Interim Results

3 September 2024

Midwich Group plc

("Midwich", the "Company" or the "Group")

Interim results for the six months ended 30 June 2024

Robust performance with record gross margins despite market challenges; full year expectations unchanged

Midwich Group (AIM: MIDW), a global specialist audio visual distributor to the trade market, today announces its Interim Results for the six months ended 30 June 2024 ("H1 2024").

Statutory financial highlights

Adjusted financial highlights

¹Definitions of the alternative performance measures are set out in Note 2

Financial highlights

Operational highlights

Post period trading and outlook

^{^}For these purposes Adjusted EBITDA includes proforma EBITDA for acquisitions acquired in the last 12 months.

Stephen Fenby, Managing Director of Midwich Group plc, commented:

"Our performance in H1 2024 demonstrated the robustness of Midwich's offering, against a tough market backdrop, with the Group delivering revenue growth of 7.5% at constant currency and a significant improvement in our Group gross profit percentage, moving from 16.3% in H1 2023 to a new record of 17.3%.

The AV market at the end of 2023, and through the first half of 2024, was affected by a degree of oversupply of mainstream products and associated discounting. Demand in corporate and education markets remained subdued, although this was largely offset by ongoing strength in the live event and entertainment sectors. This change in mix is reflected in both a further increase in the mix of technical video and audio products sold by the Group and the higher gross margins.  

Whilst it is prudent to assume macroeconomic conditions in certain markets, such as the UK & Ireland, will likely remain challenging for the remainder of 2024, we have seen some signs of the market stabilising in recent weeks, with market survey data indicating a recovery in pricing in the second half of the year. Trading since the start of July has been in line with the Board's expectations and slightly ahead of 2023.

The Group has acted to become even stronger during recent months, ahead of the anticipated market recovery, with a focus on adding new vendor opportunities, further targeted acquisitions and a tight focus on overhead efficiencies. These actions position the Group well to return to operating profit growth in H2 2024.

I would like to thank our team, customers and vendors for their unwavering support during 2024 to date."

There will be a meeting and webinar for sell-side analysts and investors at 10:45am BST today, 3 September 2024, the details of which can be obtained from FTI Consulting: [email protected].

For further information:

About Midwich Group

Midwich Group is a specialist AV distributor, with operations in the UK and Ireland, EMEA, Asia Pacific and North America. The Group's long-standing relationships with over 800 vendors, including blue-chip organisations, support a comprehensive product portfolio across major audio visual categories such as displays, projectors, technical AV, broadcast, professional audio, lighting and unified communications. The Group operates as the sole or largest in-country distributor for a number of its vendors in their respective product sets.

The Directors attribute this position to the Group's technical expertise, extensive product knowledge and strong customer service offering built up over a number of years. The Group has a large and diverse base of over 24,000 trade customers, most of which are professional AV integrators and IT resellers serving sectors such as corporate, education, retail, residential and hospitality.

Initially a UK only distributor, the Group now has almost 1,900 employees across the UK and Ireland, EMEA, North America and Asia Pacific. A core component of the Group's growth strategy is further expansion of its international operations and footprint into strategically targeted jurisdictions.

For further information, please visit www.midwichgroupplc.com

Managing Director's Report

Overview

The Group has continued to navigate challenging trading conditions in the first half of 2024, particularly in the UK & Ireland, and has delivered a solid result despite this backdrop. In line with our long-term strategy, we achieved further sales growth in higher margin technical products, with the result that gross margins increased to record levels in the period. Technical products now represent almost two thirds of the Group's revenue compared to 21% at IPO in 2016.

When market conditions are more challenging, maintaining a consistent high service level to our customers and vendors becomes an even greater priority for the Group, so we remain a long-term trusted partner. We continue to work hard to provide exceptional service and have also increased our market share with many of the Group's key vendors in the period. Our focus on developing our offering in the AV market continues to be beneficial for our customers and vendors alike.

The impact of subdued demand in corporate and education markets, driven by wider macro-economic factors, has continued beyond our, and the wider AV industry's, expectations at the beginning of the year. We believe that this resulted in some oversupply of products and associated discounting. Whilst we have largely maintained gross margins in mainstream product categories, revenue declined in this category. Demand in the live event and entertainment sectors has remained strong which resulted in a further increase in the mix of technical video and audio products sold by the Group and the higher gross margins.

We believe that we have the best team in the industry and our long-term view (supported by independent market research) remains that the AV industry will continue to grow at above GDP rates going forwards. However, the ongoing delayed market recovery resulted in some short-term pressure on adjusted operating margins. We expect these to recover through operating leverage as the market returns to normal, but the Group has also acted to deliver targeted efficiencies to improve profitability in the second half of 2024.

