EXO.L Regulatory News (EXO)

2014 FULL YEAR RESULTS ANNOUNCEMENT

4 March 2015

Exova Group plc ("Exova"), a leading international provider of technically demanding testing and advisory services announces its full year results for the period ended 31 December 2014. In April 2014 Exova's shares were admitted to the premium listing segment of the Official List and to trading on the London Stock Exchange.

Solid results in line with mid-year guidance

· Total underlying revenue growth of 8.1% at constant currency including acquisitions and net of disposals

o Underlying organic revenue1 growth of 4.0%

o Growth from acquisitions of 4.7%

o Impact of disposals of (0.6)%

· Good growth in Europe and Rest of World with Americas impacted by headwinds in Aerospace and Transportation

· Margin improvement of 20bps before additional listed company costs

· Three bolt-on acquisitions completed in 2014 and two in February 2015

· Proposed dividend of 2.0p per share in line with IPO guidance

Notes:

1) Underlying organic revenue is organic revenue adjusted for certain non-recurring items associated with a US transportation client within the Product cluster and for the discontinuation of certain food advisory services in the Health Sciences cluster in Europe.

2) Adjusted results are stated before restructuring costs, acquisition and integration costs, IPO related costs, impairment of assets, management fee to private equity investor, interest, taxation and amortisation of intangibles.

3) Pro-forma diluted adjusted earnings per share has been calculated as if the post IPO capital and debt structure had been in place throughout the period.

4) Statutory results reflect pre-IPO funding structure and IPO transaction costs.

Ian El-Mokadem, Chief Executive Officer, commented:

"We are pleased to have delivered results which are in line with our mid-year guidance as this demonstrates the strength of our business model and our ability to adapt to changing market conditions. We delivered strong growth in Europe and the Rest of World whilst growth in the Americas was moderated by headwinds in our Transportation and Aerospace businesses. Looking ahead to 2015, we expect to deliver modest organic growth, good total growth and underlying margins broadly in line with 2014 even with the reduction in activity and uncertainty in global energy markets."

Contacts

For further information please contact:

Ian Middleton, Powerscourt Group

Tel. Direct +44 (0)20 7549 0998 / +44 (0)7885 508 527

exova@powerscourt-group.com

Sophie Moate, Powerscourt Group

Tel. Direct +44 (0)20 7549 0994 / +44 (0)7761 974 589

exova@powerscourt-group.com

Ian Power, Investor Relations

Exova Group plc

Telephone: +44 (0) 131 476 7619investor.relations@exova.com

Analyst briefing and conference call

There will be an analyst briefing and conference call today at 9.00am GMT, held at Goldman Sachs, 10th Floor, Peterborough Court, 133 Fleet Street, London EC4A 2BB. If you would like to attend the meeting, please contact Powerscourt Group at the abovementioned e-mail address. A copy of the presentation is available on the website.

Corporate website: www.exova.com

Exova

Exova is one of the world's leading laboratory-based testing groups, trusted by organisations to test and advise on the safety, quality and performance of their products and operations. Headquartered in Edinburgh, UK, Exova operates 121 permanent facilities in 23 countries and employs around 4,000 people throughout Europe, the Americas, the Middle East and Asia/Asia Pacific.

Exova's capabilities help to extend asset life, bring predictability to applications, and shorten the time to market for customers' products, processes and materials. With over 90 years' experience, Exova specialises in testing across a number of key sectors from health sciences to aerospace, transportation, oil and gas, fire and construction.

FULL YEAR REPORT 2014

BUSINESS REVIEW

The principal activities of the Group are specialist testing and advisory services and the key markets served are Aerospace, Oil & Gas and Industrials, Product, Health Sciences and Middle East.

Exova operates in the Testing, Inspection and Certification ("TIC") market, but focuses primarily on the Testing sector, with Inspection and Certification activities limited to niche market and geographic areas.

The business comprises 121 permanent facilities in 23 countries and employs around 4,000 people.

