*at constant exchange rates and excluding acquisitions and disposals
** pre-goodwill amortisation and exceptional charges and excluding acquisitions and disposals
Bob Thian, Chairman, said:
“Whatman’s restructuring has yielded solid improvements in margins and profitability during 2004, although we believe that there is still considerable upside that can yet be achieved. With the acquisition of Schleicher & Schuell substantially enhancing our position in the laboratory sciences market and the expected synergies coming through on schedule, we look forward to delivering further improvements in business performance during 2005.”
Two years on, and the renaissance of Whatman is well underway. The initial restructuring of the organisation has generated benefits to shareholders; sales have started to grow ahead of the market, margins have improved and the strengthening of the management has begun.
Nevertheless, there is still much to do:
Overall, the promised improvement in profitability resulting from the upgrading of existing operations has been substantially achieved and is starting to yield improvements in business performance.
The acquisition of S&S towards the end of the year has provided a unique opportunity. The integration has got off to a good start and is expected to meet the earnings accretion targets published at the time of the acquisition.
Excluding Biometra and S&S, sales were £74 million; at constant exchange rates and excluding disposals this represents a 6% increase over 2003. This reflects a strong performance in the LabSciences segment where we grew the business by 7.1% to £47.9 million and in which we are outperforming the market. Total Group sales in 2004 were £82.8 million, including one month of S&S sales (2003: £83.8 million).
Operating profit (EBITA) in the year to 31 December 2004, including Biometra (in voluntary liquidation), but excluding goodwill amortisation and exceptional charges, was £18.3 million, up 30% (40% at constant exchange rates) on 2003 (£14.1 million). This improvement has resulted largely from further benefits of the restructuring programme which started in early 2003.
Operating profit (EBITA) of continuing operations, excluding S&S, goodwill amortisation and exceptional charges, was £18.2 million, up 29% on 2003 (40% at constant exchange rates). Operating (EBITA) margin of the continuing operations increased to 23% (2003: 17%), resulting from:
Earnings per share for the year, before goodwill amortisation and exceptional charges, were 10.45p, 39% higher than the 7.52p in 2003.
The Group has provided in the 2004 Accounts for exceptional charges of £15.8 million:
After these exceptional charges and amortisation of goodwill, the Group’s profit before tax was £1.4 million (2003: £2.6 million) and the loss per share was 0.41p (2003: loss of 1.49p).
The Group incurred a tax rate on underlying profits before goodwill and exceptional items of 25% in 2004 (2003: 32%). It is anticipated that the ongoing tax rate of the combined Group in the near term will be 25% at current levels of profit, with incremental profits taxed at 35%.
Operating cash flow in the year was £13.8 million (2003: £8.7 million). The total consideration for the acquisition of S&S was €58.8 million (£40.9 million), which was financed entirely by debt.
At 31 December 2004, the Group’s net debt was £30.3 million, a gearing ratio of 75%. Interest cover at 31 December 2004 was 43 times, based on the combined 2004 profit of Whatman and S&S before goodwill amortisation and exceptional charges.
In the announcement of the acquisition of S&S, the Board indicated that the acquisition would be 17% accretive to earnings in 2005, 39% accretive in 2006 and 48% accretive in 2007. With this expectation for very substantial improvement in profitability, but prudently planning to repay the debt, the Board has decided to recommend the payment of a final dividend of 2.87p per share, making a total dividend for the year of 4.61p per share, 7.5% higher than in 2003 (4.29p). This will be paid on 27 May 2005 to shareholders on the register at 22 April 2005.
The restructuring projects initiated in 2002 are all substantially completed:
The acquisition of S&S was completed on 30 November 2004 for a consideration of €58.8 million (£40.9 million), financed entirely by debt.
S&S’s leading position in Germany complements Whatman’s established presence in the UK and the USA, and the combined Group is now the clear number 3 in the global LabSciences market, with a 16% share of the market.
The acquisition will allow the Group to offer a more comprehensive product line with the same superior quality our customers have come to expect. The acquisition has also opened new doors for Whatman in markets and geographies in which Whatman has not, historically, been present or strong.