Working capital management continues to be a key focus for the Group with a small operating cash inflow in the period reflecting the normal seasonal investment in working capital. We expect operating cash generation for the full year to be in line with our long-term trend of 70-80% of adjusted EBITDA.

Trading performance

Revenue in H1 2024 grew by 7.5% (constant currency basis) to £646.1m. Organic revenue declined by 1.2%. Compared with H1 2023, organic revenue grew strongly in North America, but was slightly lower in other regions. Based on our customer and vendor data, combined with independent market data, we believe that the decline in these territories is significantly less than the overall market decline, with Midwich maintaining or expanding its market share in key markets.

The Group gross margin percentage of 17.3%, was a 1.0 percentage point improvement on H1 2023, and also a Group record. There were strong gross margin improvements in both North America and EMEA due to the increased mix of technical product sales, which reflected the positive impact of recent acquisitions. In a challenging market, the robust gross margin performance in the UK & Ireland was testament to the quality of our teams and the added value that they provide to our customers.

Overheads increased as expected during the period. The majority of the overhead increase was attributable to the acquisitions completed in the last twelve months, together with labour cost inflation, which is now showing signs of easing, and further investment in the Middle East. The adjusted operating profit margin reduced to 3.4% in H1 2024 from 4.3% in H1 2023.

Given the challenging market conditions, we have identified targeted cost actions to improve future profitability. These actions are expected to be largely completed in the current year with estimated annualised savings of over £5m from early 2025. The exceptional costs (approximately £3m) associated with these actions will be excluded from adjusted operating profit.

Products

Overall revenue from the two mainstream product areas (displays and projection) declined by around 10%, reflecting the wider market dynamics. These mainstream categories now account for less than a third of Group revenue as we continue to diversify into specialist areas. The gross margin on mainstream categories was broadly in line with the same period last year.

Revenue in the technical product areas grew by over 13%, through a mix of both organic growth and the impact of acquisitions. There were strong performances in the technical video, audio, LED and rental categories driven by end user investments in live events and entertainment. The overall margin on these categories also improved compared to the same period last year.

The Board continues to believe that the complexity and breadth of the AV market highlight the need for manufacturers to use a high-quality specialist distributor, such as Midwich. We continue to have significant success with the roll out of brand relationships acquired over the last few years, together with the expansion of existing relationships into new territories. The Group has a strong pipeline of new brands which will have a positive impact from the second half of 2024.

Customers

The Group's focus has always been on seeking to provide our customers with consistently high levels of service and support. Although our customer base tends to be adaptable and resilient, we are aware that softer demand in some areas, combined with higher interest rates, have caused some challenges. We continue to use our distribution expertise and value add advice to support our customers through these challenges and to accommodate the needs of the channel.

Strategy

The Group's strategy remains clearly focused on markets and product areas where it can leverage its value add services, technical expertise, and sales and marketing skills. Services, expertise and geographies are developed either in-house or through acquisitions.

Using its market knowledge and skills, the Group provides its vendors with support to build and execute plans to grow market share. The Group supports its customers to win and then deliver successful projects.

Historically, the Group has successfully used acquisitions to enter new geographical markets and to add both expertise and new product areas. Once acquired, and integrated, businesses are supported to grow organically and increase profitable market share. The Group continues to pursue a strong pipeline of opportunities, either self-sourced or, increasingly, through approaches by business owners who wish to join a strong AV focused group.

The Group has continued to deliver on this strategy in 2024, with the successful integration of the businesses acquired in 2023, the addition of two acquisitions in the year to date, and the ongoing development of our Middle East business.

The Board continues to focus on strengthening the Group's product offering, technical expertise and geographical reach.

Acquisitions

The Group completed one small acquisition during H1 2024 and exercised its put and call option to acquire the remaining 20% of its Middle Eastern business during the period.

In January 2024, the Group acquired The Farm North West LLC and The Farm Norcal LLC ("The Farm"), a west coast manufacturers' representative and technical services provider. Based in Silicon Valley, The Farm has now been integrated into the Group's U.S. operation, Starin Marketing, to expand its geographical footprint and enhance its current levels of customer and manufacturer support.  

On 31 July 2024, post the period-end, the Group acquired the remaining 70% of DHL, having previously acquired a 30% stake in 2023. DHL is a provider of dry hire lighting services to trade customers primarily operating in the UK live events market.

These acquisitions bring new technologies, customers and vendor relationships, further delivering on the Group's strategy to grow earnings both organically and through selective acquisitions of strong, complementary businesses.

The acquisition pipeline remains healthy, and the management team continues to review attractive opportunities in a number of markets and regions.

Outlook

Whilst the Board believes it is prudent to assume macroeconomic conditions in certain markets, such as the UK & Ireland, will likely remain challenging for the remainder of 2024, market survey data indicates an expected return to growth in mainstream product demand in a number of our key geographies during H2 2024.

