Interim Report January - June 2016
SECOND QUARTER 2016
- Sales in the quarter were up 8% compared to the same period of last year driven by continental Europe. Comparable business in the US after the closing of the PDR activity last year, increased by double digits.
- Order intake for the quarter was strong following the heavy rains in central Europe that took place in late May and early June.
- Adjusted EBITA amounted to EUR 6.3 million (3.4), an increase with 85% compared to the previous year. The main earnings improvement came from continental Europe and was driven by Germany which, along with the US, is continuing to perform well following the restructuring activities last year.
- Operating profit before amortization (EBITA) was EUR 6.2 million (loss 1.1). EUR 4.5 million was booked last year for restructuring in Germany and the US.
- A first pilot of the new field force system was implemented in mid-June.
- On 29 June Polygon received permission from the bondholder to reorganize the internal debt structure.
JANUARY - JUNE 2016
- Strong sales in several markets compensated for the effects of the closed activity in the US during 2015. Underlying organic growth adjusted for restructuring in the US and currency effects was positive at 7.1%. Reported sales increased by 3.3% compared to the same period of last year. Polygon gained large contracts during the period (UK, Germany and Norway), strengthening the market position.
- Adjusted EBITA amounted to EUR 12.5 million (7.8), an increase of 60% compared to the previous year. Ten countries out of 13 improved their earnings. A large part of the improvement has come from Germany and the US following the restructuring in 2015.
- Operating profit before amortization (EBITA) was EUR 12.1 million (3.3). Items affecting comparability have decreased substantially in 2016.
- Cash flow from operating activities of EUR 7.3 million followed the seasonal pattern with build-up of working capital. Net debt was EUR 99.8 million (107.3).
- The Board of Directors was strengthened in January 2016 with the addition of Ole Skov.
Group Key Figures
For Group Key Figures table, please refer to attached file below.
Comments from the CEO
2016’s flying start confirmed after a strong Q2
After last year’s repeated remarks about the absence of weather related events, we now find ourselves in a situation where the weather has been favourable, at least compared to the same period of last year. It should be mentioned that 2015 was an “exception to the rule”, namely a year with a very mild winter combined with the absence of significant floodings. Very late in 2015 we experienced floodings in the UK that, to a large extent materialized during the second quarter. In late May and early June we experienced rainfall in central Europe that caused severe floods in Germany, but also affected France, the Netherlands and Belgium. We expect the effects of these events to become visible during Q3. During major crises, Polygon is and will continue to be a very strong partner due to the fact that we can move large volumes of skilled labour and equipment within national geographies or even cross-border. Our European warehouse, where we keep an emergency drying stock, is unsurpassed when it comes to size and capability.
Although weather remains important to our business, we should at the same time keep in mind that the most of what we do can be considered repeat business. Taps will always break, showers and central heating systems will leak, people will forget to turn off the stove, electrical short circuits will occur, and so on. In that light, 2015 can be seen as a good benchmark year, when business improved considerably without any weather support.
The combination of an average weather pattern, effects from last year’s restructuring and good underlying growth has manifested itself during 2016 in improved earnings. The underlying growth, adjusted for currency effects and the closed business in the US, amounted to 7%, which we estimate to be higher than growth in the number of claims as indicated by insurance firms. Adjusted EBITA for Q2 increased by 85% compared to last year and the first half of 2016 was up 60% compared to 2015. Ultimately, this growth has been driven by the local managements responsible for implementing Polygon’s way of working (the Polygon model). After the restructuring programs from last year, Germany and the US continue to show improvement in earnings, and due to their size they are important contributors to the company’s overall development. We have also been able to better exploit Polygon’s core competence. Good examples of this are the use of Harwell’s specialist document drying expertise in markets outside the UK and the deployment of our German complex and industrial loss team, which includes technical reconditioning experts, to support projects in other countries. Going forward, we will continue to invest in our global competence centre for specialist services, where we develop and deploy “cutting-edge” expertise for the PDR markets.
