RNS Number : 5046E
Zirax PLC
29 September 2008
Zirax plc
("Zirax" or the "Company")
Interim Results for the six months to 30 June 2008
Zirax, the AIM quoted speciality chemical company focused on the development, production and sale of oilfield process chemicals and
de-icing solutions, announces its interim results for the six months to 30 June 2008.
Highlights
Financial Performance
* Total revenues up 13% to $15.1m (2007: $13.3m)
* Pre-tax loss was $0.1m (2007: profit $1.9m)
* Oilfield process chemical revenues increased to $12.8m (2007: $7.4m)
* De-icing solutions revenues were $0.9m (2007: $4.7m)
* $8.9m cash reserves at 30 June 2008
Operating Highlights
* Demand continues to exceed supply
* Principal limestone supplier acquired near our Volgograd plant to secure the supply of high quality raw materials and provide
greater cost control in the future
* Awarded two new contracts to provide our product to the Azeri-Chirag-Guneshli oilfields in Azerbaijan and increase the supply of
product to Bucharest City Council, Romania
* Fenlon Dunphy appointed the new CEO of Zirax plc
* Sixth consecutive award of Moscow de-icing contract
Sir Michael Oliver, Chairman commented:
"This has been a challenging period for the business; while demand for our range of premium grade products remains strong, a combination
of factors including a very mild winter in Russia, significant cost increases and the delay of the Rosignano plant coming fully on line has
reduced profitability. Fundamentally, the business continues to be in a very strong position to capture an increasing share of the oilfield
services and de-icing markets, however, in the short term these factors will have a negative impact on the Group's trading performance."
Enquiries:
Zirax Fenlon Dunphy, CEO T: +44 (0)20 7868 1694
Hanson Westhouse Limited Tim Metcalfe T: +44 (0)20 7601 6100
Richard Baty
Metropol (UK) Limited Alexander Selegenev T: +44 (0)20 7439 6880
Cardew Group Tim Robertson T: +44 (0)20 7930 0777
David Roach
Daniela Cormano
Interim Review
Introduction
Zirax, the speciality chemical company focused on the development, production and sale of oilfield process chemicals and de-icing
solutions recorded an increase in sales of 13% for the first six months of 2008. However, profitability was reduced due to a number of
factors; an abnormally mild winter in Moscow; significant increases in operating costs, particularly distribution costs which initially had
to be absorbed by Zirax; and a delay in the delivery of sufficient capacity from the new Rosignano plant coming on line. With demand for our
premium range of products still outstripping supply these problems are short term, but they will result in profits for the full year being
below market expectations.
The overall market environment remains extremely favourable. The Company is in a strong position having doubled capacity in the last
three years, invested in key strategic acquisitions whilst retaining a strong balance sheet and reduced its dependence on the more seasonal
de-icing business. The issues that have arisen in the first half of this year will have an impact on results, however, the strength of
Zirax's position in its chosen markets and its strategic objectives remain unchanged.
Financial Review
Total revenues for the six months to 30 June 2008 increased 13% from the equivalent period in 2007 to $15.1m. Zirax's strategy to grow
the oilfield process chemicals segment of the business delivered sales of $12.8m, growth of 74% in this segment compared to the same period
last year. As a result, and owing to a milder winter, sales of high performance de-icing products decreased to $0.9m, compared with $4.7m in
2007. The remaining industrial sector accounted for $1.4m of revenue, a 17% increase from $1.2m in 2007.
The world economy has been suffering inflationary effects and the inflationary impacts in Russia are greater than in most other
countries. Russian inflation is running at close to 20%, and power costs are predicted to increase by up to 20% per annum over the coming
years, while distribution rates have already increased by up to 25% this year. Zirax's cost of sales increased from $6.7m in 2007 to $7.9m
in 2008. Distribution, sales and marketing expenses also increased to $4.7m compared with $3.0m in 2007, whilst General and Administrative
expenses increased to $2.8m in 2008 compared with $2.0m in 2007. Whilst in general we seek to pass on higher costs to our customers in the
form of price increases, initially some costs were absorbed by Zirax leading to a reduction in our operating margin.
As expected, the newly acquired Solith in Austria contributed an overall loss of $(0.4)m in the first half of 2008, in part reflecting a
$(0.1)m effect of the fair value uplift of Solith's fixed assets and inventory.
Overall the Group recorded a small operating loss for the period of $0.3m, compared with a profit of $1.7m in 2007, and loss before tax
was $0.1m compared with a profit of $1.9m in 2007.