The Group has a strong pipeline of new vendor opportunities as well as selected bolt-on acquisition opportunities it continues to review which, when combined with a tight focus on overheads efficiencies in H2, means that the Board's expectations of adjusted operating profit for the full year remain in line with its expectations. Despite some softness in the AV market so far in 2024, according to research published by industry trade body AVIXA in July 2024, the global AV market is expected to grow at an annualised rate of 5.4% in the five years to 2029.

The Board concurs that the wider AV industry is well positioned for long-term growth and believes that the Group is very well placed to take advantage of growth opportunities. In particular, the Group's ongoing focus on more specialist areas of the market should help to sustain higher gross margins and drive incremental profit opportunities.

The Board believes that, despite early signs of improvement, the Group's major markets will remain challenging across the remainder of 2024. However, order books remain steady and underpin the Board's confidence in the Group's outlook for the current year and beyond.

Trading since the end of H1 has been in line with the Board's expectations for the full year.

Regional highlights

¹Definitions of the alternative performance measures are set out in Note 2

All percentages referenced in this section below are at constant currency unless otherwise stated.

UK & Ireland ("UK&I")

Revenue in the UK&I was in line with H1 2023, but down 4.2% on an organic basis. The Group has its highest market shares in this region and the challenging market backdrop resulted in relatively soft demand, and a degree of oversupply and associated discounting in mainstream product categories. Stronger demand in markets such as live events, entertainment and hospitality supported further growth in technical product sales. After an exceptional performance in H1 2023, gross margins held up well in the period at 17.0% (H1 2023: 17.7%). The two small acquisitions completed in H2 2023 have now been fully integrated.

Based on industry data, combined with our own analysis of customer and vendor activity, we believe that the mainstream market should begin to recover in the second half of 2024. Our long-term focus on increasing the mix of technical product sales has helped us grow or maintain market shares in the UK&I and we remain confident that the pro AV market will continue to grow faster than GDP in the medium term.

Overheads in the UK&I increased, as expected, in the period, reflecting the impact of the 2023 acquisitions and labour cost inflation. This resulted in a decline in adjusted operating profit of 38.8% to £8.5m (H1 2023: £13.9m). Stronger mainstream product demand and the impact of additional new brands, combined with targeted cost reductions, are expected to result in a stronger operating profit performance in the second half of the year.

EMEA

In EMEA, the Group's biggest region by revenue, sales fell by only 0.2% on a constant currency basis. Organic revenue declined by 2.9% reflecting a reduction in mainstream product sales largely offset by increased technical product revenue. Although the mainstream markets have been challenging in Northern Europe, we have continued to build market share across EMEA, with notable performances in Southern Europe and the Middle East, where strong demand for technical solutions, including pro audio and live event solutions, continued. The acquisitions completed in 2023 are contributing well.

Gross profit margins improved to 16.7% (H1 2023: 15.5%) because of favourable product mix and the benefit of the acquisition of prodyTel in November 2023.

Adjusted operating profit in EMEA was £11.2m (H1 2023: £12.5m), down 8.6% on the prior year due to the combined impact of lower revenue and further investment in growth areas such as the Middle East. A seasonally stronger second half, combined with cost efficiencies, is expected to result in a return to operating profit growth in H2 2024.

Asia Pacific

Revenue in Asia Pacific was down 4.1% on the prior year (H1 2023: +2.3%). New brands, added in the last twelve months, are now beginning to build momentum in the region with a return to growth in the second quarter of the year. Demand for larger projects also increased in the period.

The Asia Pacific gross profit margin of 15.8% (H1 2023: 17.5%) reflected a higher mainstream product mix. The adjusted operating loss in Asia Pacific was £0.5m (H1 2023: £0.1m profit).

North America

Revenue in North America increased by 69.0% (H1 2023: 18.7%) reflecting both a full contribution from SFM in Canada (acquired in June 2023), and further market share gains in the United States. Organic revenue growth of 16.8% (H1 2023: 5.3%) reflected demand for unified communications solutions, an increase in customer wallet share and higher project activity.

The record gross margins in the region at 19.7% (H1 2023: 14.5%) are attributable to the positive mix impact from the acquisition of SFM and The Farm (January 2024). The Farm, which enhances the region's sales capabilities, has now been fully integrated into the Starin business.

Adjusted operating profit in North America was significantly ahead of the prior year at £5.3m (H1 2023: £3.0m).

Group costs

Group costs for the half year were £2.5m (H1 2023: £3.1m) reflecting the focus on costs and lower levels of performance-related staff costs.

Operating profit

Adjusted operating profit for the period at £22.0m (H1 2023: £26.4m) is stated before the impact of acquisition related expenses of £0.3m (H1 2023: £0.3m), restructuring costs of £0.5m (2023: nil), share based payments and associated employer taxes of £2.6m (H1 2023: £2.8m) and amortisation of acquired intangibles of £5.8m (H1 2023: £4.8m). The reported operating profit for the period was £12.8m (H1 2023: £18.6m).

