24 March 2021

Pittards plc

("Pittards" or "the Group")

Full year results for the year ended 31 December 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 year ended 31 December 2020.

Stephen Yapp, Chairman, commented:

"We have entered 2021 stronger, with a more diverse and flexible business, ready to take full advantage of opportunities in our markets. It remains too early to judge how strong the recovery will be, but on balance, we see more reason to be positive that we can make further progress to build on the momentum of the second half of last year, starting the year with stronger demand from customers"

For further information, please contact:

Pittards PLC   -    www.pittards.com

Stephen Yapp, Chairman +44 (0) 1935 474 321

Reg Hankey, CEO

Richard Briere, CFO

WH Ireland Limited   -   www.whirelandcb.com

Mike Coe, Chris Savidge - +44 (0) 117 945 3472

This announcement includes inside information as defined in Article 7 of the Market Abuse Regulation No. 596/2014 and is disclosed in accordance with the Company's obligations under Article 17 of those regulations

Chairman's statement

A dominant feature of 2020 has been the COVID-19 pandemic, testing businesses both in terms of their underlying strength at the outset and their adaptability in responding to challenges as the year progressed.

I can report that Pittards has acquitted itself robustly against both these parameters, endorsing both the soundness of the strategies that we already had in place for developing our Group as the year began, and the honing of the business that we implemented as the year progressed.

We validated our strategic objectives by developing our relationships in the interiors market with regular orders from automotive and further established ourselves as a shoe manufacturer in Ethiopia, despite COVID-19 disruptions.

We mitigated some of our first half operating cash losses through inventory reduction, by optimising operations. This is testament to our heightened cost focus, whilst delivering transformational improvements due to the continued dedication of all Pittards employees, to whom I would like to express my gratitude in these challenging times.

The resilience of the Group was evidenced by a return to positive EBITDA during the second half of 2020 and our cash flow improved significantly during that period. Our re-shaped business is more agile and set for growth and the creation of longer-term value.

There were no changes to the Board during the year. The Board is confident in the business strategy and committed to its future success, with each Board member increasing their investment in Pittards by buying shares during the year. The Board's collective holding rose to 6.4% at the end of 2020 (2019: 3.2%).

In November 2020 we undertook a share buyback purchasing 0.9m shares into treasury.

Outlook

Aligned with our strategic priorities, we are delivering a broader range of products to more markets and creating a more balanced portfolio. We continue to invest in new technology, and we have planned increased capital investment compared to the previous year.

Dividend payments are considered an important future step and will be paid when covered by free cash flows.

We have entered 2021 stronger, with a more diverse and flexible business, ready to take full advantage of opportunities in our markets. It remains too early to judge how strong the recovery will be, but on balance, we see more reason to be positive that we can make further progress to build on the momentum of the second half of last year, starting the year with stronger demand from customers.

Stephen Yapp

Chairman

23 March 2021

·      Order book opened 2021 stronger than the start of the previous 2 years

·      Underlying margins improved on 2019

·      Second half of 2020 break even and positive EBITDA

·      Inventory reduced by £2.3m in 2020

·      Repeat orders from both interiors and big shoe markets

·      Reduced cost base by £2m, changed operating model

·      Re-engineered production and extended our manufacturing capabilities in Ethiopia.

During the first quarter of 2020, alongside many other businesses, we were challenged with the sudden impact of COVID-19.  As a global pandemic unfolded, this unusual situation affected our people, our customers and supply chains.

We implemented a new business plan that enabled a responsive approach to the challenges we faced and reviewed this on a weekly basis. The key pillars of this plan were focused on:-

·      Safety of people - Implemented best practice in line with government advice as it evolved

·      Customer support - Continued to supply and kept close dialogue 

·      Cash management - strict daily control

·    Cost control - realignment of all costs

Continued weak global demand for leather and related goods was a feature in the first half, with full year revenue at £15.2m (2019: £22.3). The impact of the first half was challenging operationally, given the sudden change in demand related to COVID-19.

During this challenging time our first priority was the safety of our employees.  We quickly implemented changes in working practice in line with up to date government guidance throughout the year.  We are fortunate to have quite large factories which enables us to implement socially distanced working practices. 