In April 2014 Exova's shares were admitted to the premium listing segment of the Official List and to trading on the London Stock Exchange.

Overview of performance

1) Adjusted items are stated before restructuring costs, acquisition and integration costs, IPO related costs, impairment of assets, management fee to private equity investor, interest, taxation and amortisation of intangibles.

2) Pro-forma diluted adjusted earnings per share has been calculated as if the post IPO capital and debt structure had been in place throughout the period.

3) The cash conversion ratio is calculated by dividing free cash flow by adjusted EBITDA. Free cash flow is defined as adjusted EBITDA less movement in net working capital (excluding the effect of the IPO related cost accrual), less capital expenditure net of disposals.

Revenue

Revenue for the year was £274.9m which represented organic growth at constant currency of 0.4%. Adjusting this for certain non-recurring revenue items associated with a US transportation client within the Product cluster and for the discontinuation of certain food advisory services in the Health Sciences cluster in Europe, underlying organic revenue growth was 4.0%.

Acquisitions contributed 4.7% of growth, offset by two small disposals which resulted in a reduction of 0.6%. The Group reports in sterling which strengthened considerably during the course of the year over the currencies in most of the territories in which the Group operates. This resulted in a negative translational effect of 6.0%.

Adjusted EBITA margin

Adjusted EBITA margin decreased by 40bps from 17.2% to 16.8%. Following the IPO in April 2014, the Group incurred additional on-going costs of £1.5m associated with being a listed company. The most significant element is the cost of equity incentive plans for senior management. After adjusting for these costs the underlying Adjusted EBITA margin improved by 20bps.

Separately disclosed items

Amortisation of intangible assets

Amortisation of intangible assets for 2014 was £9.3m, an increase of £0.3m from £9.0m in 2013. This increase was primarily due to the additional amortisation of customer relationships associated with 2013 and 2014 acquisitions.

Impairment of property, plant and equipment

In 2013 there was a £0.9m exceptional cost relating to the impairment of fixed assets in the Americas region associated with specialised equipment used in a contract which has now ended. No further use for the equipment could be identified in the Group. There were no impairments of property, plant and equipment in 2014.

Acquisition and integration costs

We incurred £1.6m of acquisition and integration costs in 2014 primarily relating to the integration of Defiance Testing and Engineering Services Inc. and the purchase and integration of Catalyst Environmental Limited and Metallurgical Services Private Ltd.

Restructuring costs

We incurred £2.2m of restructuring costs in 2014, compared to £4.5 m in 2013. Restructuring costs in 2014 comprised £1.6m relating to closure or disposal of three Oil & Gas and Industrials sites in Norway, Sweden and Canada and other restructuring in this sector. These actions allowed the Group to exit activities which were particularly vulnerable to a downturn in Oil & Gas markets and create a more efficient offering to customers in this sector. Other restructuring costs comprised £0.3m in Americas and £0.3m in other parts of the world.

IPO related costs

In 2014 we incurred £13.3m of costs associated with the IPO (2013: £4.2m). These costs primarily related to commissions, legal, accounting and other advisor fees including unrecoverable VAT in connection with the IPO.

On-going financing costs have reduced significantly since the refinancing associated with the IPO in April. However, net cash interest payable in the period to 31 December 2014 increased from £21.6m to £26.2m due to the make whole cost on redemption of the senior loan notes of £15.5m. There were no further non-cash costs relating to the loan to parent undertaking and preference shares after the date of the IPO.

Earnings per share ("EPS")

Diluted adjusted earnings per share for the twelve months ended 31 December 2014 was (4.1)p (2013: (338.5)p). This measure calculates EPS before separately disclosed items.

Pro-forma diluted adjusted earnings per share for the twelve months ended 31 December 2014 was 11.8p. This measure has been calculated as if the post IPO capital and debt structure had been in place throughout the period.

Dividend

In line with guidance given at the time of the IPO, the Board is recommending a final dividend of 2.0p per share which represents a pay-out ratio of 25% of adjusted net income. The dividend will be paid on 5 June 2015 to shareholders on the register at the close of business on 22 May 2015.

