Interim Report January – June 2015

SECOND QUARTER 2015

• Sales increased by 13% compared with the same period last year. Weather conditions during the second quarter and a mild winter limited water-related damages. An increase in fire and large loss damages together with last year’s gain of large contracts in the UK compensated the low growth in water damages. Backlog in the Group is 20% higher than last year, excluding the New York City Housing Authority (NYCHA) project. Order intake late in the period was weak following the lack of weather events.
• Operating profit before amortisation and non-recurring items (EBITA before NRI) amounted to EUR 3.4 million (0.1). The development is attributable to improvement programs and new management in several markets. The operating result in Europe accounts for the entire profit increase. North America was influenced in 2014 by the Polar Vortex which increased the number of freeze damages.
• Country presidents in Germany and the US were replaced during the quarter, and both countries initiated restructuring programs. The reduction of central administration has been completed in Germany. In the US, the PDR (property damage restoration) business has been discontinued in order to focus exclusively on the TCS (temporary climate solutions) business. The management team at Polygon’s head-office in Stockholm has been reduced from five to three persons. Restructuring charges, mainly attributable to Germany and the US, amounted to EUR 4.5 million. Last year the restructuring charges amounted to EUR 3.7 million.
• Operating loss (EBITA) amounted to EUR 1.1 million (3.6).
• New appointments to the Board of Directors in June are Lars-Ove Håkansson, previously CEO and Chairman of Skanska, and Petter Darin from Triton Advisers (Sweden) AB. At the same time Torbjörn Torell stepped down from the Board.

JANUARY – JUNE 2015

• Sales increased by 9% compared with the same period last year, partly due to favourable order intake in late 2014.
• Operating profit before amortisation and non-recurring items (EBITA before NRI) amounted to EUR 7.8 million (4.0). The profit increase is attributable to leverage on the sales growth.

Amounts in brackets in this report refer to the corresponding period in the previous year.

Group Key Figures
For Group Key Figures table, please refer to attached file below.

Comments from the CEO
Q2 is clearly a step in the right direction

In the first quarter report I stated, “We are better prepared to meet the challenges in Q2 which historically is our weakest quarter […] the improvement actions should give positive effects both on the project margin side as on the cost side.” I am pleased that my forecast was accurate, especially since the improvement is within our operations, as we have not been helped by weather events. Backlog at the start of 2015 was improved after good sales efforts in late 2014.

In the second quarter alone we improved our operative EBITA level from last year at zero to 3.1 percent, and for the whole period we improved the operating result by almost 100 percent. All countries except the US have improved their results in the first half of the year compared with 2014.  

The restructuring program initiated in Germany, where the first step was to cut the central costs, has now been completed by the move of the head office. We could see improvement in the cost structure already in the second quarter. The refocus in the US has started with a cost cut which, as in Germany, has rendered favourable effects in the second quarter. The organisation and management can now focus entirely on sharpening our offer in the temporary climate solution (TCS) area.

Last but not least, I see improvements in all countries where we changed the country president last year. The current management teams, together with a strong focus on a set of strategic initiatives, will help us on the journey to improve our profitability. We need to grow the business, improve our efficiency in operations and get leverage from a more optimised indirect structure.

Short-term outlook
New framework agreements and effects from productivity measurements should partly compensate for the weak order intake towards the end of the second quarter. Indirect costs are reduced after the restructuring projects in the US and Germany. We foresee limited restructuring in the second half of the year.

Market development
There are several market trends in the property damage restoration market that benefit larger players like Polygon such as: the centralisation of procurement, 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, which consequently will increase water damages.

Net sales and profit for the second quarter 2015
Consolidated sales amounted to EUR 109.1 million, an increase of 13% compared with the same quarter last year. Organic growth, excluding currency and acquisition effects, amounted to 9%. Growth in Europe is 13% while North America is 14% below last year’s sales in local currency. Due to the lack of weather events and a mild winter, the sales mix was unfavourable with an increasing share of non-water related jobs, which have lower margins. Order backlog for the Group increased by 20%, excluding the NYCHA project, which influenced the second quarter 2014.

Operating profit for the Group before amortisation and non-recurring items (EBITA before NRI) amounted to EUR 3.4 million (0.1). Earnings have been positively impacted in most markets compared with last year as an effect of restructuring programs from previous periods, in addition to restructuring initiated and executed during the second quarter this year. In Germany and the US, programs have been completed to reduce indirect spending. Both programs had positive effects in the second quarter.

