Interim Results

Pittards plc

("Pittards", the "Group" or the "Company" )

Interim results for the six months ended 30 June 2020

Pittards plc, the specialist producer of technically advanced leather and luxury leather goods for retailers, manufacturers and distributors, today announces its results for the six months ended 30 June 2020.

Key financials

· Revenue for the first half £6.6m (H1 2019: £12.1m)

· EBITDA negative £1.3m (H1 2019: £1.2m positive)

· Loss before tax amounted to £2.3m (H1 2019: £0.2m profit)

· Net assets were £14.6m (31 December 2019: £17.9m)

· Gross margin was 17.1% (31 December 2019: 29.7%)

· Group cash facilities headroom of £2.5m (£2.7m: 2019) including CBILS completed July 2020

Stephen Yapp, Chairman, said: -

"Despite the disruption of the first half, we enter the second half with renewed confidence and stability and with positive and improving cash flows. Our strategy to enlarge our portfolio of markets, products, improve quality of margin and lower our cost base, is showing clear signs of delivering benefits to the business. Over 14% of sales in the first half compared to 1.5% in H1 2019 were from our new target markets, and overall sales have consistently risen from May through to August. We are well positioned to deliver positive operational cashflow in the second half together with a reduction in net debt compared to the half year."

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CEO report

The impact of the global pandemic had a material effect on our business in the first half, adversely affecting our short-term sales revenue across our entire business. Over 90% of our sales are exported, which exposes us to global demand, logistics and supply chain effects. In response to this challenging environment we put together a programme of change which prioritised the safety of our people, customers, and cash. Our cash strategy has delivered improvements in the areas of inventory, working capital and cost control.

Key financials

· Revenue for the first half £6.6m (H1 2019: £12.1m)

· EBITDA negative £1.3m (H1 2019: £1.2m positive)

· Loss before tax amounted to £2.3m (H1 2019: £0.2m profit)

· Net assets were £14.6m (31 December 2019: £17.9m)

· Gross margin was 17.1% (31 December 2019: 29.7%)

· Group cash facilities headroom of £2.5m (£2.7m: 2019) including CBILS completed July 2020

Operational and strategic update

The global nature of our business with over 90% of Group sales outside of Europe and our core customer base having a higher dependency on manufacturing facilities in South East Asia, exposed us earlier to the turbulence brought about by the pandemic than a UK centric business. As early as January activity was not following an expected pattern and slowed from then on. This slow down affected both our UK and Ethiopian businesses.

The lockdowns that followed around the world impacted on consumer confidence and had a significant effect on first half operations. The peak of our lockdown period was during April when we furloughed 122 out of 175 total UK staff. There was no furlough scheme in Ethiopia, although there were some measures available to address cost in accordance with Ethiopian labour laws.

Sales in the first half to our core customers were 62% down on the equivalent period last year, with the US market particularly hard hit as the first half unfolded. Our factories, both in UK and Ethiopia, remained open and delivered product to certain customers who are key suppliers to COVID19 response services both in the UK and overseas to ensure supplies were maintained. We switched our finished goods manufacturing facilities to produce both face masks and bags for scrubs.

The easing of lockdown restrictions between June and August created a period of greater stability which resulted in a significant increase in sales into our growth customers, in particular automotive, shoe and speciality consumer goods. With a more diversified portfolio, the shape of the business continues to improve despite the impact of the COVID19 lockdown, which has obscured the progress the Group is making.

In our markets the aviation market has been hardest hit with sales yet to recover. We are making progress in the automotive market and although some customers closed temporarily in the first half, we have seen sales growth in the second half to date. Military and support services sales also showed some recovery leading into the second half.

Between June and August sales into our new target markets accounted for 26% of sales, compared to 14% in the first half. We have also seen some positive order trends in golf, defence, cycling and speciality endurance gloves and indeed sports in general, as our core existing customers show signs of recovery, with sales orders up since the half year.

We have continued to work on developing our innovation product portfolio, including our new Tri Protex antimicrobial leather and a further product line for fire-retardant leather in to Rail applications, for which trials are ongoing.

Financial update

Severe disruption due to COVID19 dominated the first half, with significantly reduced activity and production volumes falling far below normal levels. In response, we have been recalibrating our business, including a re-shaping of the cost base which is expected to be finalised before the end of the year.

The loss before tax in the first half amounted to £2.3m loss (2019: £0.2m profit), which was entirely due to reduction in volumes although the impact was partially offset by cost reductions.