Acquisitions

The Group made good progress with acquisitions in 2014 delivering 4.7% revenue growth.

On 6 January 2014, the Group acquired 100% of the share capital of Catalyst Environmental Limited, a leading provider of UKAS and MCERTS accredited stack emission testing in the UK and Ireland, for an initial cash consideration of £5.2m (£4.9m net of cash acquired) with a further payment of £1.3m contingent upon future profitability in the year following acquisition. The value of the contingent consideration payable on the date of acquisition has been assessed and the full amount has been recognised in the financial statements as the profitability target was met in full. The business, which has been renamed Exova Catalyst, adds six facilities and 58 colleagues to our existing portfolio and will allow the Group to develop further the specialist stack testing capabilities which we already provide in Americas and Rest of World.

On 1 May 2014, the Group completed the acquisition of a calibration business in Norway from Raufoss Offshore for a cash consideration of £0.3m. Raufoss Offshore provides calibration services to customers in the oil & gas, defence, transportation and engineering sectors throughout Norway. This acquisition adds seven colleagues and strengthens Exova´s position as the leading provider of measurement technology and calibration services in Scandinavia. As part of the deal, Exova Metech will also continue to provide calibration services to divisions within Raufoss Offshore.

On 21 July 2014, the Group acquired 100% of the share capital of Metallurgical Services Private Limited of Mumbai, one of India's leading metallurgical testing specialists, for a cash consideration of £6.3m (£6.2m net of cash acquired) with a further payment of £2.8m contingent upon future profitability in the two years following acquisition. The value of the contingent consideration payable on the date of acquisition has been assessed, including a sensitivity analysis which did not significantly change the fair value measurement and the full amount has been recognised in the financial statements based on the profitability target being met in full. The acquisition, which brings 130 colleagues and a new laboratory to the Group's global network, will extend our geographical reach and support the expansion of our services to customers in emerging Asian markets. The company, which has been renamed Exova Metallurgical Services, was founded in 1964 and since then has developed long term relationships with over 3,500 customers in sectors including oil & gas, industrials, and infrastructure. Demand for specialist testing in the Indian subcontinent is anticipated to grow as a result of significant industrial and infrastructure investment, expansion of global manufacturing operations and increased regulatory requirements.

On 4 February 2015, the Group completed the outsourcing of the in-house calibration operation of Sartorius-Werkzeuge which adds six new colleagues based in Düsseldorf for a consideration of £0.6m. Sartorius-Werkzeuge is part of the global Würth Group which is a provider of precision tool support services and Exova Metech will now become its preferred supplier of calibration services.

On 9 February 2015, the Group acquired 100% of the share capital of Environmental Evaluation Limited (EEL), a leading provider of environmental testing, inspection and consulting services to UK customers for a consideration of £4.9m. The company helps customers meet environmental regulations through the provision of asbestos testing and inspection, stack sampling and occupational hygiene advisory services and is recognised as a leading provider of asbestos management services for the nuclear decommissioning industry. The acquisition added 83 colleagues and will form part of the Group's Health Sciences cluster.

External net debt (excluding debt issue costs)

Following the IPO, as expected, the net primary proceeds were applied to reduce debt, with remaining senior bank debt refinanced through a new term loan. As a result, net external debt has decreased from £219.9m at 31 December 2013 to £144.1m at 31 December 2014.

At 31 December 2014, our term loan comprised £173.5m of non-amortising borrowings denominated in sterling, euro, Canadian dollars, US dollars and Swedish krona. In addition, a £90m revolving credit facility was undrawn at 31 December 2014. There are no repayments scheduled on our term loans until 2019.

The external net debt to last twelve months adjusted EBITDA ratio was 2.5x as at 31 December 2014 (2013: 3.6x).

Presentation of results

Constant currency growth figures are provided in order to remove the impact of currency translation. We calculate growth at constant rates by translating the current and prior period results at the same exchange rates.

