Financial highlights
· Group revenue of £54.3m (2016: £57.1m)
· Adjusted operating profit pre-exceptional charge* of £4.7m (2016: £2.2m)
· Operating profit of £0.5m (2016: £1.5m)
· Adjusted profit before tax pre-exceptional charge* of £4.7m (2016: £2.3m)
· Exceptional charge for Settlement Agreement with BRK of £3.8m included in cost of sales (2016: exceptional restructuring charge of £0.2m included within administrative expenses)
· Profit after tax of £0.5m (2016: £1.8m)
· Adjusted gross margin** increased to 33.1% (2016: 28.6%), principally due to a significant reduction in product warranty and product screening costs
· Basic EPS post-exceptional items of 1.1p per share (2016: 4.0p per share)
· Maintained investment in intangible assets of £3.6m (2016: £3.9m)
· Net cash of £3.3m as at 31 December 2017 (2016: £14.3m) and no debt (2016: £nil)
Operational highlights
· Expanded revenue channels with major customer wins across UK Retail, Trade and EMEA
· Launched Wi-Safe Connect and Z-Wave compatible alarms expanding the Company's connected homes proposition
· Maintained market-leading position in CO alarm provision in the UK supporting national marketing campaigns
· Launched Europe's first domestic battery powered gas alarm as a range extension product
· Acquisition of final core modules of Intamac Systems' source code for £0.9m in cash to enhance the Group's connected home product offering
· Product warranty returns and warranty costs were in line with the Board's expectations
· Manufacturing of Sprue's own products at Flex in Poland is underway and on track
· The Board proposes to seek shareholder approval at the Company's forthcoming AGM to change the Company's name to FireAngel Safety Technology Group plc
Termination of Distribution Agreement (“DA”) and Manufacturing Agreement (“MA”) and appointment of two new strategic manufacturing partners
· On 31 March 2017, Sprue received the requisite 12 months' written notice from Newell Brands Inc. (“Newell”), to terminate the DA entered into between Sprue, BRK Brands Europe Limited (“BRK”) and Jarden Corporation (now owned by Newell) and the MA with DTL, a subsidiary of Newell (the “Termination”)
· Termination ended Sprue's obligation to pay the fixed BRK annual distribution fee of £2.9m and right to distribute BRK's products and brands in Europe, both with effect from 31 March 2018
· As announced on 31 March 2017, the Company entered into a manufacturing and supply agreement with Flex to source a range of smoke and heat alarms and accessories from Flex's facility in Poland together with a new supply agreement with a leading manufacturer based in the Far East to purchase alternatives to the BRK products
Settlement Agreement with BRK
· As announced on 10 May 2018, Sprue signed a settlement agreement (the “Settlement Agreement”) with BRK Brands Inc, BRK Brands Europe Limited, Jarden LLC and Detector Technology Limited (together “BRK”) in full and final settlement of all matters between the parties
· As a result of signing the Settlement Agreement, Sprue has booked a £3.8m exceptional charge as part of cost of sales in these results) which includes £3.4m to write down the book value of the remaining BRK inventory as at 30 April 2018 to £nil (as Sprue will no longer be selling BRK inventory), provisions of £0.2m to cover disposal (scrappage) costs of BRK inventory manufactured before 1 January 2017 and £0.2m to cover the Group's legal and professional fees incurred since 22 March 2018 in respect of the dispute with BRK
Graham Whitworth, Executive Chairman of Sprue, commented:
“We worked throughout 2017 to put in place the fundamental building blocks to install an independent supply chain and to position the Company as a dynamic, technology-led growth business. We are pleased with what we achieved last year. We have an exciting array of products to come through and look forward to seeing sales of new products and technology resulting from the £3.6m investment in intangible assets made during the year (2016: £3.9m).
Disappointingly, on 22 March 2018, the day before the 2017 final results were set to be approved by the Board, the Company was unexpectedly notified by BRK of a “Termination for Breach Notice” as announced on 23 March 2018. Whilst it is regrettable that release of these results has been delayed until now, the Board wanted to ensure that the Company “drew a line” under its eight year relationship with BRK and signed a full and final settlement agreement as announced on 10 May 2018.
As a result of signing the Settlement Agreement, Sprue has booked a £3.8m exceptional charge in these results which includes £3.4m to write down the book value of the remaining BRK inventory as at 30 April 2018 to £nil (as Sprue will no longer be selling BRK inventory), provisions of £0.2m to cover disposal (scrappage) costs of BRK inventory manufactured before 1 January 2017 and £0.2m to cover the Group's legal and professional fees incurred since 22 March 2018 in respect of the dispute with BRK. Whilst the Board is pleased to have brought all disputes with BRK to an end with a “clean break” for both sides, the Group's 2018 cash flow will be adversely impacted by approximately £3.8m as a result of the Settlement Agreement.
Sales in the four months to 30 April 2018 are approximately 20 per cent. lower than in 2017, primarily because of lower sales into Germany due mainly to overstocking. Whilst the Board believes that manufacturing Sprue's products at Flex, Poland, plus the investment into technology building blocks will open up growth opportunities, and is the right move for the Group strategically, in the short term, this has impacted the Group's trading as management has been focused on the transition plan, and latterly, on settling the dispute with BRK amicably.
We are pleased to report that production at Flex is under way. The commencement of production at Flex has increased the Group's capital costs with £1.4m in total spent in 2017 on Flex tooling (2016: £0.5m of non-Flex costs). The Group has commenced the sale of alternatives to BRK products sourced from our new supplier in the Far East. For Sprue's customers, it is very much “business as usual”, but with renewed focus and emphasis on selling FireAngel branded products.
With disruption from the transition to the new FireAngel range, new product introductions and lower than anticipated sales into Germany in H1 2018 due mainly to overstocking, the Board expects that the Group will report an operating loss for H1 2018. In addition, the Group's sales and operating profit for the full year are likely to be significantly below the most recent market expectations. The Company's 2018 results will be more heavily weighted towards H2 than has been the case in recent years as we install new FireAngel retail ranges, potential new sales emerge and sales into Germany are expected to recover.
However, the Board expects the Company's operating results to improve significantly in 2019 and beyond when there is no BRK distribution fee to pay and, as expected, sales increase into newly emerging channel opportunities and recover in the Group's key market, Germany, together with sales growth in UK Retail and UK Trade.”