CGS Castings Plc

The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018.  Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

Castings P.L.C.

Annual Financial Report

DTR 6.3.5 Disclosure

Year ended 31 March 2024

Chairman's Statement

The turnover of the group increased to £224 million (£201 million last year) with a rise in profit before tax to £21.3 million compared to £16.7 million last year.

Overview

Turnover increased by 12% compared with the previous year and operating profit increased by 21%. The despatch weight fell by 5% compared to the prior year which was at the highest level since 2014.

Demand from our customers was very strong during the year, particularly during the first half. Our heavy truck customers (approximately 80% of revenue) increased their build rates to satisfy an unprecedented level of demand, which was caused in part by the backlogs associated with the Covid period and the subsequent supply constraint issues that were well documented. In order to satisfy the elevated schedules, the group outsourced the production of some castings for a period of time to supplement our own internal production.

As we entered the second half of the year it became apparent that the OEMs had satisfied the backlog demand and we started to see schedules at a lower level. This was especially evident in the final quarter of the financial year and these reduced levels have continued into the new financial year. We are currently operating at a level approximately 20% below the highest point in 2023/24.

We have seen a year of relatively stable input prices following very significant increases in raw materials and energy in the previous financial year. The most significant increase related to electricity following the end of our fixed price contract on 30 September 2022. This additional cost of power has continued to be surcharged to our customers thus not adversely affecting group profit. It does however impact reported margins and comparisons with the prior year as the first six months of 2022/23 included the lower electricity prices in the fixed price contract.

Foundry businesses

Demand was particularly high in the first six months and then reduced during Q3 and again in Q4. The reduction in the second half of the year negatively impacted production efficiencies in these businesses. The most significant impact on the margin percentage has been the pass-through of cost rises for a full year, particularly in respect of electricity which affects the foundries to a much greater extent than the machining business.

In November 2023, the board approved the installation of an additional foundry production line at our William Lee site. Whilst we are still in the early stages of the project, it is expected that the new line will be commissioned, on time and in line with budget, in June 2025 and at a cost of approximately £17 million; it will add up to 12,000 tonnes of additional gross foundry capacity which represents a 15% increase on the group's current capacity. The additional facility will enable us to take advantage of new and growing market areas such as wind energy, agriculture and further opportunities in the US as well as satisfying additional demand from our existing customer base.

CNC Speedwell

It is pleasing to report a very good performance in the machining business following the strong finish to the previous financial year. This demonstrates the impact of high volumes in the period and also reflects the benefits of the engineering productivity and prices of new parts introduced last year.

Investment has been focussed on replacement capacity and sustainability initiatives such as solar panels and the second phase of the more energy efficient cooling plant. The solar panels are expected to generate up to a maximum of 10% of the monthly power demand for the machining business and this is an area that we are seeking to expand in other businesses within the group.

Outlook

Our heavy truck customers are suggesting that the current lower levels of demand are likely to continue in the short-term with the potential for a slight increase in the autumn. We will continue to develop opportunities with existing customers in areas such as the electrification of lighter trucks and build relationships in other markets such as wind energy, agriculture and in the US.

Dividend

The directors are recommending the payment of a final dividend of 14.19 pence per share to be paid on 23 August 2024 to shareholders on the register on 19 July 2024. This, together with the interim dividend, gives a total dividend for the year of 18.32 pence per share which, in line with our progressive dividend policy, represents an increase of 5.6% on the prior year.

 Supplementary dividend

In addition to the final dividend set out above, the board has reviewed the cash position of the group and considered the balance between increasing returns to shareholders whilst retaining flexibility for capital and other investment opportunities. As a result, the directors are declaring a supplementary dividend of 7.00 pence per share to be paid on 24 July 2024 to shareholders on the register on 21 June 2024. This dividend, being discretionary and non-recurring, does not compromise our commitment to invest in market leading technologies to maintain our competitive advantage.

Directors

As previously announced, after nearly sixty three years with the company, of which forty have been as chairman, Brian Cooke retired from the board on 15 August 2023. I reiterate my thanks to him for his outstanding contribution to the group.

I also wish to thank the directors, senior management and all of our employees for their hard work and commitment during the year.

A. N. Jones

Chairman

12 June 2024

Business and Financial Review

General overview

The underlying demand from our commercial vehicle customers, which make up nearly 80% of group revenue, was very strong, particularly in the first half of the year. Following the COVID-19 period and the well-publicised supply constraint issues, the OEMs experienced unprecedented demand for heavy trucks.

During the second half of the year, the backlog demand had been absorbed by the OEMs with many reporting a normalisation of heavy truck demand. The impact of this reduction was seen in the final quarter of the year and forward schedules continue to reflect this lower level.