Integration of the Whatman and S&S customer service and sales groups has been successfully completed during the first quarter of 2005. Based in Florham Park, New Jersey (North America), Maidstone, UK (South Europe), Dassel, Germany (North Europe), Singapore (Asia Pacific) and Tokyo (Japan), the combined teams are now positioned to provide existing and new customers with a substantially broader product and improved service capability. In North America and the UK, the established Whatman presence will benefit from the increased selling resources and additional products, including:
The geographical strength of S&S in Germany and Central Europe provides a considerable opportunity to offer the combined product range to S&S’s strong loyal customer base.
Integration and rationalisation of the combined product range will be completed by the fourth quarter of 2005. The pre-acquisition Whatman range had already been reduced from 16,000 products to under 4,000. A similar programme to reduce the S&S product range from 17,000 items, together with a further reduction of the Whatman pre-acquisition range, is well under way and will result in a combined offering of 7,000 products.
Initial stages of the integration of operations are progressing well:
Migration of S&S business operating systems to the upgraded Whatman platform is on schedule, for completion by the end of 2005. Completion of these initial integration projects will reduce the combined workforce from 1170 at the date of acquisition to 980 by the end of the year.
A further stage of the integration will combine the existing paper conversion operations at Banbury and Dassel. This project will be completed by the end of the year and will achieve a further reduction in headcount.
As announced at the beginning of 2004, the Group now has three reporting segments. The segment previously named “Filtration and Separation” is now divided into “LabSciences” and “MedTech”. The segment previously named “Biotechnology” is now called “BioScience”.
The statutory accounts for 2004 include post-acquisition one month of S&S sales. The analysis in the following table shows the unaudited proforma total sales of the Group for the whole of 2004:
* at constant exchange rates
LabSciences is the preparation of non-cellular samples prior to analysis, including environmental applications. It comprises cellulose and glass filtration media, membranes and chromatography. In addition to traditional products, this segment includes syringe filters, capsules and other encapsulated products.
Underlying sales (at constant exchange rates and excluding the filter cartridge business which was sold at the end of 2003) were up 7.1%, in a market which grew by about 3%. Within this overall growth, some weakness in European demand was outweighed by particularly strong activity in the United States.
The traditional cellulose and glass fibre macrofiltration products continued to hold their own, together achieving a 4% increase in sales (at constant exchange rates) in a steady market.
Membrane sales in this segment were up 20% at constant exchange rates, helped by the award of a five year US contract for air pollution monitoring.
The Company’s latest generation of innovative products continue to provide new opportunities:
The unique features of these new products offer our customers user-friendly and cost reducing solutions in a wide range of applications, from QC testing in an environmentally friendly process which extracts ethanol from corn to preparation of HPLC samples in organic synthesis.
About half the Group’s sales in the LabSciences sector are through specialist laboratory distributors. Recent changes in this distribution channel, while creating some short term uncertainty in the market, provide the Group with an opportunity for improved longer term growth.
MedTech comprises filtration components supplied on an OEM basis to manufacturers of medical devices and clinical diagnostics tests.
Underlying sales were disappointingly down 4% at constant exchange rates, due to a shortfall in sales of relatively low margin drug reconstitution products resulting from a subcontract supply problem. This shortfall was expected to be filled by increased sales of membranes for clinical diagnostics. In the event, this did not come through in the second half of 2004 but we remain confident that this will happen in 2005, as further applications continue to be found for the Group’s unique portfolio.
In addition, Fusion 5, which enables five processes in lateral flow diagnostic assays to be combined into a single process, was successfully launched during the year and has already achieved sales to a number of global diagnostics manufacturers.
BioScience is the preparation of cellular samples prior to analysis and storage for study of nucleic acids or proteins. It comprises FTA, multiwell plates, column based DNA separation, and electrophoresis products.
Underlying sales were up 17% year on year at constant exchange rates, with particularly strong second half growth.