Restructuring costs in the second quarter increased to EUR 4.5 million due to the cost reductions in Germany and the US. The restructuring is mainly redundancy costs. Operating loss (EBITA) amounted to EUR 1.1 million (3.6).

The work in the NYCHA project in the US was finished in late April. Administrative closing of the project is ongoing.  

Net financial expenses for the period amounted to EUR 2.8 million (4.8) including a currency loss of EUR 0.9 million. Last year the currency differences were close to zero and some extra costs occurred due to the bond financing. Loss before tax for the period amounted to EUR 5.2 million (9.7), and net loss was EUR 5.3 million (9.4).

Net sales and profit for the first half year 2015
Consolidated sales amounted to EUR 220.1 million, an increase of 9% compared to the same period last year. Organic growth excluding currency and acquisition effects amounted to 8%. Europe shows a growth of 10% while North America is in local currency 7% below last year’s sales, mostly due to a decrease in Canada. 2014 was boosted in the US by the Polar Vortex. Due to the lack of events and a mild winter, the sales mix was unfavourable with an increasing share of non-water related jobs with lower margins.

Operating profit for the Group before amortisation and non-recurring items (EBITA before NRI) amounted to EUR 7.8 million (4.0), an improvement of 95% compared with the same period last year. The improvement is mainly attributable to the second quarter. The first quarter was satisfactory in 2014 while second quarter was weak. Effects from previous restructuring and new actions explain the improved result. All markets except the US have improved the results compared with last year.

Restructuring cost was EUR 4.5 million (4.5) of which nearly all was booked in the second quarter. Operating profit (EBITA) amounted to EUR 3.3 million (loss 0.5).

Net financial expenses for the period amounted to EUR 2.0 million (6.7) including currency gains of EUR 1.8 million (0.4). Loss before tax for the period amounted to EUR 1.5 million (10.0), and net loss was EUR 1.6 million (9.5).

Cash flow and financing
Cash flow from operating activities during the second quarter of 2015 amounted to EUR 5.0 million (neg: 1.4) and cash flow before financing activities amounted to EUR 2.2 million (neg: 3.8). Due to the NYCHA project and work in progress, as part of the high business activity late in the quarter, working capital has increased since year-end.

Total interest-bearing net debt amounted to EUR 107.2 million (December 2014: 101.7).

Equity amounted to EUR 40.2 million (December 2014: 42.4).

The Group’s liquidity buffer amounted to EUR 26.5 million (December 2014: 31.9), comprising cash and cash equivalents of EUR 16.5 million (December 2014: 21.5) and unutilised contracted loan commitments of EUR 10.0 million. (December 2014: 10.4)

Capital expenditure
Capital expenditure during the second quarter of 2015 amounted to EUR 2.8 million (2.4).

Parent company
The consolidated figures in the report are presented at the consolidated level of Polygon AB. The Parent Company, Polygon AB (corporate registration number 556816-5855), directly and indirectly holds 100% of the shares in all subsidiaries in the Group, except for the company in Denmark of which the non-controlled interest is 24.2% Net income for Polygon AB for the second quarter amounted to a profit of EUR 39,000 (1.2 million).

Most significant risks and uncertainty factors
Around 75% of Polygons business is property damage control following 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 weather. Since part of Polygon’s cost structure is fixed, the proceeds of the operations are to some extent unpredictable 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 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 elaboration of the Group’s risk and uncertainty factors, please refer to the 2014 Annual Report.

Polygon’s view is that there have not been any significant changes during the reporting period with regards to risks and factors of uncertainty 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 are no material transactions with companies in which MuHa No2 LuxCo S.á.r.l has significant or controlling influence.

Accounting policies
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 is the same as those applied in the consolidated annual accounts for 2014. More specified accounting policies can be found on page 10-16 in the Annual Report for 2014.

A number of standards and changes of standards are in effect from January 1, 2015. Polygon does not intend to apply them beforehand and the overall assessment is that they will have no major impact on the Group’s result or position.

The term “IFRS” used in this document comprises the application of IAS and IFRS as well as the interpretation of these standards published by IASB’s Standards Interpretation Committee (SIC) and International Reporting Interpretations Committee (IFRIC).

  
The undersigned assures that this interim report gives a true and valid overview of the Parent Company and the Group’s business, position and results, describing essential risk and uncertainty factors that the Parent Company and its subsidiaries face.

  
Stockholm, 14 August 2015

Evert Jan Jansen
President and CEO

For more information please contact:
Mats Norberg, CFO, + 46 70 331 65 71
Email address: ir@polygongroup.com

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