Input prices have remained relatively stable during the year. The most significant increase in the last two years related to electricity following the end of a fixed price contract on 30 September 2022.

The additional cost for power purchased during the prior year was approximately £15 million reflecting elevated prices for the second half of that year. This year has a full year of elevated cost resulting in a further increase of approximately £13 million compared to the prior year. The total impact in the year when compared to the previous fixed contract rate is in the region of £28 million.

These electricity increases have continued to be surcharged to our customers and result in an increased revenue in the year. This has not adversely affected group profit as it is a pass-through of a direct cost increase.

Overview of business segment performance

The segmental revenue and results for the current and previous years are set out in note 2. An overview of the performance, position and future prospects of each segment, and the relevant KPIs, are set out in the next column.

Key Performance Indicators

The key performance indicators considered by the group are:

•     Segmental revenue

•     Segmental profit

•     EPS

•     Net cash

•     Dividends per share

Foundry operations

As set out previously, customer demand was strong in the first half of the year, with schedules reducing in he second half, particularly so in the final quarter of the year.

The foundry businesses experienced a decrease in output of 5.0% to 50,450 tonnes and a rise in external sales revenue of £23.6 million (11.8%) to £222.5 million. After taking into account the reduction in weight from machining, this equates to approximately 56,200 tonnes of production.

Of the total output weight for the year, 63.3% related to machined castings compared to 59.2% in the previous year. The change reflects the trend of an increasing proportion of more complex, machined parts.

The segmental profit of £16.2 million was broadly flat compared to the previous year, which represents a profit margin of 6.4% on total segmental sales (2023 - 7.3%).

The pass-through of elevated input costs continues to be the most significant impact on the margin percentage. This has been increased further by the full-year impact of the electricity surcharge compared to six months in the prior year. In addition, the significant and sharp fall in the demand schedules in the final quarter of the year negatively impacted the margin in the year.

Investment of £5.2 million has been made in the foundry businesses during the year. The most significant element of this was £1.5 million of initial payments for the production line at our William Lee site. This represents the first foundry capacity increase for the group for over 15 years and the £17 million project remains on budget and on target for commissioning in June 2025.

Other investment during the year included a replacement programme on production and processing equipment, along with AI in areas such as metal melting and quality assurance.

Machining

The machining business generated total sales of £37.6 million in the year compared to £27.7 million in the previous year. Of the total revenue, 5.0% was generated from external customers compared to 7.3% in 2023.

The segmental result for the year was a profit of £3.7 million (2023 - £0.2 million).

With the higher demand in the year and increasing volumes on newly introduced parts, the machining business has continued to build on the strong final quarter of last year.

As demand from the foundry customers reduced in the second half of the year, the machining business continued at a higher level for longer as the group looked to replenish finished inventory levels that had been depleted since the start of the year.

We have invested £5.3 million during the year, which included £1.8 million on sustainability initiatives relating to a second more power efficient cooling plant and solar panels and £3.2 million has been invested in replacement, more efficient, machining capacity.

Business review and performance

Revenue

Group revenues increased by 11.7% to £224.4 million compared to £201.0 million reported in 2023, of which 85% was exported (2023 - 83%).

The revenue from the foundry operations to external customers increased by 11.8% to £222.5 million (2023 - £199.0 million) with the dispatch weight of castings to third-party customers decreasing by 5.0% to 50,450 tonnes (2023 - 53,100 tonnes).

Revenue from the machining operation to external customers decreased by 7.2% during the year to £1.9 million (2023 - £2.0 million).

Operating profit and segmental result

The group operating profit for the year was £19.8 million compared to £16.4 million reported in 2023, which represents a return on sales of 8.8% (2023 - 8.1%).

Finance income

The level of finance income increased to £1.53 million compared to £0.34 million in 2023, reflecting the higher interest rates available on deposits during the financial year.

Profit before tax

Profit before tax has increased to £21.3 million from £16.7 million in the prior year.

Taxation

The tax charge of £4.57 million (2023 - £2.92 million) is made up of a current tax charge of £4.25 million (2023 - £2.41 million) and a deferred tax charge of £0.31 million (2023 - £0.51 million).

The effective rate of tax of 21.4% (2023 - 17.5%) is lower than the main rate of corporation tax of 25% (2023 - 19%). The primary reason for this is a credit to the deferred tax estimate relating to the prior year of £0.70 million.

Earnings per share

Basic earnings per share increased 21.4% to 38.45 pence (2023 - 31.66 pence), reflecting the 27.4% increase in profit before tax which was partially offset by a higher effective tax rate compared to the previous year.

Options over 37,620 shares were granted during the year (2023 - options over 42,468 shares). The company purchased 100,000 shares during the year (2023 - 47,900). As a result, the weighted average number of shares has decreased to 43,488,441 resulting in a diluted earnings per share of 38.32 pence per share (2023 - 31.58 pence per share).

