Eurocell has published it’s half-year results for 2023, and, just like everyone else, they are seeing the effects of a downmarket that is sinking southwards stronger than many predicted.
Here are the main points and my take on what we can read into them.
Eurocell results
Half-year results produce a long report, but here are the main points of the results:
Summary:
· Challenging market backdrop, with particularly severe decline in new build housing
· First half profits down as expected
· Further deterioration in market conditions since July Trading Update means full year performance now anticipated to be below our previous expectations
· Early and decisive action on cost taken in response to lower volumes and to position the business well for when markets recover
· Efficient inventory management driving good cash flow performance, maintaining strong balance sheet and liquidity
Financial headlines:
· Group sales down 2% vs H1 2022, including:
– Profiles down 1%: reduced RMI(4) and weaker new build activity, partially offset by benefit of market share gains
– Building Plastics down 3%: RMI volume in our branches steady but subdued
– Price remains a significant component of sales, with overall Group volumes down 6%
· Increased competition for limited demand leading to pressure on margins in the branch network
· Continue to offset input cost inflation with selling price increases where possible
– Particularly labour and electricity, where we operate a rolling 12-month forward hedging policy
– PVC resin prices fell back slightly in H1 and anticipate some easing on input cost pricing in H2
· Recycling feedstock prices 66% higher than H1 2022
· Adjusted profit before tax from continuing operations down 62% vs H1 2022
– Lower sales volumes, margin pressure in the branches and higher recycling feedstock prices
· Net cash generated from operating activities up 15% vs H1 2022
– Efficient stock management driving a net working capital inflow of £4.2 million (H1 2022: net outflow £9.6 million)
· Strong balance sheet and liquidity, with pre-IFRS 16 net debt of £15.2 million (31 December 2022: £14.4 million)
– Average pre-IFRS 16 net debt of £16.2 million in H1 (H1 2022: £16.5 million)
· Interim dividend of 2.0 pence per share
CEO statement:
Market conditions in H1 2023 became more challenging than we had anticipated, on the back of a sluggish new build housing market and lower RMI activity, with the CPA(5) July update forecasting declines of 19% and 11% respectively in these sectors. Against this backdrop and an exceptionally strong comparative period, we delivered some resilience in the Group’s sales performance in the first half, with volumes down 6%, and improved cash flow.
As expected, H1 profits were down on the prior period. Lower market volumes have resulted in an increasingly competitive environment and margin pressure in the branch network. First half profits were further impacted by recycling feedstock prices, which were significantly higher than H1 2022.
With the decline in market volumes and a tough outlook for the balance of 2023 and 2024, we acted quickly to lower operating costs and focused on efficient working capital management. In addition, we continue to seek operational efficiencies, for profit and cash flow improvement, the benefits of which we should start to see next year.
We anticipate that profits in H2 will benefit from lower input prices as well as the operational cost savings already secured. However, with another base rate increase implemented and the prospect of more to come further impacting upon consumer confidence, market conditions have deteriorated since the beginning of August, meaning that we now anticipate full year performance will be below our previous expectations.
On becoming CEO in May, I initiated a review of our strategy, including the future size and shape of the branch network, customer proposition and other business structures, and I expect this will identify more opportunities for growth and efficiencies. In addition, our pipeline for new fabricator account wins remains positive, supported by a net reduction in UK capacity following the announcement that Duraflex intends to exit the market in September.
Looking further ahead, the UK construction market continues to have attractive medium and long-term growth prospects, driven by the structural deficit in new build housing and an ageing housing stock that requires increased repair and maintenance. Overall, I believe the actions we are now taking leave the business well positioned to benefit from a recovery in our markets which will, over the medium-term, drive sustainable growth in shareholder value.
Analysis
On the face of it, a 2% reduction in group sales compared to H1 of 2022 isn’t all that significant. Considering the strength of the downturn, 2% feels fairly positive. However it is the drop in profit that is the focus point here. A mix of rising material costs, labour costs and drop in demand have made for a distinctly unprofitable trading environment.
It should be said that this is not unique to Eurocell. Much of the industry faces the same quagmire of competing problems. A strong drop in demand, continued higher prices, rising wages, drops in consumer confidence and rising interest rates are hitting businesses from all angles, and they are all hitting the bottom line.
As a result, Eurocell have had to shed around 100 jobs as part of plans to boost that profitability. Again, this is not unique to the company, with others in the fenestration sector making similar moves to remain profitable.
One thing that really stands out in the CEO statement from Darren Waters is the specific mention of trading conditions deteriorating from the start of August. This was a point made by the latest Safestyle UK trading update, which you can read here. In their statement they also specifically mentioned that trading conditions degraded further at the start of H2. Both Eurocell and Safestyle are bell-weather companies in the sector. The fact both companies have made the same point indicates that we’re seeing a more protracted contraction in market activity, and the difficulties that brings with it.
The industry faces a tough reality, whether we want to admit that in public or not. Inflation has been a major problem for consumers in a series of issues to hit spending. That, hopefully, is behind us. But it is now rising interest rates which is the next hurdle. It takes roughly 12-18 months for any rise in interest rates to take effect on the real world. We began hiking rates at the end of 2021. We’re still hiking now, with two or three further increases expected. The effects of these rises, using the 12-18 month measure, will be felt next year. We’re also facing a housing slowdown, with mortgage approvals grinding to a halt and the number of new homes being built frozen as demand drops. Prices continue to fall and mortgage payments keep rising, putting further pressure on homeowners.
One ray of light amongst this is the idea that if homeowners shelve their plans to move, assuming they have the available money to do so, they may turn their attention to improving their current property. This should be an area the fenestration sector seeks to take advantage of as the market continues to sail through troubles waters.
You can view the full report from Eurocell here: https://ir.q4europe.com/Tools/newsArticleHTML.aspx?solutionID=3486&customerKey=EurocellPlc&storyID=15868013
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