Organic growth at constant currency represents revenue growth at constant currency excluding the growth attributable to acquisitions until the acquisition has been owned for a 12 month period and excluding the revenue attributable to disposals in the year of disposal and the preceding year.

Underlying organic revenue is organic revenue adjusted for certain non-recurring items associated with a US transportation client within the Product cluster and for the discontinuation of certain food advisory services in the Health Sciences cluster in Europe.

Adjusted results are stated before restructuring costs, acquisition and integration costs, IPO related costs, impairment of assets, management fee to private equity investor, interest, taxation and amortisation of intangibles.

The Group presents, as separately disclosed items on the face of the consolidated statement of comprehensive income, those items of income and expense which, because of their nature, merit separate presentation to allow users to understand better the elements of financial performance in the period to facilitate a comparison with prior periods and a better assessment of trends in financial performance.  

Foreign exchange

OPERATING PERFORMANCE

Revenue

Adjusted EBITA

Regional Performance

Europe

Aerospace

Following strong growth in 2013 the European market demand for commercial aerospace testing slowed in 2014 due to a transition from development to production release work, coupled with delays in production ramping up in certain supply chains. This adversely affected testing volume with customers such as forgers supplying components for airframes and engines. Volumes began to recover somewhat in the second half, particularly from engine OEMs and better demand for testing of composite materials. Despite the slower first half, we showed good growth from the investment we made in 2013 to relocate and expand our laboratory in Toulouse. In the UK we consolidated our three non-destructive testing laboratories into a single location in Dudley, significantly reducing the cost base of the business. We also renewed important long term agreements with key customers in Sweden including Saab and FMV, the Swedish Defence Materials Administration.

Oil & Gas and Industrials

There was modest growth in the Oil & Gas materials testing market compared to 2013 with some large subsea pipeline projects taking place in southern Europe and off the west coast of Africa. We saw continued North Sea project work flowing into the UK laboratories. However, there was an increasing emphasis on technically demanding services while more routine testing work slowed. The investment in our Dudley laboratory at the end of 2013 proved very successful with strong demand for corrosion testing throughout the year. There was also sustained demand for work in coatings and fracture mechanics, supporting large pipeline construction projects around the world. During the year we closed a small laboratory in Norway and relocated our laboratory in Aberdeen to larger premises to improve efficiency and expand our service offering to the North Sea market. The new Aberdeen laboratory will focus on supporting the local welding market and has expanded non-destructive capability, making it a "one stop shop" for key clients. In the industrials sector weaker demand in our polymers business in the UK and Sweden was offset by better performance in routine metals testing work. We divested our small ordnance testing laboratory (LTT) in Sweden.

Product

Our Fire Testing business continued to grow strongly in 2014 with continued development and acceptance of European standards being a key driver. Demand for product certification remained high and investments in additional people and systems were made to service increased volumes in both voluntary and mandatory schemes. During 2014 we pioneered a new best practice in our Fire Consulting business by creating a shared resource model with our Middle East colleagues to manage demand for fire engineering services on large design projects in the field of rail, metro and airport construction. This approach allowed both regions to improve growth and margin compared to 2013. Our calibration business also continued to perform well in 2014. Organic growth was supported by a number of small outsourcing contracts and acquisitions. In addition to the Vestas and GSMobile deals which we completed at the end of 2013, we outsourced the calibration department of Raufoss Offshore in Norway during 2014. As a result of these deals the footprint of the business has expanded since 2013 to include operations in Czech Republic, Norway, USA and China. A number of long term contracts were also renewed during the year including Saab Group.

Health Sciences

We saw strong organic growth in 2014 due to major contract wins in the food sector, driven by increasing consumer demand for food safety and authenticity. There was also growth in the water hygiene and pharmaceuticals testing laboratories as a result of increasing market share and key contract renewals. To support the food contract wins, we made significant upgrades to automation and testing equipment in our Birmingham laboratory. The management team in the sector has been significantly strengthened during the year, with a number of experienced general managers joining the business to help support the strong customer demand. The Catalyst Environmental stack emissions testing business acquired at the beginning of the year was successfully integrated and delivered good organic growth.