Dividends

The directors are recommending a final dividend of 14.19 pence per share (2023 - 13.51 pence per share) to be paid on 23 August 2024 to shareholders on the register on 19 July 2024. This would give a total ordinary distribution for the year of 18.32 pence per share (2023 - 17.35 pence per share).

In addition, a supplementary dividend of 7.00 pence per share has been declared which will be payable on 24 July 2024 to shareholders on the register on 21 June 2024.

Cash flow

The group generated cash from operating activities of £21.6 million compared to £22.4 million in 2023. When compared to 2023, the variance is mainly due to the significant increase in operating profit of £3.4 million offset by a higher working capital outflow of £4.4 million when compared to the outflow in 2023.

In the year to 31 March 2024, the most significant increase to working capital relates to an increase in inventory levels of £7.0 million compared to the start of the year. The weight of finished stock is now back to an appropriate level having been depleted in the prior year. The decrease in receivables and payables reflects the slowing of demand at the end of the year.

Corporation tax payments, net of overpayments from prior years, during the year totalled £2.6 million compared to £2.9 million in 2023.

Capital expenditure during the year amounted to £9.6 million (2023 - £6.2 million), as set out previously, and the charge for depreciation was £8.9 million (2023 - £8.6 million).

Financial assets relating to listed investments were disposed of during the year for £0.4 million.

The company pays pensions on behalf of the two final salary pension schemes and then reclaims these advances from the schemes.  During the year repayments of £2.1 million (2023 - £2.1 million) were received from the schemes and advances were paid on behalf of the schemes of £2.1 million (2023 - £2.1 million). These advances will be repaid to the company during the current financial year.

Dividends paid to shareholders were £14.2 million in the year (2023 - £13.7 million) which includes £6.5 million in relation to a supplementary dividend in respect of the year ended 31 March 2023.

The company purchased 100,000 (2023 - 47,900) shares to be held in treasury at a total cost of £0.40 million (2023 - £0.15 million).

The net cash and cash equivalents movement for the year was a decrease of £3.0 million (2023 - decrease of £0.18 million).

At 31 March 2024, the total cash and deposits position was £32.5 million (2023 - £35.6 million).

Pensions

The pension valuation showed an increase in the surplus, on an IAS 19 (Revised) basis, to £10.9 million compared to £10.4 million in the previous year.

The majority of the liabilities of the schemes are covered by an insurance asset that fully matches, subject to final adjustment of the bulk annuity pricing, the remaining pension liabilities of the schemes. However, there remains the uninsured element relating to the GMP equalisation liability. This liability has decreased during the year as a result of the change in valuation assumptions.

The pension surplus continues not to be shown on the balance sheet due to the IAS 19 (Revised) restriction of recognition of assets where the company does not have an unconditional right to receive returns of contributions or refunds.

Balance sheet

Net assets at 31 March 2024 were £134.0 million (2023 - £131.7million). Other than the total comprehensive income for the year of £16.8 million (2023 - £13.9 million), the only movements relate to the dividend payment of £14.2 million (2023 - £13.7 million), shares purchased in the year for £0.40 million (2023 - £0.15 million) and share-based payment charge of £0.1 million (2023 - £0.1 million).

Non-current assets have increased to £61.8 million (2023 - £60.7 million) as a result of investment in property, plant and equipment during the year being at a level greater than the depreciation charge.

Current assets have decreased to £112.3 million (2023 - £113.7 million) with the inventory increase being offset by a reduction in receivables and cash levels.

Total liabilities have decreased to £40.1 million (2023 - £42.8 million), largely as a result of a decrease in trade payables.

Consolidated Statement of Comprehensive Income

for the year ended 31 March 2024

Consolidated Balance Sheet

as at 31 March 2024

Consolidated Cash Flow Statement

for the year ended 31 March 2024

Consolidated Statement of Changes in Equity

for the year ended 31 March 2024

a)   Share capital - The nominal value of allotted and fully paid up ordinary share capital in issue.

b)   Share premium - Amount subscribed for share capital in excess of nominal value.

c)   Treasury shares - Value of shares acquired by the company.

d)   Other reserve - Amounts transferred from share capital on redemption of issued shares.

e)   Retained earnings - Cumulative net gains and losses recognised in the statement of comprehensive income.

Notes to the Consolidated Financial Statements

1    Basis of preparation

The group financial statements have been prepared in accordance with UK-adopted international accounting standard in conformity with the requirements of the Companies Act 2006.

The IFRSs applied in the group financial statements are subject to ongoing amendment by the IASB and therefore subject to possible change in the future. Further standards and interpretations may be issued that will be applicable for financial years beginning on or after 1 April 2024 or later accounting periods but may be adopted early.