Sales of FTA products, the unique technology for collection, archiving and purification of DNA, were up 39% on the prior year. The technology is now well established as the worldwide standard in forensics applications. In addition, we are now achieving sales to other sectors, including entry into the food and agriculture market place and a first application for epidemiological studies in the pharmacogenomics sector.
Negotiations are progressing with potential partners who will be licensed to market the FTA technology in applicational areas which are not directly accessible through existing Whatman channels.
The margin on FTA sales continues to improve, resulting from both manufacturing efficiency and customers’ evaluation of the effectiveness of the technology.
Sales of multiwell products were up 4% at constant exchange rates, at last showing some signs of the potential for specialised plates to OEM customers.
Sales from Biometra, which was put into voluntary liquidation in mid 2003, fell during the period in line with market conditions, but some significant progress was achieved toward a resolution of the intellectual property disputes. We continued to provide for the full net asset value of this business pending resolution of these disputes.
An extended R&D facility was commissioned at Sanford in the first quarter of 2005 and the S&S R&D team will relocate during the second quarter, establishing an excellent combined resource for membrane, FTA, microarrays and engineering research and development. Additionally, the S&S acquisition brings further expertise in membrane engineering based at Dassel in Germany. R&D expenditure for the combined group will constitute around 2% of total revenue.
The Group’s FTA technology continues to be strengthened, with three new US patents, for clone archiving, diagnostics and DNA elution, and one European patent having been granted in 2004, and a further US patent, for sample visualisation, granted since the year end. Formats for use in fully automated applications have been completed and data collection for CE marking and for US 510k FDA registration was also completed.
All three market segments continue to benefit from extensions of the Group’s established technologies:
The acquisition of S&S brings to the Group a new protein microarray technology, which although still in its infancy has exciting potential for high throughput proteomics applications, a new market area for Whatman.
The search for a new CEO is now well underway and we hope to be in a position to make an announcement in the near future. Pending the appointment of a new CEO, I am personally overseeing the integration and restructuring of S&S while also continuing to direct the overall renaissance of the Group. Additionally, Finance, Operations and Administration are reporting to me until the new CEO is appointed.
Dr Hinrich Kehler (previously Chairman of the Advisory Board of S&S) joined the Board as a non-executive director on 1 January 2005 and brings extensive business experience in addition to his knowledge of the S&S operations.
Tom McNally, who joined the Board in a non-executive capacity in 2003 following an outstanding career with Abbott Laboratories, has taken on executive responsibility for the R&D, Business Development and Sales functions, pending the appointment of a new CEO.
A Scientific Advisory Board has been established and the Group is very fortunate to have appointed Dr Roger Ford, Professor of Innovation and Technology Strategy at the University of Salford, and Dr Geoff Moggridge, Senior Lecturer in Chemical Engineering at the University of Cambridge, to the Advisory Board.
I am very pleased to welcome the S&S employees to Whatman and I am sure they will add considerably to the strength of the Group’s human resources.
I would again like to record my thanks to all our staff for their continuing commitment to the business through another year of transformation.
The achievement of an acceleration of top line growth in Q1 has been hampered by the lack of sales leadership following the departure of our CEO and two regional sales managers in Q4 2004. This year got off to a slow start which continued through January and February.
The Business Development and Sales reins were picked up by Tom McNally in January, and March saw a pick up in sales and orders. Overall, Q1 2005 was behind our own expectations, but we believe that Q2 will see us back on track.
Our search for a new CEO is well underway and we have a good short list of candidates from which we hope to make an appointment in the near future. In addition, the full complement of regional sales managers is now in place and this should allow us to regain sales growth momentum.
Meanwhile, the integration plans and product rationalisation announced at the time of the acquisition of S&S are coming through on schedule and we are on track to deliver the earnings accretion targets announced at that time.
We still have some way to go on the restructuring of the combined group and we shall be commencing a manufacturing improvement programme at the beginning of the summer which we expect to further enhance operating margins.
Overall, we continue to make good progress and I am confident that there is considerable further upside to come.