Americas

Aerospace

Our Aerospace business is weighted toward commercial aircraft production and, as in Europe, was impacted during 2014 by delays to some aircraft programmes and destocking due to inventory backlogs in the supply chain. By the end of the year, these factors appeared to be mostly behind us and we expect to see momentum building into 2015. We made significant investments in upgrading our capabilities in a number of laboratories to position ourselves for technically demanding test types expected in the coming years as production of engines and airframes incorporating new materials ramp up.

Oil & Gas and Industrials

The offshore Gulf of Mexico and onshore Western Canada Oil & Gas markets were very strong throughout 2014. Demand for corrosion testing services for materials to be deployed in hostile environments was especially robust and we initiated a major investment in expanding and upgrading the corrosion testing capability in our Houston laboratory. The Industrials market was mixed with some segments like chemical production and infrastructure displaying strength. However, our laboratories servicing the steel industry were impacted by delays in enactment of new federal standards for railcars used in transportation of crude oil. Following a strategic review of our geological core testing and analysis business in Calgary, Canada it was sold to Loring Tarcore Labs Ltd. Geological core testing was a declining part of our Canada Oil & Gas business and with uncertain demand for this service in mature oilfields, a sale was deemed the best option to maximise value from our resources in the region.

Product

Revenue from our Transportation sector declined significantly due to the anticipated absence of on-site testing work for a large US client which contributed to a strong 2013. In addition, several vehicle programme launches in recent years were completed by the end of 2013 and the market experienced a typical gap before the next wave of new programmes. We won a large multi-year engine testing programme which started to mobilise at the end of 2014 and will continue into 2016 and we exited the year with a general increase in quotation activity in the sector indicating further recovery in the market towards the end of 2015.

Health Sciences

The market for our technically demanding services for the pharmaceutical industry was strong through the year driving healthy growth in the laboratories servicing this segment. The environmental segment in eastern Canada was affected by the exceptionally harsh winter in early 2014 and delays to large construction projects in the province of Quebec following a mid-year change in government. The softer market was compensated to some extent by new business wins from several large clients following investments to improve service delivery.

Rest of World

Middle East

The market continued to grow strongly in the Middle East driven by the award of major events such as the 2022 World Cup in Qatar and Expo 2020 in Dubai and also by major infrastructure spending in Saudi Arabia. We successfully completed the restructuring of the zone into two clusters to create synergies among the laboratories and reinforced the team with key talent which has allowed us to start capturing these opportunities.

UAE/Oman: The construction industry in Dubai continued to grow boosted by the recent award of Expo 2020 and this has driven demand for local civil testing. Our façade testing serves the wider Gulf Cooperation Council (GCC) countries and has also continued to perform well. The market in Abu Dhabi was slower and we experienced increasing pricing pressure for routine work. However, the outlook may be improving with an expected new wave of major infrastructure projects such as the Etihad Railway which will link the principal centres of population and industry in the UAE, as well as forming a vital part of the planned railway network linking the six countries of the GCC.

Saudi Arabia/Qatar: Demand for our soil, concrete and asphalt testing services in Saudi Arabia and Qatar increased significantly as a number of major infrastructure projects got underway. We have secured significant business on the Doha Metro for the next three years. In Qatar we have commissioned a new asphalt testing facility to support the Government's planned QR80 billion highway investment programme in advance of the World Cup in 2022.

Oil & Gas and Industrials

Despite fewer projects in local markets, we were able to grow our sales in Singapore by providing testing capabilities using mobile laboratories in remote territories. For example, we provided an innovative, high-specification 'laboratory in a box' concept for Subsea 7 in support of its project work offshore Angola. Designed and built in Daventry, UK and operated by the Rest of World team, this truly mobile plug and play concept consists of a fully-fitted laboratory and machine shop created in two 40-foot purpose-built units to deliver pipeline coating qualification tests. We also extended our business reach through the acquisition in July 2014 of Metallurgical Services Private Limited, a move which gives us a foothold in India and supports the expansion of our offering to customers in emerging Asian markets.

