TIDMMCON
RNS Number : 0197X
Mincon Group Plc
25 April 2019
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 2019 to date,
incorporating the first quarter to 31st March 2019.
Key elements (comparison of Q1, 2019 to Q1, 2018):
Continued improvement in our product sales mix:
-- Mincon manufactured product sales up 30%
-- Being organic growth of c. 4% and
-- Acquisition growth of 26%
-- Third party product sales down 5%
Resulting in:
-- Revenue up 24% overall
-- Profitability slightly behind last year in Q1
We continue our strategy of improving our product mix by
manufacturing what we sell, where this provides commercial
advantage. This has resulted in Mincon product representing 86% of
sales in the quarter compared to 81% last year and in the period
under review our manufacturing capability has now built to a level
where we are able to meet customer orders in a normal commercial
timeframe. This allows us to focus on the efficiency of delivery
and margins, and to reduce the extra overhead that had come into
place to meet the last phase of growth, before we meet the service
requirements of the new direct sales coming on stream through the
rest of the year.
Revenue
In the quarter the Group caught up with the order book, is
current with its orders, and has additional capacity available in
the production facilities of certainly 10% to 20% even at the new
levels of throughput.
The heat treatment facilities are now coming on stream in
Benton, Illinois this month after a successful series of
commissioning throughput, and are expected to come on-line in
Perth, Australia in June/July this year. The additional vacuum
furnace capacity has been commissioned in the Marshalls Carbide
plant, and the final furnace arrives in Shannon in July. These
capital commitments extend back several years in some cases, and in
the last year new plant and equipment capital commitments are
running well below the depreciation run rate of c. EUR4m a
year.
Factories are, in the main, well specified now for the product
range and sales level. In the first quarter we continued to reduce
our inventory of rigs, with the later ones getting sold at cost
less commission and a degree of refurbishment, certainly above the
written down value they were held in prior to the year end. We had
eleven rigs, and we have sold six in the last few months. This was
an important objective, and to some degree it suggests we are
reasonably well into the mining recovery flagged two years ago.
The Challenger brand
We found, as we completed our drill string build out, and
extended our ranges of hammers and bits, that we began to be able
to compete in supplying complete drill consumable solutions
directly to mines. As we build out our revenue in construction
piling, we find that the natural shape of the business is higher
value contracts extending over a number of years. The investment in
our engineers and engineering, together with the experience of
drilling held by key service team members, means we can advise on
the consumables solutions for the end customers.
This is a relatively new business structure for us, but it both
fits with the ambition to build out relationships with the
end-customers, and with the engineering philosophy in the Group. We
have to offer better value, whether it is the service commitment,
the engineering, the pricing or, as we find, a combination of all
three. Dealing directly with the end customers allows us to create
the breadth in relationship that positions the Group as a reliable
element of the construction or mining process.
We have to be reliable. So much of what we do is at the start of
the processes, whether it is delivering the ore tonnage, or the
piling that supports buildings and harbours, that the fault
tolerance of the end customers is low, and the potential
liabilities higher than simply replacing a hammer or a bit. We are
getting much deeper into the service element. This dependence by
customers on our service and engineering means that we also have to
keep the requisite inventory near the contract site, and service
individuals proximate to the service delivery. This is an emerging
model for us, and each contract requires people, investment,
service-guarantees and time.
We have recently won multi-million dollar business in Chesapeake
Virginia, in Indonesia, in Chile, and in Finland which are not
reflected in this growth as yet to any degree. These will require
some restructuring and build out in the Group to support the end
customers, incur some initiation and front-end costs, and this is
causing a rethink of our management structure to lean towards a
regional footprint, mapping the thinking behind the investment in
the key factories in the Americas, Australasia/Asia Pacific (APAC)
and EMEA (Europe Middle East Africa)
Gross margin
Gross margin was at about the budgeted level considering the
expected product mix changes, at 35%, as this includes a full
quarter of the lower margin Driconeq Group in Q1, 2019, and nothing
from this acquisition in the previous year. The drill pipe business
(excluding their profitable heat treatment activity) has a gross
margin of c. 20%, and the turnover is about a sixth of our revenue.
It's a good acquisition and a good team, and there is additional
margin to play for in the supply costs side of the business in
phase 2 of the on-boarding. Overall in the Group we can comfortably
produce what we couldn't deliver a year ago, and our eyes are
inward now on overhead reduction, factory efficiency, and the
realisation of assets and disposal of businesses that don't sit
with the current three year plan.
Group review and streamlining
We have developed a complex business model over the last few
years as we added factories, customer service centres and products,
organically and through acquisition.
We have decided to overhaul the Group, reduce the overhead by a
targeted EUR3 million a year, and reorganize on a regional basis
into three zones; Americas, EMEA, and Australasia/Asia Pacific.
This will cost some money, take some time, but we have already
reduced overhead by a run rate of EUR1 million a year since the
recent budgeting and review planning. It is our expectation that
the reduction in expenses will become self-financing in the current
year and provide the service level and response needed to support
the positioning of the Group and the brand as a challenger to the
incumbent market structure.
Initially this will not substantially disrupt the Group, but
develop the reporting structure, and increasingly as the other
Group reviews take place from the operational side, we will be
making decisions through 2019 on what we make and where we make it.
We have flagged this before. Since we expect low margin, less
engineered products to come increasingly under pressure in an
interconnected world, Mincon Group is repositioning with the full
consumables offering and a higher service element, directly to the
larger end customers. We aim to combine this with product systems
that are more fuel efficient, offer better value in use overall and
are more environmentally friendly.
The Greenhammer hydraulic systems
We expected the system to go back into the beta testing on site
in Australia in March, but the mine was evacuated for the first
time in nine years as cyclone Veronica blew through Western
Australia. In consequence the mine suffered flooding and the
production schedules were severely disrupted. The rigs had to go
back into full production to catch up on the ore shortfall , and we
now expect to be back on site in May. We have spent the time
improving the system in accordance with our own testing and
constant development, and we are ready to re-engage the system when
the rig comes off-line.
The smaller size system is also available, and we continue to
develop the thinking and engineering around different applications
and hammer types to continue to increase the addressable market for
the system suites.
Market comment
We have seen the quarter deliver increased revenue with only
moderate profit movement, and the growth is mostly from the
addition of a distributor, and the additional quarter of the
Driconeq Group, both lower margin activities. We have seen the full
quarter impact of the overhead build out while the business growth
in the direct model will be realised through the coming months and
years.
Our manufacturing and delivery, which has been an issue for the
last two years, has caught up with our sales growth, and now that
we can deliver in accordance with the customer requirements, we can
focus on the efficiency of our factories and the value from our
customer centres. Other than that, we have to take each new direct
customer opportunity as a separate project, and make sure that we
engage cross-functionally to meet the service requirements while
earning a return commensurate with the investment and risks.
Annual general meeting
The annual general meeting of Mincon Group plc will be held
later today, Thursday 25(th) April 2019 at 10.00 am in the Park Inn
by Radisson, Shannon, Ireland.
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
25(th) April 2019
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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