Despite the loss before tax for the period, there is a tax charge of $0.5m as a result of profits arising in Russia.
Investment in fixed assets of $0.8m in the first half of 2008 primarily relates to the continued investment in our Volgograd plant and
facility.
Cash and cash equivalents increased from $8.2m at 31 December 2007 to $8.9m at 30 June 2008. Cash from operations was $3.9m, with the
Group making a net cash investment in assets of $1.2m and net cash payment against funding of $2.1m. The Group has sufficient cash funds to
meet its foreseeable business plans. Any surplus funds are invested, but we do not undertake speculative treasury transactions.
Basic EPS was a loss of 0.35 cents, compared with earnings of 0.83 cents in 2007. In line with the Board's stated strategy no dividend
will be payable for the period. It remains the Board's view that the business is in a growth stage and, as such, it needs to maintain cash
to fund its development.
Operating Review
Despite challenging conditions in the global economy and the impact of external factors on our business, Zirax's underlying sales
performance remained strong, with significant untapped demand for our products, from the oilfield markets in particular, driving revenues.
The supply of product from Rosignano, Italy has been delayed due to technical issues with the production process. A programme has been
put in place to resolve this matter and we are hopeful that we will achieve an increase in supply later this year with full capacity being
reached by the middle of 2009. Since Rosignano's opening in November last year, we have had to control the Group's potential sales because
of the lack of available capacity to supply our customers. As a result, Zirax has also incurred extra distribution and administration costs,
relating primarily to ensuring certain key customers are supplied.
With the increased capacity at Volgograd and the Rosignano supply issues being resolved we believe that Zirax is well positioned to take
full advantage of the increasing global demand for our products.
The increase in revenue over the period is mainly as a consequence of our strategy to decrease our dependence on the de-icing markets,
and in particular our contract with Moscow City Council. Zirax has successfully changed its sales mix through focusing on the significant
opportunities from growing revenue streams in the oilfield services markets and increasing our ability to source product from multiple
locations. As such, we are particularly pleased to report a 74% increase in sales from this segment during the period, and remain confident
that we can build on the success of our announcement earlier this month that we had signed a supply agreement to provide our product for use
in the Azeri-Chirag-Guneshli oilfields in Azerbaijan. Despite the tougher market conditions in the wider economy and the recognition that in
our own market we need to recover our margins, Zirax believes that it has created a solid base to build from and is actively seeking to
widen the product and service offering to this market.
Sales decreased significantly in the de-icing segment as a result of our move towards the oilfield markets, but also from the extremely
mild 2007/08 winter season in Moscow. De-icing is normally a good margin business for Zirax so this fall in sales affected our bottom line
in the period. Despite this, we have secured for the sixth consecutive year the tenders to supply the City of Moscow with a reduced volume
of 23,000 MT for the upcoming winter season, representing $6.6m in revenues. This is a 5,000 MT reduction in sales compared to the previous
winter season as Moscow still has inventory from 2007/08. As announced earlier this month we have signed an agreement with Bucharest City
Council to increase the supply of product having been successfully trialled in Romania last year.
Earlier in the year we acquired Austrian company Solith which gives Zirax a foothold into Central and Western European markets where we
believe there are substantial opportunities for development. At the time of acquisition Solith was solely dependent on winter de-icing
revenue, but in the first half of 2008, 49% of Solith's business came from new non-winter related revenues. The Solith results therefore
have equally contributed to the de-icing and industrial segments. It was also known and understood that the business was loss making and
would in the short term remain so, however we look forward to Solith achieving profitability in the near future.
On the costs side, we also announced earlier this month that we are acquiring our principal limestone supplier; this investment will be
completed later in 2008. This quarry, near our plant in Volgograd, will secure our supply of high quality raw material and provide us with
greater control over future cost. For distribution, initially it has not been possible to pass on the increased costs to most of our
clients, who are typically on contracts for one year; however, there is the opportunity to offset some of this in the second half and
beyond.
Board Change
Having served six years as Zirax's Chief Executive Officer, it has been agreed with Valery Andosov that he will step down from his post
and leave the Board in order to pursue other interests. Fenlon Dunphy has been appointed as CEO with immediate effect and during an interim
period will also maintain responsibility for all financial matters. Mikhail Petrushin, Executive Director of Zirax plc, will take over
responsibility for the Russian operations, becoming General Manager of Zirax LLC, our principal subsidiary company. Valery will provide a
consultancy service to the business for an interim period in order to aid the transition. The Board is grateful to him for the success he
has brought the Company to date and wishes him well for the future.