Product

We saw significant growth in our Fire Consulting business in the Middle East due to a major project win on the Doha Metro which was supported by the opening of a new office in Qatar. Mass transit rail, airport and stadia projects have been amongst the most technically demanding to involve the fire safety design teams in this part of the world. A new best practice of sharing technical resource across our regional teams has improved capacity and margin in our global business. Our Australia Fire Consulting business showed steady progress. Fire Testing continued to benefit from the new capacity added in 2013, as well as expanding into sprinkler system testing for the first time.

Outlook

The Board currently expects to deliver modest organic growth in 2015. This will be a result of good growth in Health Sciences, the Middle East and most of our Product businesses and a gradual improvement in Aerospace and Transportation, partially offset by an expected contraction in Oil & Gas and Industrials. M&A growth is expected to be supported by transactions completed recently as well as by an active pipeline of new opportunities. Proactive management actions will help support underlying group margins which we expect will be broadly similar to 2014.

Our medium term expectation remains mid-single digit organic growth and gradual margin improvement.

GROUP INCOME STATEMENT

For the year ended 31 December 2014

* Earnings per share on adjusted results is disclosed in Note 5.

GROUP STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2014

GROUP BALANCE SHEET

As at 31 December 2014

GROUP STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2014

 GROUP STATEMENT OF CASH FLOWS

For the year ended 31 December 2014

Separately disclosed items included in cash flow from operating activities (19.8) (6.7)

NOTES TO THE FULL YEAR RESULTS ANNOUNCEMENT

For the year ended 31 December 2014

Adoption of new accounting standards, amendments and interpretations

Following the listing of Exova Group plc on the London Stock Exchange in April 2014 the following standard has been adopted:

IAS 33 Earnings per share

IAS 33 sets out the requirements for the calculation and presentation of earnings per share for entities whose ordinary shares are traded in a public market. The standard requires the basic and diluted earnings per share to be presented in the statement of comprehensive income or, if profit or loss is presented in a separate statement, the basic and diluted earnings per share should be included in this separate statement.

The Company has presented the earnings per share figures on the face of the Income Statement. As a result of this new disclosure requirement the Company has presented the Income Statement and the Statement of Comprehensive Income as two separate statements to give sufficient prominence to the earnings per share disclosures. 

NOTES TO THE FULL YEAR RESULTS ANNOUNCEMENT

For the year ended 31 December 2014

2. SEGMENTAL REPORTING

3. SEPARATELY DISCLOSED ITEMS

The Group presents, as separately disclosed items on the face of the Group Income Statement, those items of income and expense which, because of their nature, merit separate presentation to allow users to understand better the elements of financial performance in the period to facilitate a comparison with prior years and a better assessment of trends in financial performance.

Included in the income tax credit is £2.3m (2013: £1.9m) related to the amortisation of customer relationships.

4. NET FINANCE COSTS

NOTES TO THE FULL YEAR RESULTS ANNOUNCEMENT

For the year ended 31 December 2014

5. EARNINGS PER SHARE

6. DIVIDENDS

The Board is recommending a final dividend of 2.0p per share. The dividend will be paid on 5 June 2015 to shareholders on the register at the close of business on 22 May 2015.

NOTES TO THE FULL YEAR RESULTS ANNOUNCEMENT

For the year ended 31 December 2014

7. BUSINESS COMBINATIONS

NOTES TO THE FULL YEAR RESULTS ANNOUNCEMENT

For the year ended 31 December 2014

7. BUSINESS COMBINATIONS (continued)

(c) Acquisitions in 2013

During the prior year, the Group made the following acquisitions in aggregate:

8. BANK AND OTHER BORROWINGS