Pennant International Group plc (LON:PEN) Chief Executive Officer Phil Walker and Chief Financial Officer Michael Brinson caught up with DirectorsTalk for an exclusive interview to discuss highlights from full year results, how the business transformation has been reflected in the financials, working capital and what we can expect from the group going forward.
Q1: Phil, following the release of the annual results on 26th April, what do you consider the key highlights for Pennant International over the period?
A1: I’d like to start by saying this has been an encouraging period for the group. If you look back at what we set ourselves as a challenge to achieve and what we’ve shared in RNS’s and in meetings, everything that we wanted to achieve we’ve managed to deliver in this last period. Everything we wanted to do has been completed and we’ve managed to do more.
So, what does that really mean?
Results in line, improved performance, the momentum building in the business and we’ve enjoyed the third consecutive trading period of reporting a positive EBITDA.
We’re not getting carried away, the results are not fantastic but in terms of the journey and a position, we’re exactly where we thought we’d be, if not slightly ahead. We’ve transformed the business mix, you see that in the margin and you see that in the revenues, and we’ve taken steps to realign the business and then the post-period acquisition which we talked about on the last DirectorsTalk interview.
So, overall, in terms of the year, a good performance, moving in the right direction, the business that was stabilised last year is now starting to deliver and we’re looking forward to what the next period will bring.
Q2: It is clear good progress has been made towards implementing the business transformation to a software and services model. Michael, how has this change been reflected in the financial results?
A2: We’ve made a material shift in gross margins across the group as the sales and services model begins to come through in the financial results.
So, you’ll see in the accounts, we’ve moved the gross margins across the group from 27% in 2021 to now 42% in 2022, reflecting that sales mix shift. There’s were cost measures taken in 2022 where we removed about £1 million worth of costs from the group which has been sustained in the results. This has enabled us to report EBITDA profits now in 3 consecutive six-month periods, and these profits are coming through at a much lower revenue base because of this software and services mix.
In terms of looking forward in the numbers, gross margins are expected to continue to rise as this benefit of the transformation comes through, and it will continue to flow through into the performance at that lower revenue levels. As we add more revenue levels of this sales mix, improved profitability at EBITDA and operating margin will come through in the numbers.
Q3: Looking at working capital, how has the position changed and what capacity do you have in the balance sheet?
A3: So, in 2022, we took action to rationalise our property portfolio as we moved to this software and services transformation in the business.
The freehold space wasn’t being fully utilised so we took the action to sail our headquarters in Cheltenham, in the UK. That’s rationalised from about 60,000 square feet to 30,000 square feet so we still have, in the balance sheet, £3 million worth of freehold property in the UK, in doing so, it brought £2.1 million of cash into the group.
What that’s enabled us to do in the year is materially improve our net debt position throughout 2022, we close 2021 with an overdraft of circa £3.5 million, reducing down to £0.4 million at the end of 2022, and actually into a net cash position in the beginning of Q2 2023.
This has enabled us to make the acquisition of Track Access Production, which Phil mentioned, and we’ve been able to fund this entirely from working capital due to the strength in the balance sheet.
Q4: Phil, as we look towards 2023 and beyond, what should people expect from Pennant International?
A4: Sat here today, I’m feeling pretty optimistic about what the next period will bring.
As outlined in the results RNS, we have an order book of about £25 million at year-end, of which about £13 million was contracted for 2023, and since that was published, we’ve secured about £1.2 million of work that will be delivered in the year.
We’re currently on a run rate of about £14.5 million versus a market expectation of £16.6 million. Also note that alongside those contract wins and the acquisition, the analyst have performed a recent upgrade, first upgrade in 7 years, and the current year result have been upgraded to £1.3 million EBITDA with an upgrade to 2024 of £1.6 million EBITDA. So, from a financial perspective, the current year is shaping up nicely and the forecast period beyond ’23 is looking good.
Beyond that, what we’re trying to do is having made a post-period acquisition, it’s still very much within our strategy to add scale, expand our partnerships and look to add complimentary businesses in the group. That’s one area.
Secondly, the successful launch and cementing of our new GenS product in our IPS suite. For those that don’t know, we’re launching the version 2 of our GenS products in May this year, that’s a significant investment by the group to bring the software suite for the IPS business up into the modern times. We’re looking forward to seeing the organic growth that comes off the back of that investment.
So, I surmise as saying momentum is with us, we’ve got a solid base for this year and we’ve got some good opportunities coming through, both organically and through potential acquisitions. We’re well placed to continue to move this momentum forward.
