National Milk Recrds - Audited Final Results
RNS Number : 3499B
National Milk Records PLC
07 October 2020
 

7 October 2020

                                                                                                                        

National Milk Records plc

('NMR', or the 'Company' or the 'Group')

Audited Final Results

National Milk Records plc, the leading supplier of dairy and livestock information services, is pleased to announce its audited results for the year ended 30 June 2020.

Financial Overview

·    Group revenue of £21.6 million (2019: £22.8 million)

·    Operating Profit of £0.8 million (2019: £2.3 million)

·    Diluted EPS of 4.7 pence (2019: 9.4 pence)

·    Net debt decreased to £1.4 million, (2019: £1.7 million), 1.0 times EBITDA

·    Proposed dividend of 1.25 pence per share

·    Financial Impact of cyber-attack and COVID-19 difficult to measure, but modelling estimates detrimental effect of c.£1.1 million

Operational Overview

·    Continued growth in revenues for disease and surveillance testing which have grown by 6% and 5% respectively

·    Signing of exclusive licence for Genocells technology in the UK

·    Continued investment in business capability with CAPEX up 21%

·    Significant operational and financial impact from cyber-attack and COVID-19

·    Internal launch of strategic plan

·    Bank credit approved to support continued business development in line with strategic plan

Managing Director, Andy Warne, commented:

"NMR has had a challenging year and sustaining services to our customers and stakeholders up and down the supply chain has been difficult, which has therefore resulted in a fall in our revenues and operating profit.  However, these challenges have highlighted the essential nature of NMR's service offering, and this is more pertinent now than it has ever been. We continue to recover well from both of the key challenges that we have faced during the year, and we maintain our ambition in terms of our investment and growth plans for the future.

"Given the significance of the operational impacts of the cyber-attack and COVID-19, the NMR team has performed well in its ability to sustain services to the degree where annual revenues across recording and payment testing services, collectively, only decreased by 8.0%. There were also cost implications from these challenges, however, NMR still delivered an EBITDA of nearly £1.5 million.

"The business has invested significantly during the year in a number of areas, including, investment in IT to support in our recovery from the cyber-attack, but principally in support of our strategic plan,  the laboratory investment programme, which includes an automation platform to support the growth in Johne's disease testing, upgraded liquid handlers and replacement milk analysers, and, investment in intangible assets, including the investment in Finance and CRM systems together with the exclusive licence for Genocells in the UK.

"With regards to the UK dairy sector, I am pleased to state that the industry remains strong, with positive prospects for investment in UK processing capacity and for milk prices.

"Following the guidance from Public Health England, this year's Annual General Meeting will be a closed meeting. Maintaining transparency of our governance is very important to the NMR board, and we will respond to questions ahead of our AGM and publish the outcome of the meeting and prepared presentations on our website.

"Over the next year, together with my management team, I am focused on securing the foundations for the future and delivering the growth and investment ambition in our strategic plan. I look forward to updating shareholders on the Company's progress in due course."

 

 

For further information please contact:

National Milk Records plc
Andy Warne, Managing Director

Mark Frankcom, Finance Director


+44-7970-009141

+44-7458-002444
 

 

Canaccord Genuity
Adam James
Georgina McCooke

 

+44-20-7523-8000

Blytheweigh (Financial PR)
Megan Ray
Rachael Brooks

+44-20-7138-3204

 

 

 

 

 

 

CHAIRMAN'S REPORT

National Milk Records PLC ("NMR" or the "Company"), the Aquis Stock Exchange traded leading supplier of dairy and livestock information services, is pleased to announce its audited accounts for the year ended 30 June 2020.

 

This has been a challenging financial year for NMR and I am extremely proud of how the NMR family has responded to two viral challenges to our business, the RYUK cyber-attack in the autumn of 2019 was closely followed by the global COVID-19 pandemic in the spring of 2020. The NMR Board has endeavoured to keep shareholders informed on both challenges as they have developed.  

 

The RYUK cyber-attack became evident to NMR on Friday 13 September. A key factor in the disruption caused was that our back-up protocols were compromised. No ransom was paid, and NMR staff worked diligently to restore, recover or re-write our IT systems.  The key payment testing services were prioritised in the recovery process and our processor customers saw limited disruption in our service provision. The principal disruption was caused to our farmer customers in terms of milk recording and disease testing. NMR provided an emergency somatic cell counting service within seven days of initial shut down of our recording services. The level of disruption caused to individual farms varied considerably: NMR proactively instigated a 20% discount of the per cow recording fees for two months: and then dealt with individual farmers on a case by case basis. As well as this immediate discount to revenue and the costs of recovery including third party consultancy NMR has suffered a legacy aged debt related to this period when farmers withheld payment on the basis of poor service.

 

However, we have responded significantly to the cyber-attack, accelerating digital transformation, improving protection and monitoring and upgrading our capabilities in disaster recovery. The investment made in these areas will have a positive impact on the Company moving forward and will provide us with greater security and flexibility to support the growth of our business.