The Board is also very grateful to all the staff who have contributed to the Company's growth and looks forward to continuing to work
closely with them as we enter a key period in Zirax's future development.
Outlook
This is a very frustrating period for the Zirax management team. The demand for our products is strong, but due to a combination of
factors, most of which are external, the Company has been unable to take full advantage of this demand. The key issues are being addressed:
we expect the Rosignano plant to come fully on line in 2009, higher costs are being passed on or being mitigated through other channels; and
new revenue streams will substantially reduce the significance of the Moscow contract. While the results for 2008 will be below
expectations, Zirax remains in an excellent position to capitalise on the investments it has made to increase its market share.
Consequently, the Board remains confident in the Group's longer-term trading outlook.
Sir Michael Oliver
Chairman
Independent review report to Zirax plc
Introduction
We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six
months ended 30 June 2008, which comprises the Consolidated Income Statement, Consolidated Balance Sheet, Consolidated Cash Flow Statement,
Consolidated Statement of Changes in Shareholders' Equity and related notes. We have read the other information contained in the half-yearly
financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the
condensed set of financial statements.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for
preparing the half-yearly financial report in accordance with the AIM Rules for Companies which require that the financial information must
be presented and prepared in a form consistent with that which will be adopted in the company's annual financial statements.
As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European
Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with
International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.
Our responsibility
Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial
report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of the AIM
Rules for Companies and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or
to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in
writing.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim
Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United
Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the
half-yearly financial report for the six months ended 30 June 2008 is not prepared, in all material respects, in accordance with
International Accounting Standard 34 as adopted by the European Union and the AIM Rules for Companies.
PricewaterhouseCoopers LLP
Chartered Accountants
London
29 September 2008
a) The maintenance and integrity of the Zirax plc website is the responsibility of the directors; the work carried out by the auditors does
not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to
the financial statements since they were initially presented on the website.
b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in
other jurisdictions.
Consolidated Income Statement
For the Period Ended 30 June 2008
Notes Six months to Six months to Year to
30 June 2008 30 June 2007 31
December
2007
Reviewed Reviewed Audited
$'000 $'000 $'000
Revenue 3 15,065 13,287 30,665
Cost of sales (7,887) (6,682) (14,628)
---------- ---------- ----------
Gross profit 7,178 6,605 16,037
Distribution expenses (4,687) (3,003) (6,777)
General and administrative (2,757) (1,951) (4,521)
expenses
---------- ---------- ----------
Operating (loss)/profit (266) 1,651 4,739
Interest receivable 267 229 495
Interest payable and similar (290) (10) (177)
charges
Net foreign exchange gain 171 53 240
---------- ---------- ----------
Net finance income 148 272 558
(Loss)/profit before taxation (118) 1,923 5,297
Taxation 5 (484) (492) (1,559)
---------- ---------- ----------
(Loss)/profit for the period (602) 1,431 3,738
====== ====== ======
Earnings per share expressed in US cents per
share:
Basic 4 (0.35) 0.83 2.17
---------- ---------- ----------
Diluted 4 (0.35) 0.83 2.17
====== ====== ======
Consolidated Balance Sheet
At 30 June 2008
30 June 2008 30 June 2007 31 December 2007
Reviewed Reviewed Audited
$'000 $'000 $'000
Non-current assets
Property, plant and equipment 12,621 9,452 10,907
Intangible assets 1,189 204 225
Trade and other receivables 6,414 2,759 6,104
Deferred income tax assets 211 152 202
---------- ---------- ----------
Total non-current assets 20,435 12,567 17,438
---------- ---------- ----------
Current assets
Inventories 5,445 2,719 3,199
Trade and other receivables 6,015 4,167 11,524
Cash and cash equivalents 8,928 8,603 8,156
---------- ---------- ----------
Total current assets 20,388 15,489 22,879
---------- ---------- ----------
Current liabilities
Short-term borrowings 2,496 - 4,153
Trade and other payables 6,712 1,963 5,633