The preparation of financial statements in accordance with IFRS requires the use of certain accounting estimates. It also requires management to exercise its judgement in the process of applying the group's accounting policies.

The primary statements within the financial information contained in this document have been presented in accordance with IAS 1 Presentation of Financial Statements.

The financial statements are prepared on a going concern basis and under the historical cost convention, except where adjusted for revaluations of certain assets, and in accordance with applicable Accounting Standards and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. A summary of the principal group IFRS accounting policies is set out below. The presentation currency used is sterling and the amounts have been presented in round thousands ("£000").

2    Operating segments

For internal decision-making purposes, the group is organised into three operating companies which are considered to be the operating segments of the group: Castings P.L.C. and William Lee Limited are aggregated into Foundry operations, due to the similar nature of the businesses, and CNC Speedwell Limited is the Machining operation.

Inter-segment transactions are entered into under the normal commercial terms and conditions that would be available to third parties.

The following shows the revenues, results and total assets by reportable segment in the year to 31 March 2024:

All non-current assets are based in the United Kingdom.

The following shows the revenues, results and total assets by reportable segment in the year to 31 March 2023:

All non-current assets are based in the United Kingdom.

All revenue arises in the United Kingdom from the group's continuing activities.

2    Income tax expense

The UK tax rate was increased from 19% to 25% from 1 April 2023 as per the Finance Act 2021 and consequently, the deferred tax balances have been measured using these revised rates.

4    Dividends

The directors are proposing a final dividend of 14.19 pence (2023 - 13.51 pence) per share totalling £6,166,700 (2023 - £5,884,695). In addition, the directors have declared a supplementary dividend of 7.00 pence per share, totalling £3,042,065. These dividends have not been accrued at the balance sheet date.

5    Earnings per share and diluted earnings per share

The calculation of the basic and diluted earnings per share is based on the following data:

6    Property, plant and equipment

The net book value of land and buildings includes £2,169,000 (2023 - £2,169,000) for land which is not depreciated.

Included within plant and equipment are assets in the course of construction with a net book value of £890,000 (2023 - £385,000) which are not depreciated.

7    Commitments and contingencies

Capital commitments primarily relate to the investment in the new foundry line.

The group does not insure against the potential cost of product warranty or recall. Accordingly, there is always the possibility of claims against the group for quality related issues on parts supplied to customers. As at 31 March 2024, the directors do not consider any significant liability will arise in respect of any such claims (2023 - £nil).

8 Pensions

The company operates two defined benefit pension schemes which were closed to future accruals at 6 April 2009. The funded status of these schemes at 31 March 2024 was a surplus of £10,863,000 (2023 - £10,413,000). On 24 March 2020, the Trustees of the schemes completed a bulk annuity insurance buy-in with Aviva Life & Pensions UK Limited thus providing certainty and security for all members of the schemes. The buy-in secures an insurance asset from Aviva that fully matches, subject to final price adjustment of the bulk annuity pricing, the remaining pension liabilities of the schemes. The buy-in covers the investment, longevity, interest rate and inflation risks in respect of the schemes and therefore substantially reduces the pension risk to the company.

The pension surplus has not been recognised as the group does not have an unconditional right to receive returns of contributions or refunds under the scheme rules.

9 Preliminary statement

The financial information set out above does not constitute the company's statutory financial statements for the years ended 31 March 2024 or 2023 but is derived from those financial statements. Statutory financial statements for 2023 have been delivered to the Registrar of Companies and those for 2024 will be delivered following the company's Annual General Meeting. The auditors have reported on those financial statements; their reports were unqualified, did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports and did not contain statements under Section 498 of the Companies Act 2006.

The annual report and financial statements will be posted to shareholders on 21 June 2024 and will be available on the company's website, www.castings.plc.uk, from 24 June 2024.

Appendix 1 - Principal Risks and Uncertainties

In common with all trading businesses, the group is exposed to a variety of risks in the conduct of its normal business operations.

The directors regularly assess the principal risks facing the entity. Whilst it is difficult to completely quantify every material risk that the group faces, below is a summary of those risks that the directors believe are most significant to the group's business and could have a material impact on future performance, causing it to differ materially from expected or historic achieved results. Information is also provided as to how the risks are, where possible, being managed or mitigated.

The group does not operate a formal internal audit function; however, risk management is overseen by senior management and group risk registers are maintained and regularly reviewed, alongside factors which may result in changes to risk assessments or require additional mitigation measures to be implemented.

External consultants are used to assess design and effectiveness of controls relating to IT security to provide specialist support to management in this area.

Key risks arising or increasing in impact are reviewed at both group and subsidiary board meetings.

The impact of each risk set out below has been described as increased, stable or decreased dependent upon whether the business environment and group activity has resulted in a change to the potential impact of that risk.