Exceptional costs

In response to the more challenging mainstream product market conditions, the Group made some targeted cost reductions in both discretionary expenditure and headcount in the period as part of a productivity programme that has continued into the second half of the year. This programme is expected to result in savings of c.£3.5m in H2 2024, with associated one-off costs of c.£3.0m (including £0.5m in H1 2024). These one-off costs are deemed to be exceptional and have been excluded from the Group's adjusted profit measures. Annualised savings from this programme are expected to be over £5m from early 2025.

Movement in foreign exchange

Compared to the prior year, Sterling strengthened in the period. These movements reduced reported revenue and adjusted operating profit in H1 by 1.7% and 1.6% respectively. Based on current exchange rates this trend is expected to continue for the remainder of the year. Note, the Group makes most of its sales and purchases in local currency; this provides a natural hedge for transactional activity.

Net finance costs

Adjusted net finance costs for the period were an expense of £4.8m (H1 2023: £4.6m) and mainly relate to the financing costs of the Group's revolving credit facility which is used to fund its acquisition investments.

Reported net finance costs were £2.7m (H1 2023: £3.0m). The adjustments to net finance costs include fair value movements in derivatives and foreign exchange movement on borrowings for acquisitions of (£0.6m) (H1 2023: (£1.5m)), valuation changes in deferred and contingent considerations of (£0.9m) (H1 2023: £0.3m), and movements in put option liabilities over non-controlling interests of (£0.6m) (H1 2023: (£0.4m)).

Taxation

The reported tax charge for the period was £2.8m (H1 2023: £4.0m). The adjusted effective tax rate was 27.1%; (H1 2023: 26.1%) calculated based on the adjusted tax charge divided by adjusted profit before tax. The increase in effective tax rate is mainly attributable to the introduction of corporation tax in the United Arab Emirates and geographic mix.

Cash flows and net debt

The Group had an adjusted net cash inflow from operations before tax of £3.6m for the period (H1 2023: £8.2m inflow). The first half is traditionally more working capital intensive when compared with the full year due to the seasonality of demand, especially in the education sector. A continued focus on cash management resulted in a reduction in total working capital, as a percentage of annualised revenue, compared to the same period in the prior year. The Board is comfortable that the Group's long-term average annual cash conversion rate (70-80%) remains sustainable.

Gross capital spend on tangible assets was £2.7m (H1 2023: £2.4m) and included investment in rental assets in UK&I. An investment of £4.9m in intangible fixed assets (H1 2023: £5.9m) was predominantly in relation to the Group's new ERP solution, which went live in its first country at the end of the period.

Adjusted net debt (excluding leases liabilities), was £132.3m at 30 June 2024 (£102.1m at 30 June 2023), equivalent to 2.0x adjusted EBITDA.

The adoption of IFRS 16 in 2019 resulted in an increase in recognised lease liabilities (predominantly for office, showroom and warehouse facilities). Lease liabilities excluded from adjusted net debt totalled £21.8m at 30 June 2024 (£22.8m 30 June 2023). Total net debt was £154.1m at 30 June 2024 (£124.9m at 30 June 2023).

The Group's has a revolving credit facility of £175m which is primarily used for acquisition investments. Approximately 63% of the facility was drawn at 30 June 2024 (54% at 31 December 2023). This facility is supported by six banks, runs to June 2028 and has an adjusted net debt to adjusted EBITDA covenant ratio of 3 times and an adjusted interest cover covenant of 4 times adjusted EBITDA. The EBITDA covenant is calculated on a historical twelve-month basis and includes the full benefit of the prior year's earnings of any businesses acquired. Other borrowing facilities are to provide working capital financing. The Group has access to total facilities of c.£300m.  

The Group has various instruments to hedge certain exchange rate and interest rate exposures. These include borrowing in local currency to finance acquisitions and financial instruments to fix part of the Group's interest charges. These instruments are marked to market at the end of each reporting period, with the change in valuation recognised in the income statement. Given any amounts recognised generally arise from market movements, and accordingly bear no direct relation to the Group's underlying performance, any gains or losses have been excluded from adjusted profit measures.

Dividend

The Board is pleased to declare an interim dividend of 5.5 pence per share (H1 2023: 5.5p). This will be paid on 18 October 2024 to those shareholders on the Company's register as at 13 September 2024. The last day to elect for dividend reinvestment ("DRIP") is 27 September 2024.

The Board believes in a progressive dividend policy to reflect the Group's strong earnings and cash flow while maintaining an appropriate level of dividend cover to allow for investment in longer-term growth.

Stephen Fenby

Managing Director