Sales demand has become more fragmented but broader in markets we reach. The changing shape of the business is aligned with the strategic priorities to achieve a more balanced customer portfolio, specifically the inroads made in Ethiopia in shoe production and sales, along with UK interiors and key shoe accounts. These remain priority development markets for the Group. Sales to these markets grew to 22% of sales, up from 18% of sales in 2019 on a like for like basis.

Cost management was a key focus for the year, in which extra disciplines were introduced and there was a targeted headcount reduction which further reduced the cost base.  This has left us leaner, but in a scalable position with the appropriate expertise to meet specific customer needs. We have expanded our design and production management functions, despite overall headcount reduction. Our key objective was to establish a much more resilient business at lower levels of activity and this was achieved.

Our reported gross margins include labour and fixed production costs, however our underlying margins  comprised of sales less underlying variable material cost.  Our underlying margins have continued to improve during 2020. Our reported gross margin was 21% (2019: 31%) and EBITDA fell to negative £1.1m (2019: positive £2.0m) and PBT to a loss of £2.3m (2019: £0.6m profit), although we returned to a profitable model during the second half of 2020, resulting in positive EBITDA for the second half as a whole. 

Inventories reduced to £15.0m (2019: £17.3m), as our change in mix of business and operational improvements facilitated a more consistent and predictable pattern for managing down inventory. Our counter measures for operational costs continued to gather pace with headcount reducing to 1,096 (2019: 1,224). Raw material prices have broadly stabilised, and we have recalibrated our procurement accordingly.

Net debt at 31 December was £10.1m (2019: £9.7m). The shape of the business necessitated increased debtor days, whilst at the same time supporting our customers who took longer to pay. Despite this, we have actively sought to improve payment to suppliers and therefore we actually paid them 1 day faster on average than 2019.

Currency moved slightly against us for 2020 although average exchange rates were broadly unchanged on 2019. The Group aims to hedge between 40% to 60% of requirements, with an average rate of $1.34 to June 2022. The average rate in 2020 for the Group was $1.31, broadly unchanged on 2019. As a guide 10% change in US$ against GBP could impact profitability by £0.3m either positively or adversly. This risk is less pronounced than previous years, illustrating the diminished impact currency had on operating profits compared to recent years.

Over the past three years we have invested £1.2m in machinery to improve our efficiency and expand our capability, particularly in Ethiopia for shoe manufacturing, although we are not yet fully utilising this capacity. We are planning further capital investment of c£0.9m over the next twelve months, as we look to improve margins and operating efficiency, whilst anticipating growth in new markets.

As a result of COVID-19, our retail venues were forced to close and we decided not to renew our lease at Clarks Village, Somerset, and to focus more on digital channels which achieved increased sales this year.

Market view

Numerous global factors continued to impact the demand for leather, principally COVID-19 lockdowns, China/US tariffs and general economic weakness. Brexit has had little impact on the Group, by and large, and we don't anticipate this changing in the near term.

The trend of global demand over the past few years has been downward for both finished hides and skins. However, given the increase in consumer appetite for outdoor pursuits, including golf and endurance, it is likely we will see recovery in demand in our market segments when social restrictions ease.

Some of our market segments have been harder hit by the pandemic, most notably the aviation and automotive industry, where global sales are down dramatically on 2019, although  we continued to sell to them. Notwithstanding the challenges faced by these industries, we have been focused on innovation to deliver better technical performance and create sustainable products across a broader range of markets, including big shoe, interiors, military and equestrian.

Operations

During the year we responded to the lower levels of volume by challenging how we work. The supply chain has been supportive in realigning costs which has led to a lowering of the Group's operating costs, whilst providing a better fit to support operations. A key change to production was the recalibration of supply of performance leathers, with processing split between Ethiopia and the UK, to make full use of the technical strengths of both divisions.

We remain committed to  the growth opportunities of the interiors markets and are actively in dialogue with automotive and aviation prospective customers. We have also launched a new fire retardant technology for the mass transit market.  Our new Explorer Firebloc™ leather incorporates this technology and is aimed at the rail sector.

In Ethiopia, we have demonstrated our broader manufacturing capability in finished product and have increasing sales in footwear, alongside the production of shoe leather for Vivobarefoot and Soul of Africa, marking an important milestone.   Further developing our finished product manufacturing in Ethiopia continues to be an important strategic goal for us.