Gross margins fell to 17.1% (H1 2019: 29.7%). However, pure variable material margins continued to improve due to a better mix of business and lower input costs. We have recalibrated our capacity for new volumes and aim to achieve improved reported margins in the second half of 2020, this has already been visible in both July and August, with gross variable margins also improving.

We have reduced Group headcount from 1740 at the beginning of 2019, to 1052 as at 30 June 2020, whilst preserving our capacity to respond to an increased level of demand as markets recover. This has been facilitated by the investment in automation in recent years, new technology, people, and more flexible working arrangements.

Administrative costs fell during the period helped by all Directors and senior staff participating in a salary sacrifice arrangement. We continue to hedge the US dollar to balance currency risks. Currency losses in the period were £0.4m with a corresponding gain within revenue.

At the period end net assets fell to £14.6m (December 2019: £17.5m). Net debt was up by £1.4m to £11.3m (£9.9m: 31 December 2019) with most of the increase occurring during the period to April. Net debt has since reduced and at the end of August stood at £10.9m.

During the first half the Group refinanced the UK mortgage with Lloyds, which was previously £1.20m to £1.75m. It also secured a new £1m CBILS (Coronavirus Business Interruption Loan) loan, repayable over six years. This was agreed in June and formally signed and drawn down in July. Our cash headroom has been maintained at similar levels to December 2019, at £2.5m (2019: £2.6m). The profile of our debt has improved as long-term debt has increased to £2.0m from £0.4m at the last year end.

Overall stock has been reduced by £0.5m to £16.8m at the half year. This reduction has continued into the second half with inventory falling at the end of August falling to £16.3m. Our supplier average payment days fell to 57 days at the end of June (H1 2019: 59 days), assisting our supply chain management. Our customer average days to pay rose to 69 days (H1 2019: 55 days). The increase in debtor days was mostly due to a change in mix of customers. Over 80% of customer accounts are still credit insured.

During the UK national lockdown, we furloughed 122 staff, but this number fell consistently from May to stand at 27 staff at the end of September. In what has been a successful programme, we sought to bring staff back as soon as we could. The furlough scheme enabled the business to both preserve jobs and recalibrate its cost base, creating the time and space to reshape our approach to the new norm. The impact of furlough payments on our second half profitability and cashflow will be limited.

Outlook

There are clear signs of a modest recovery in our sales revenue during Q3, along with a progressively improving order book. We are cautiously optimistic that the positive trend since May will continue for the remainder of the year, however, it remains too early to judge the sustainability and scale of further recovery.

Our management of cash in the first half and our success in putting in place a new working model, which is sustainable at much reduced volumes, will benefit the second half. Both July and August have traded with positive cashflow and EBITDA.

Our Ethiopian business shows increased activity in the finished product side and has recovered some ground from earlier in the year, with an encouraging order bank to fulfil in the second half. We have been changing our approach to our traditional tanning business, however because the restrictions of COVID19 were applied much later in the year, there remains work to recalibrate our Ethiopian tanning business to profitability, and good progress has been made.

We are mindful of the continued threat of COVID19 restrictions to business operations. In response to the evolving uncertainty in March, a going concern statement was issued in our 2019 annual report. Given the performance this year, and following a recovery in performance as restrictions eased, the Directors do not believe there are any new circumstances that cast any further doubt on the Group's ability to continue as a going concern.

We currently see more opportunity than risk in the new normal that is emerging. We are encouraged by the cash generation since the half year and the corresponding reduction in net debt. We anticipate a more agile, cash generative business model, as we head towards the end of the year.

Note 1 - Basis of preparation

The financial information set out in the interim statements for the six months ended 30 June 2020 and the comparative figures are unaudited and do not constitute statutory accounts as defined in section 434 of the Companies Act 2006. As permitted, this interim report has been prepared in accordance with UK AIM listing rules and not in accordance with IAS 34 Interim Financial Reporting, therefore it is not fully in compliance with International Financial Reporting Standards (IFRS).

The financial information for the full preceding year is extracted from the statutory accounts for the financial year ended 31 December 2019. Those accounts, upon which the auditor issued an unqualified opinion, have been delivered to the Registrar of Companies. The auditor’s report did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

These financial statements are presented in sterling, being the functional currency of the primary economic environment in which the Group operates.

Note 6 - Prior year restatement reported in 2019 accounts

Deferred tax, amounting to £0.648m, in relation to the temporary timing difference caused by the revaluation of buildings in Ethiopia, was previously not recognised from the net assets of the group at 1 January 2018. As a result, the opening reserves at 1 January 2018 have been restated along with the deferred tax provision. There has been no impact on the previously reported consolidated income statement. This was corrected in the 2019 Annual Report and there have been no subsequent prior year restatements.