On several occasions we have mentioned our diligent efforts related to “getting the basics right” as an important driver behind our current performance improvement. Well-designed processes that are executed in a consistent way are fundamental for both profit and growth. We will continue to drive gross margin improvements through operational focus on productivity and efficiency. An ever-increasing number of countries within our Group are reaching a mature phase and are looking to expand their business through bolt-on acquisitions or the development of new services and new customer segments. They have the processes and people in place to successfully integrate new businesses. The model has been proven in the two most recent acquisitions, Harwell in the UK and Tinkler Bau in Austria, both of which continue to perform well. One prerequisite for financing acquisitions is that the business generates sufficient cash. We expect to see improved cash flows through an improved EBITDA, a well-managed working capital and very little restructuring exercises going forward.
The effects of business optimization projects together with the order intake at the end of Q2 should contribute positively in the second half of the year. The effects of last year’s costs savings from restructuring will have a smaller impact in the second half compared to the first half of the year. Weather events in the second half of the year will contribute positively, as the comparable period had almost no weather events.
There are several trends in the property damage restoration market that are benefiting larger players like Polygon, such as procurement centralization, the customer preference for one-stop-shops and the more complex requirements for front-end IT systems. Global warming is gradually increasing rainfall levels and extreme weather conditions, which will consequently increase water damages.
Net sales and profit for the second quarter of 2016
Sales amounted to EUR 118 million, an increase of 8% compared to the same quarter of last year. Continental Europe developed well with growth of 12% and sales for comparable business in the US (TCS and document restoration) increased by double digits. Activity in Nordics and UK improved after a slow Q1 and showed growth of 4%. Order intake for the Group improved compared to last year mainly due to the flooding in continental Europe and gain of large loss projects in Germany.
Adjusted EBITA was EUR 6.3 million (3.4) and improved by 85%. The impact of last year’s restructuring, structural improvements and leverage from sales growth explains the increase in earnings. The main improvement was seen in Continental Europe, driven by Germany and also supported by good earnings in the other countries. Items affecting comparability amounted to EUR 0.1 million (4.5). Operating profit before amortization (EBITA) was EUR 6.2 million (loss 1.1).
Net financial expenses for the period amounted to EUR 1.5 million (2.8) of which EUR 1.9 million (1.9) refers to interest expenses and EUR 0.4 million (loss 0.9) refers to exchange rate gains.
Profit before tax amounted to EUR 3.3 million (loss 5.2) and net profit was EUR 3.2 million (loss 5.3).
Net sales and profit for the first half of 2016
Sales amounted to EUR 227 million, an increase of 3.3% compared to the same period of last year. Organic growth adjusted for restructuring in the US last year and currency effects was 7.1%. This was mainly fuelled by good development in continental Europe driven by Germany and strong sales in the UK following the event late in December. The Nordic area recovered after a slow first quarter. Sales in North America were down by 23% but the remaining core business (TCS and document restoration) grew by 16%.
Adjusted EBITA of EUR 12.5 million (7.8) improved by 60%. The main driver was the effects of last year’s restructuring combined with sustainable improvements in several countries. The increase in continental Europe explains a major part of the increase. North America improved substantially from a low level while the Nordics & the UK showed a more moderate increase. Items affecting comparability amounted to EUR 0.5 million (4.5). Operating profit before amortization (EBITA) was EUR 12.1 million (3.3).
Net financial expenses for the period amounted to EUR 4.2 million (2.0) of which EUR 3.8 million (3.8) refers to interest expenses and EUR 0.4 million (plus 1.8) refers to exchange rate losses.
Profit before tax amounted to EUR 5.0 million (loss 1.5) and net profit was EUR 4.9 million (loss 1.6).
Cash flow and financing
Cash flow from operating activities during the second quarter was EUR 6.7 million (5.0). Trade receivables were negatively impacted by the high activity late in the period. Corresponding figures for the first half year, EUR 7.3 million (5.7), followed the normal seasonal pattern with a working capital increase.
