Manufacturer warns £5m exceptional costs will hit full-year profits

Wakefield-headquartered listed plastic components manufacturer Carclo has published a further profit warning this morning, as it expects to spend up to £5m on exceptional costs relating to its Wipac division, Czech Technical Plastics facility and equalising guaranteed minimum pensions.

The firm, which last issued a profit warning in January, this morning issued a trading update for the year ended 31 March 2019. Carclo said that although progress had been made in increasing production output, the costs of scrap, freight and production labour “remained at higher than expected levels as an unprecedented number of new programmes were launched into the previously reported unstable manufacturing environment.”

Carclo added: “This situation, combined with lower development and tooling revenue as fewer new programmes were awarded, a risk highlighted in the Group’s statement on 11 January 2019, resulted in the profits for Wipac, and consequently the Group, falling below the Board’s expectations for the year.”

The firm added that exceptional costs associated with reorganising the Wipac business and restructuring the Czech Technical Plastics facility were in the range of £1.5m to £2m, of which around £400,000 was non-cash.

In addition, exceptional costs of around £3m associated with the equalisation of guaranteed minimum pensions (“GMP”) are to be charged in the year. Carclo added: “Work to determine the effect of the reduced profitability on the carrying value of goodwill will be finalised as part of the year end audit.”

Carclo said that its Technical Plastics and Aerospace Divisions performed “as anticipated” in the year, with the second half seeing a much-improved performance from the Technical Plastics Division. It said that this reflected the “growing success of the ongoing operational improvement programme and controlled growth in volumes.”

Carclo added: “A programme commenced just before the year-end to reduce the footprint of the Technical Plastics facility in the Czech Republic to further improve the site’s future profitability. Overall, both the Technical Plastics and Aerospace Division saw year-on-year improvements in operating profits, with the Aerospace Division significantly ahead.

“In Wipac, the main operating business in the Group’s LED Technologies Division, production volumes have begun to increase in recent weeks although customer backlogs have remained largely unchanged as customer demand has risen, partly for Brexit related safety stock reasons.

“With some key personnel changes having been made in the past three months and a range of operational initiatives subsequently implemented, the Board is confident of further progress being made in improving output in the near-term. Given that a number of new mid-volume platforms go into production over the coming months and years, the revenue outlook for the business remains strong, with the opportunities and challenges this brings.”

The listed group has completed an organisational re-structure, adding that “the recently appointed interim COO role quickly being eliminated in order to provide greater clarity and swifter decision making.

“This move is seeing benefits with the local, recently enhanced, Wipac team leading the business with renewed focus and unified direction. Customers remain broadly supportive of our actions and, in a number of cases, are providing expert on-site assistance. In addition, discussions are ongoing for the earlier than planned customer reimbursement of monies incurred by Wipac for the design and development of future production programmes.”

Group net debt at 31 March 2019 was in line with expectations, at slightly above the level at the half year. Carclo added: “Given the ongoing discussions with customers referred to above, the net debt to EBITDA banking covenant test at 31 March 2019 was deferred by the bank for one month in advance of the year-end.”

Carclo is financed through an overdraft facility and a £30m term loan maturing in March 2020, which will require refinancing in the coming months.