Investing in the next generation of our team is an important part of our business. With this in mind, we have been approved for the UK Government's Kickstart scheme for 16-24 year olds.  So far, we have recruited 13 kick start team members and we plan more.

Technical

Jon Loxston has taken on the role of Chief Technical Officer (CTO) to lead our solution driven approach to current and future customer needs.

Pittards HQ in Somerset is the intellectual hub of the Group.  Research and development is carried out to create innovative technologies, processes and performance products. By way of example, in 2020 this led to the release of two new products:

Tri Protex^® ; comprising 3 separate anti-microbial technologies bound together to form one synergistic umbrella technology.  Pittards technologies Microspike^TM and Microdefence^® together with Micro-Fresh^TM, create a protective environment throughout the leather structure destroying microbials.  Pittards Tri Protex^® conforms to AATCC100, achieving 99.9% elimination of bacteria.

Pittards Explorer Firebloc^TM leather has been designed specifically for the management of heat and fire resistance where the highest performance upholstery leather is required on rail transport.  Using advanced chemistry and innovative manufacturing techniques. Pittards has imparted high performance heat management, smoke, toxic emission control/suppression and fire resistance to upholstery leather which conforms to EN45545-2 2018, the European railway standard for fire safety.

We continue to invest in capital equipment which is targeted at improving production efficiency or reduces energy and water use.  In 2020, we initiated the purchase of: a new vacuum drier, three dye drum vessels, a whole hide splitting machine and two  shaving machines.  Alongside this, our technical team routinely review our factory processes to improve overall efficiency in line with our sustainable approach to operations in general.

The world is being adversely affected by increased greenhouse gas emissions, deforestation and increased pollution and it recognised that the world's population must address these issues for the good of all.  We understand that implementing and adhering to guidelines and regulations will contribute towards improving the global situation and we recognise the importance of this.  Our customers expect compliance to international and their own standards concerning the environment, health and safety, quality and leather performance.

Pittards is ISO 14001:2015, major brand audited and REACH compliant.  We are also ISO 9001:2015 compliant and Leather Working Group (LWG) Bronze Medal rated in the UK.  We have long experience with customer Restricted Substance Lists (RSL) and Material Restricted Substance Lists (MRSL) and working within the ZDHC framework.  We work with chemical partners that take a strategic approach to environmental impact.

Outlook for 2021

The global pandemic has had a big impact upon our business. Our resilience has enabled us to come through one of the most serious set of circumstances we are likely to face, and we have emerged a stronger business today than we were in 2019.

Looking forward to 2021, we have started the year with a better order book.  Whilst some of this may have been from the need to refill the supply chains there are also signs of a general recovery in demand.  In addition to our traditional markets, we are also well placed to respond to our new strategic market sectors of interiors (automotive, aviation and rail), larger shoe brands and shoe production in Ethiopia. 

With a more efficient cost base we will be able to respond more positively to recovering demand in the global marketplace, and new capital projects being delivered will allow us to grow more capacity in a more efficient way. 

Our commitment to our sustainable and responsible supply chains is well established and we will continue to build upon our continuous improvement culture.

The successful development of Explorer Firebloc^TM for the mass transit market and Tri Protex® antimicrobial technology, demonstrates our market led innovation, with more developments to come. 

Our employees have come through many challenges during 2020.  By working together and evolving our working practices we will continue to develop our flexible approach allowing agile responses to our customer's needs.

Although there are still some unpredictable macro-economic factors, and some inflationary cost pressures our confidence is growing as we build a more balanced business with a broader range of customers.

Cash management will remain a key focus and we believe opportunities currently still outweigh risks to build on our 2020 second half performance.

Reg Hankey

Chief Executive Officer

23 March 2021

Financial review

Reduced revenue at £15.2m (2019: £22.3m), arising from the periods of substantial disruption earlier in the year, inevitably led to Group gross profit falling to £3.2m (2019: £6.9m). This obscured the better mix of business and lower raw material cost, which bodes well for underlying margins. We expect to resume the improving trend of gross margins from 2019, underpinned by the low-cost facility in Ethiopia, improved operational efficiency and broader product range.