Total interest-bearing net debt amounted to EUR 99.8 million (December 2015: 96.2). The Group’s liquidity buffer amounted to EUR 32.8 million (December 2015: 36.5), consisting of cash and cash equivalents of EUR 23.1 million (December 2015: 26.5) and unutilized contracted loan commitments of EUR 9.7 million. (December 2015: 10.0).
Equity amounted to EUR 47.3 million (December 2015: 42.3).
On June 29 Polygon received permission from the bondholders to undertake a debt reorganization of the Polygon Group. The purpose of the debt reorganization is to strengthen the balance sheet of Polygon Germany and to better reflect the revenue profile of the Group on an entity-by-entity basis. The reorganization was implemented with effect from 1stof July and will both provide operational advantages and enhance cash flow for Polygon Group.
Capital expenditure in the second quarter was driven by a focus on TCS and structural investments in special large loss equipment and amounted to EUR 4.3 million (2.8). The total for the first half year was EUR 8.2 million (5.3).
The consolidated figures in this report are presented at the consolidated level for Polygon AB. The Parent Company, Polygon AB (corporate identity number 556816-5855), directly and indirectly holds 100% of the shares in all subsidiaries in the Group, except for the company in Denmark, in which the non-controlling interest is 24.2%. The net loss for Polygon AB for the second quarter amounted to EUR 47 thousand (profit 39).
Significant risks and uncertainties
Around 75% of Polygon’s business consists of property damage control, which follows a seasonal pattern of predictable demand. The remaining 25% is related to more extreme and less predictable events caused by weather and fire. The frequency of property damage can vary depending on circumstances beyond Polygon’s control, the outdoor temperature and the weather. Since part of Polygon’s cost structure is fixed, the proceeds of the operations are unpredictable to some degree and vary from time to time.
Polygon is to a large extent dependent on its key customers, the insurance companies, and must maintain mutually beneficial relationships with them in order to compete effectively. Our top ten customers represent about 30% of Polygon’s sales, with the newest customer on the top-ten list having a seven-year relationship.
For further details about the Group’s risks and uncertainties, please refer to the 2015 Annual Report.
Polygon’s view is that there have not been any significant changes during the reporting period with regard to the risks and uncertainties that were presented in the Annual Report.
Related party transactions
The Group is under the controlling influence of Polygon Holding AB, the Parent Company of Polygon AB. Polygon Holding AB is under the controlling influence of MuHa No2 LuxCo S.á.r.l. There have been no material transactions with companies in which MuHa No2 LuxCo S.á.r.l has significant or controlling influence.
The Board of Directors of Polygon AB (publ) or any of its subsidiaries may from time to time resolve to purchase notes issued by Polygon AB (publ), which are listed on Nasdaq Stockholm, on the market or in any other manner. Any purchase of notes will be made in accordance with the terms and conditions of the notes and the applicable laws and regulations.
The interim report for the Group has been prepared in accordance with IAS 34 Interim Reporting. The interim report for the Parent Company has been prepared in accordance with the Swedish Annual Accounts Act.
The Group applies the International Financial Reporting Standards (IFRS) as adopted by the EU and the Swedish Annual Accounts Act.
The accounting policies applied in this interim report are the same as those applied in the consolidated annual accounts for 2015. More detailed accounting policies can be found on pages 11-16 of the Annual Report for 2015.
A number of standards and changes in standards are effective from 1 January 2017. Polygon does not intend to apply these in advance and the overall assessment is that they will have no material impact on the Group’s result or position.
The term “IFRS” used in this document refers to the application of IAS and IFRS as well as the interpretations of these standards published by the IASB’s Standards Interpretation Committee (SIC) and the International Reporting Interpretations Committee (IFRIC).
The undersigned gives his assurance that this interim report provides a true and fair overview of the business activities, financial position and results of the Parent Company and the Group and describes the significant risk and uncertainties to which the Parent Company and its subsidiaries are exposed.
Stockholm, 11 August 2016
Evert Jan Jansen
President and CEO
For more information please contact:
Mats Norberg, CFO, + 46 70 331 65 71
Email address: email@example.com