Current tax liabilities 271 201 891
---------- ---------- ----------
Total current liabilities 9,479 2,164 10,677
---------- ---------- ----------
Net current assets 10,909 13,325 12,202
---------- ---------- ----------
Non-current liabilities
Long-term borrowings 1,024 - -
---------- ---------- ----------
Total non-current liabilities 1,024 - -
---------- ---------- ----------
Net assets 30,320 25,892 29,640
====== ====== ======
Shareholders' equity
Share capital 2,965 2,965 2,965
Share premium 11,194 11,194 11,194
Other reserves 7,500 4,777 6,218
Profit and loss account 8,661 6,956 9,263
---------- ---------- ----------
Total shareholders' equity 30,320 25,892 29,640
====== ====== ======
Consolidated Cash Flow Statement
For the Period Ended 30 June 2008
Six months to Six months to Year to
30 June 2008 30 June 2007 31
December
2007
Reviewed Reviewed Audited
$'000 $'000 $'000
Cash flows from operating
activities
(Loss)/profit before taxation (118) 1,923 5,297
Adjustments for:
Depreciation of property, plant 623 312 714
and equipment
Amortisation of intangible 11 - 7
assets
Loss on disposal of property, - - 15
plant and equipment
Share options expense 60 61 122
Interest receivable (267) (229) (495)
Interest payable and similar 290 10 177
charges
---------- ---------- ----------
Profit and loss before working 599 2,077 5,837
capital changes
Decrease/(increase) trade and 7,003 (550) (7,396)
other receivables
Increase in inventories (1,697) (622) (940)
(Decrease)/increase in trade (719) 25 131
and other payables
Increase in taxes payable 81 77 42
---------- ---------- ----------
Cash from/(used in) operations 5,267 1,007 (2,326)
Taxes paid (1,401) (680) (1,055)
---------- ---------- ----------
Net cash from/(used in) 3,866 327 (3,381)
operating activities
---------- ---------- ----------
Cash flows from investing
activities:
Interest received 184 168 347
Purchase of property, plant and (753) (1,325) (2,708)
equipment
Purchase of intangible assets (126) (204) (184)
Acquisition of subsidiary (457) - -
---------- ---------- ----------
Net cash used in investing (1,152) (1,361) (2,545)
activities
---------- ---------- ----------
Cash flows from financing
activities:
Proceeds from borrowings 2,556 - 6,190
Repayment of borrowings (4,358) - (2,202)
Interest paid (271) (10) (150)
---------- ---------- ----------
Net cash (used in)/from (2,073) (10) 3,838
financing activities
---------- ---------- ----------
Net increase/(decrease) in cash 641 (1,044) (2,088)
and cash equivalents
Cash and cash equivalents at 8,156 9,448 9,448
beginning of the year
Effects of exchange rate 131 199 794
changes
---------- ---------- ----------
Cash and cash equivalents at 8,928 8,603 8,154
end of the period
---------- ---------- ----------
Consolidated Statement of Changes in Shareholders' Equity
For the Period Ended 30 June 2008
Share Share Other Profit and Total
capital premium reserves loss account equity
$'000 $'000 $'000 $'000 $'000
Period ended 30 June 2007
Profit for the period - - - 1,431 1,431
Effect of exchange rates - - 359 - 359
------- --------- ------- ------- ---------
Total recognised income and - - 359 1,431 1,790
expense
Share options credit - - 61 - 61
Balance at 1 January 2007 2,965 11,194 4,357 5,525 24,041
------- --------- ------- ------- ---------
Balance at 30 June 2007 2,965 11,194 4,777 6,956 25,892
------- --------- ------- ------- ---------
Period ended 30 June 2008
Loss for the period - - - (602) (602)
Effect of exchange rates - - 1,222 - 1,222
------- --------- ------- ------- ---------
- - 1,222 (602) 620
Share options credit - - 60 - 60
Balance at 1 January 2008 2,965 11,194 6,218 9,263 29,640
------- --------- ------- ------- ---------
Balance at 30 June 2008 2,965 11,194 7,500 8,661 30,320
==== ===== ==== ==== =====
1. Basis of preparation
The financial information has been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting,
and should be read in conjunction with the Group's annual financial statements for the year ended 31 December 2007.
The financial information contained in this report has been prepared on the basis of the accounting policies presented below and has
not been audited and does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. The statutory
accounts for the year ended 31 December 2007, which were prepared under IFRS as adopted by the EU, have been delivered to the Registrar of
Companies.
The auditors' opinion on those accounts was unqualified and did not contain a statement made under section 237(2) or section 237(3)
of the Companies Act 1985.
2. Significant accounting policies
The financial information has been prepared under the historical cost convention.
The accounting policies adopted and the methods of computation in the interim financial report are consistent with those followed in
the preparation of the Group's annual financial statements for the year ended 31 December 2007.
