified;

(ii) Did not include a reference to any matters to which the auditors drew attention to by way of emphasis without qualifying their report; and

(iii) Did not contain a statement under Section 498(2) and 498(3) of the Companies Act 2006 in respect of the financial statements for the year ended 31 March 2015 and 31 March 2014.

4. Business segments

4.1. Products and services within each business segment

For management purposes, the Group is organised into two operating activities: the Diffusion business and Central costs. The principal products and services of these activities are as follows:

Diffusion ET Environmental Limited trading as Diffusion: manufacture and distribution of fan coils and commercial heating products, together with after sales spares and service from its facility in West Molesey, Surrey.

Central costs Costs associated with being a public company and maintaining the AIM quotation on the London Stock Exchange.

4.2. Segment revenue and segment result

Revenue represents sales to external customers. Inter-segment sales in the year amounted to £538,000 (2014: £352,000), which is eliminated on consolidation. Diffusion had one customer (2014: one) with revenue in excess of 10%, which amounted to £1,099,000 (2014: £1,582,000).

4.3. Segment assets and liabilities

4.4. Other segment information

4.5. Geographical segments

5. Earnings per share

The earnings and weighted average number of ordinary shares used in the calculation of basic and diluted earnings per share, are as follows:

Potential dilutive share options under the Group's share option scheme was 283,106 (2014: 196,572).

6. Posting of Directors' Report, Strategic Report and Financial Statements

The 2015 Directors' Report, Strategic Report and Financial Statements and Notice of Annual General Meeting, will be posted by 12 June 2015 to those shareholders who have elected to receive them and will be available to view on the Company's website www.diffusion-group.co.uk.

The 2015 Annual General Meeting of the members of Energy Technique Plc will be held at the offices of finnCap Limited, 60 New Broad Street, London EC2M 1JJ on 9 July 2015 at 12.00 Noon.