TIDMMCON
RNS Number : 2503F
Mincon Group Plc
26 October 2018
MINCON GROUP PLC
("Mincon" or the "Group")
INTERIM TRADING UPDATE
Mincon Group plc (ESM:MIO AIM:MCON), the Irish engineering group
specialising in the design, manufacture, sale and servicing of rock
drilling tools and associated products, today provides an interim
trading update for the period from 1st January, 2018 to date,
incorporating the first nine months of trading to 30(th) September,
2018.
The results incorporate the contribution from Driconeq, which we
acquired in March this year.
Key elements (comparison of the first nine months of 2018 to
2017):
* Revenue up 22% for the first nine months
o Mincon product sales increased 37%
* of which Driconeq accounted for c. 26%
* and the residual group growth was c. 11%
o Third party product sales down 26%
* Gross margin excluding Driconeq up to 41% from 38.7%
o Gross margin of 38.3% when Driconeq is included
* Operating profit excluding Driconeq at 15.8% up from
14.3%
o 14% when Driconeq is included
* Profit before tax excluding Driconeq at 15.2% up from
13.1%
o 13.3% when Driconeq is included
* EBITDA excluding Driconeq up to 19% from 17.6%
o 17.2% when Driconeq is included
Driconeq is a substantial acquisition with a low gross profit
margin and a high material content, and unless separately commented
on, distorts the understanding of the underlying margin performance
of the rest of the Group.
Mincon product expressed as a percentage of our total sales
continues to grow, from 76% to end Q3 last year to 85% for the year
to date in 2018, 86% in Q3 alone. We have been driving a strategy
where we manufacture and sell our own engineered products to give
us superior control on our quality and distribution, and better
margin where our engineering delivers advantage to our customers.
Exclusive of Driconeq, the change to Mincon manufactured products
continues to deliver an improved gross margin, to 41% compared to
38.7% for the comparable group to last year, or 38.3% when Driconeq
is included.
Revenue
The Group continues to grow, albeit this has moderated as we
reflect comparatives on the higher levels of turnover achieved in
the latter part of last year. Of more note is that the capacity
investment which we initiated in 2016, and which continues to
arrive and be installed, is returning the Group to a dynamic
equilibrium, where we can grow and maintain our lead times for
delivery at the four and five week level.
We can now begin to redeploy resource to focus again on more of
the higher value products, new products where we have been unable
to allocate production time, and building out, for example, hammer
ranges where we have the engineering work completed but have had no
capacity to produce.
We plan to increase profits next year by improving efficiency,
reducing waste on freight and other overheads, and in allocating
labour to higher value added activities. We should take this
opportunity to thank our whole team in the factories and customer
service centres for their hard work and commitment over the last
two years in creating this step change in our business.
There are two significant changes in our management model for
the coming year. The first is in the creation of the "product
manager" category to provide focus on each of our main business
lines, and the second is in the build out of our engineering team.
Working together with the factories , these teams will co-ordinate
the service model to our customers, the development of our product
ranges, and provide the commercial and engineering direction for
the Group in the coming years.
Driconeq acquisition
Driconeq is a substantial acquisition, and the investment of
time and funding required to bring it into the Group in a coherent
fashion has been extensive. The acquisition included businesses and
factories in Sunne, Sweden, Johannesburg South Africa, and Perth,
Australia, with the Australian company having to be taken out of
administration. As we previously mentioned, the Australian business
required an additional A$1 million to prepay creditors who had
entered into an arrangement through the court, which has
accommodated the transfer of the business and people into our
Australian operations.
In Sunne, similarly, we have combined the drillpipe businesses
and transferred our own business and people into Driconeq, all of
which has been amicable and in compliance with local regulations.
In South Africa the management teams have been working together,
though we have no plans to combine them. In Sweden our heat
treatment plant in Kristenhamm remains unchanged, as a well-run
profitable business serving the group, among others. Overall the
performance of the Driconeq Group is improving, and beginning to
meet expectations.
We are beginning to see the benefits of the reorganization with
an improving operating margin benefitting from the consolidation,
and we are optimistic that the performance in 2019 will be in line
with the expectations we had on acquisition.
The hydraulic hammer range
As announced by the Company on 15 October, this project
continues on its development path, and while we have been expecting
the system to go on a key customer rig during this year, we have
had minor delays for fitting, specifically in relation to the
threading of the drill string. These are not significant
engineering set-backs, rather they are the fitting elements through
which we continue to build the IP of the system. We find the
problems and solve them, and while doing so, build a more robust
system with a higher barrier to entry.
We expect to have the engineering work done on the drill string
by the end of the November 2018 and be ready to install the system
from then. Achieving high levels of engineering efficiency and
quality will always be a priority of Mincon and we remain focused
on bringing this system to market once we are satisfied it is ready
to launch.
Margins
The gross margin of the underlying business continued to
improve, to 41% for the year to the end of September, compared to
38.7% last year, and this supported a 1.5% improvement in the
operating margin for the Mincon Group (excluding Driconeq) to
15.8%.
Excluding Driconeq, the profit before tax at the end of
September came out at 15.2% compared to 13.1% last year, and when
including Driconeq, this netted out at 13.3% overall.
Balance sheet
We have directed our cash into acquisitions, inventory and
capital expenditure in the last year in particular, to match
capacity with the strength in orders, and to gain control of key
processes like heat treatment, which allows us to base production
in three key factories in Shannon, Perth and Benton Illinois, and
allocate it efficiently according to customer needs and
manufacturing advantage.
This phase of investment came to an end, as planned, in H1, and
while we continue to install contracted capital expenditure, we
have substantially finished this build out, and expenditure levels
should glide towards the depreciation charge over the next year.
The inventory spend has also peaked, and with the normalising of
turnover and orders at the current level, we can improve
efficiencies across the entire Group. We see the lead time on
supply also shrinking so that we do not need to maintain investment
in raw materials at the current levels through the next six
months.
Market comment and position
We have probably reached the dynamic equilibrium we have been
seeking through the last eighteen months, where we can supply
customers within a more normal four or five weeks lead time, and
maintain a reasonable organic growth rate. While we have brought on
new capacity, so have competitors and suppliers, so the market is
stabilizing at the current higher level. To gain much more from
here means taking market share, and that means bringing through the
next generation of products, widening the product range, and
delivering new fuel efficient engineering to the market.
While we have not set price competition as our market position,
we will address challenges as they arise, while continuing to carry
out case studies that establish the value of our products to the
end customer. The success of this approach can be seen in our
improving margins, but we do not take these for granted.
Forward looking statements
Any forward looking statements made in this document represent
the Board's best judgment as to what may occur in the future.
However, the Group's actual results for the current and future
financial periods and corporate developments will depend on a
number of economic, competitive and other factors, some of which
will be outside the control of the Group. Such factors could cause
the Group's actual results for future periods to differ materially
from those expressed in any forward looking statements included in
this announcement.
ENDS
26 October, 2018
For further information, please contact:
Mincon Group plc
Joe Purcell - Chief Executive Officer Tel: +353 (61) 361 099
Peter E. Lynch - Chief Operating Officer
Davy Corporate Finance (Nominated Adviser and ESM Adviser)
Anthony Farrell Tel: +353 (1) 679 6363
Daragh O'Reilly
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END
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