3. Segment information
The segment results for the period ended 30 June 2008 are as follows:
Oilfield Process De-icing Industrial Chemicals Total
Chemicals Solution
s
$'000 $'000 $'000 $'000
Revenue 12,791 865 1,409 15,065
Segment operating 783 - (21) 762
profit/(loss)
Central costs (1,028)
----------
Operating loss (266)
Finance costs and net 148
foreign exchange
----------
Loss before taxation (118)
Taxation (484)
----------
Loss for the period (602)
======
The segment results for the period ended 30 June 2007 are as follows:
Oilfield Process De-icing Industrial Chemicals Total
Chemicals Solution
s
$'000 $'000 $'000 $'000
Revenue 7,371 4,716 1,200 13,287
Segment operating profit 942 1,329 221 2,492
Central costs (841)
----------
Operating profit 1,651
Finance costs and net foreign 272
exchange
----------
Profit before taxation 1,923
Taxation (492)
----------
Profit for the period 1,431
======
4. Earnings per share (EPS)
Six months to Six months to
30 June 2008 30 June 2007
(Loss)/profit for the period ($'000) (602) 1,431
--------- ---------
Number of shares - weighted average
Basic ('000) 172,321 172,321
Basic earnings per share (cents) (0.35) 0.83
---------- ----------
Number of shares - weighted average
Diluted ('000) 172,321 172,321
Diluted earnings per share (cents) (0.35) 0.83
---------- ----------
5. Taxation
Despite the loss before tax for the six months ended 30 June 2008, there is a current tax charge of $0.5m as a result of profits earned
in Russia.
6. Acquisition of subsidiary
On 18 January 2008, the Group acquired 100% of the share capital of Solith Anlagenbau und Service GmbH ("Solith"). Solith, located in
Austria, specialises in the production and distribution of value added de-icing products, including calcium chloride derivative "Brine C",
used for motorway de-icing maintenance. The maximum consideration payable by Zirax is EUR3.7m, satisfied by a cash payment of EUR200,000 on
completion, and the balance of up to EUR3.5m, payable via a two-tier performance related earn out arrangement for the sale of product in
Austria over a maximum period of six years.
The assets and liabilities arising from the acquisition, provisionally determined, are as follows:
As at 18 January 2008 Carrying value Fair value adjustment Fair value
$'000 $'000 $'000
Property, plant and equipment 819 196 1,015
Inventories 179 143 322
Trade and other receivables 265 - 265
Trade and other payables (730) - (730)
Borrowings (1,244) - (1,244)
-------- -------- --------
Net liabilities acquired (711) 339 (372)
===== ===== =====
Purchase consideration:
Cash paid 323
Direct costs relating to 141
acquisition
--------
464
Fair value of net liabilities 372
acquired
--------
Goodwill 836
=====
Solith's loss for the period since acquisition was $0.4m. Because of the proximity of the acquisition to the start of the period, the
revenue and loss of the group stated as if the acquisition had taken place at the start of the period, would not be significantly different
to the revenue and loss disclosed in the income statement.
7. Balances and transactions with related parties
(i) Balances with related parties:
Balance sheet caption Relationship Six months ended Six months ended 30
30 June 2008 June 2007
$'000 $'000
Trade receivable from and
prepayments to:
OAO Kaustik Under common control 30 71
---------- ----------
30 71
====== ======
Trade payables to:
OAO Plastcard Under common control 71 1
OAO Kaustik Under common control 636 942
OOO European Chemical Other related party 4 6
---------- ----------
711 949
====== ======
(ii) Transactions with related parties:
Income statement caption Relationship Six months ended Six months ended
30 June 2008 30 June 2007
$'000 $'000
Revenue from transactions
with:
OAO Kaustik Under common control 104 162
---------- ----------
104 162
====== ======
Inventory purchases:
OAO Kaustik Under common control 4,361 3,575
OOO Evroles Under common control 182 -
OOO European Chemical Other related party - 30
---------- ----------
4,543 3,605
====== ======
Production services purchases:
OAO Kaustik Under common control 294 347
====== ======
8. Exchange rates
Exchange rates for the US dollar during the period were:
Average rate to Average rate to Average rate to Closing rate Closing rate at Closing rate at
30 June 2008 30 June 2007 31 December 2007 at 30 June 2007 31 December 2007
30 June 2008
USD 1 - GBP 0.5043 0.5076 0.4996 0.5011 0.4990 0.5007
USD 1 - RR 23.8924 26.0714 25.5516 23.4573 25.8162 24.5462
This information is provided by RNS
The company news service from the London Stock Exchange
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