Cost savings were a key feature of 2020, with annual cost savings heading into 2021 compared to 2019 of £2m. 2021 will benefit from our newly aligned cost base, whilst 2020 benefitted from furlough support of £0.6m. Furlough support had minimal impact on the second half of 2020 at £0.1m, as there were no furlough claims in November or December and no material further claims for support are planned for 2021. We are not reliant on any form of cash deferment or subsidy at this time.

We are addressing inventory control, through lowering capacity and adapting our processing model with Ethiopia, broadening the portfolio into 2020 and improving quality control. Our slow-moving inventory fell to £2.8m (£3.2m:2019), and we have addressed capacity and new channels to aid a reduction of core skin inventory.

Overall inventory levels have fallen to £15.0m (2019: £17.3m), and we are confident we will build on this progress in 2021, as our newly aligned capacity plan and business model should facilitate further de-stocking in 2021.

Apart from inventory, working capital has been adversely affected by the changing shape of the business. Credit terms to new markets and customer mix has resulted in a modest increase in debtor days. We have supported the supply chain with faster payment in 2020 compared to 2019.

We were encouraged to achieve net debt at £10.1m (£9.6m: 2019), after the peak earlier in the year of £11.5m, considering that we have also funded treasury shares worth £0.4m, with our share buyback during Q4-2020. This was a robust cash performance, with a £1.6m improvement in net debt since the half of 2020 on a like for like basis, and to preserve debt within £0.1m of 2019 allowing for treasury shares.

One of the Group's key financial measures is gearing. Our gearing rose to 73% in 2020 but we remain committed to manage down gearing to sustainably below 70%.

During the year, Return on Capital Employed (ROCE) was negative, decreasing from 4.2% positive in 2019. On an ongoing basis, our Return On Investment (ROI) is recovering positively and we are targeting to deliver our near term objective of returns above our Weighted Average Cost of Capital (WACC) which fell to 3.8% in 2020 (2019: 4.9%).

End of year position

Net assets have decreased from £17.5m to £13.9m, mainly due to the loss in the first half of the year and the devaluation of Ethiopian BIRR.

The Group is actively seeking to mitigate foreign exchange risk as far as practical. Due to economic uncertainty, we eased the hedging strategy in 2020 by lowering cover to 40% and extending cover to June 2022. Sales proportionally in GBP increased during 2020 assisting in lowering currency risk to £0.3m annual impact on PBT, for every 10% move in US$.

Total net debt (including lease obligations and overdrafts) increased to £10.1m as of 31 December 2020. Our headroom on Group facilities improved however to £3.3m (£2.6m: 2019). Allowing for own share purchases into treasury of £0.4m, our like for like debt was £9.7m net debt as at 31 December 2020 (2019: £9.6m net debt) when we did not have treasury shares. The UK business achieved positive free cashflow (excluding CAPEX) for the year, helped by falling inventory and improving EBITDA, marking a significant change in operating performance.

Over the last two years we have invested £1.2m in capital programmes to enhance operating capability and efficiency. We plan increased capital spend in 2021, of circa £0.9m across the Group after a pause during 2020, but these spends will be carefully targeted with short payback, operational efficiencies and growth prospects.

1.       Basis of preparation

The consolidated financial statements have been prepared on a going concern basis and in accordance with International Financial Reporting Standards ("IFRS") including International Accounting Standards ("IAS") and IFRS Interpretations Committee ("IFRS IC") interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under accounting standards as adopted for use in the EU.
 

The information in this preliminary statement has been extracted from the audited financial statements for the years ended 31 December 2020 and 2019 and as such, does not constitute statutory accounts within the meaning of s434 of the Companies Act 2006. A full annual report for the year ended 31 December 2019 on which the auditor has issued an unqualified audit report, has been delivered to the Registrar of Companies. The Group's annual report for 2020, on which the auditors have issued an unqualified audit report, will be delivered to the Registrar of Companies in due course. No statement has been made by the auditor under Section 498(2) or (3) of the Companies Act 2006 in respect of either of these sets of accounts.

3. Taxation  

·      Copies of the full 2020 Annual Report will be available on the company's website within 7 working days at www.pittards.com. 

·      Further copies may be obtained by contacting the Company Secretary at Pittards plc, Sherborne Road, Yeovil, Somerset, BA21 5BA.

The annual general meeting is to be held at the registered office on 14 May 2021 at 12pm.