 

COVID-19 has had a profound effect on society generally. As an integrated supplier to the dairy industry NMR was regarded as an essential service and we maintained our payment and food safety services to milk processors in the normal way. There has been a great focus on reducing the COVID-19 risk at our operational sites and our administrative staff were asked to work from home. Our milk recording services are largely supported by a national network of self-employed technicians and lockdown, social distancing rules and classification of some individuals as vulnerable caused disruption to our recording services. Of our approximately 4,000 farmer customers, 1,300 of our customers changed their service to some extent, either delaying or cancelling recordings as well as moving to a Do it Yourself ("DIY") sampling service. Our field staff have again worked diligently to help our farmers maintain the integrity and completeness of their milk records.

 

Due to these two events, reporting on the underlying performance of the business is difficult. Overall revenues of the financial year were £21.590 million (2019: £22.798 million) a reduction of 5%.  Operating Profit reduced by 66% to £775,000 (2019: £2,269,000). The underlying business remains in robust shape although the distraction and disruption caused by RYUK and COVID-19 impacted management's capacity to grow the business and execute the initiatives in our strategic plan during the year.

 

Despite these challenges, we believe that the outlook for NMR is positive. COVID-19 has demonstrated that the services we provide, to farmers, processors, and ultimately, individuals are essential. Additionally, reporting an EBITDA of £1.437 million (2019: £2.761 million) in this environment indicates the resilience of our business model.

 

We have also demonstrated that we have been able to proactively respond to the challenges presented and, in the medium to long term the procedures and programmes we have implemented and the  investments we have made will help to strengthen the business and provide a good platform for further growth.

 

There is also increased pressure for food provenance and safety as well as animal welfare and environmental awareness which has and will continue to, increase the demand for NMR services at the farm gate level. NMR's direct relationship with the UK grocery retailers as well as the UK's dairy farmers gives NMR a unique position to capitalise on this increased demand.  

 

Therefore, the NMR Board is recommending a dividend payment of 1.25 pence per share (2019: 1.25 pence per share) for all shareholdings on the register on 16 October 2020, with an ex-dividend date of 15 October 2020. This level of dividend payment both demonstrates our confidence in the business and allows for further significant investment in our operational capacity and our new innovations such as "Genocells", whilst also acknowledging the support of shareholders during the year. If approved by shareholders at the AGM, the final dividend is expected to be paid on 20 November 2020.

 

Moving forward, the focus for NMR will be about investing in future growth and shareholders wishing to align themselves with this strategy can join our Dividend Re-Investment Plan (DRIP). This plan gives shareholders the option to reinvest their dividend payments to buy more shares in the Company.

 

With regards to future growth, earlier this year we launched, internally, our 2020-2023 Strategic Plan which encompasses four key areas: our core business; milk testing; provenance/supply chain; and complementary step change opportunities. Moving forward, we will be focussing on a number of initiatives in these areas to grow the Company in a robust and sustainable way, therefore restoring improving total returns to our shareholders. However, it is important to note that, during the next financial year, we will still be experiencing some negative effects of the COVID-19 pandemic which will ultimately impact the financial performance of the Company. 

 

In my previous Chairman's statement, I reported uncertainty over Brexit and I also wondered if by the time of the AGM in November 2019 there would be any more certainty. Here we are a year later none the wiser. Our advice remains the same in that over a three-year period the NMR Board is optimistic about the future of the UK dairy sector and is investing appropriately to capitalise on this optimism. In the UK dairy market, foreign exchange remains a key driver: a weaker pound helps exports and reduces the competitiveness of imports whilst increasing the cost of feed imports.  I am also sure the UK dairy sector will not be immune from short-term issues regarding uncertainty and confusion, particularly if a trade agreement is not reached.

 

The NMR Board notes that the Agricultural Horticultural Development Board publishes independent market updates on a weekly basis. This allows investors to stay in touch with market dynamics and make their own judgement of the future dairy fortunes. (https://ahdb.org.uk/dairy/dairy-markets

 

I would like to thank all the NMR employed staff and self-employed milk recorders for their hard work during the year.

 

Trevor Lloyd

Chairman
 

 

STRATEGIC REPORT - Managing Director's Review

The Business Model

 

In line with our Strategic Plan, NMR has been reporting internally against five revenue streams: Core Business; Testing Adjacencies; Surveillance Adjacencies; Other Adjacencies; and Genomics. We are pleased to present this year's annual report on this basis, having established comparator periods. Core Business is our largest revenue stream and represents services associated with testing milk, notably milk recording, payment testing and surveillance services for Johne's disease. Testing Adjacencies includes services for testing of other agricultural samples including ear tag services for Bovine Viral Diarrhoea, together with growing areas such as testing for thermoduric bacteria. Surveillance Adjacencies covers the rapidly growing markets for product surveillance including testing for contaminants and our Farm Assist service. Other adjacencies include our On-Farm Software business and heat detection services. Genomics is drawn out separately and includes genotyping of animal samples and will include NMR's Genocells service which was mentioned in the Chairman's statement.

 

Trading Report and KPIs

 

Our financial performance in the year ended 30 June 2020 includes the effect of two significant detrimental events. The RYUK cyber-attack in September 2019 and the impact of the COVID-19 pandemic this spring and summer have had a significant bearing on our operations and our financial performance. I will cover them in turn in this report but it's important to also reflect that they alone do not define the NMR financial year. NMR has learned from what has been a tough year and our management team and staff are stronger and more resolved to progress with our investment plans. These investment plans are detailed in our 2020-2023 Strategic Plan which we launched internally with our management team in March this year.

 

In September 2019, NMR suffered a cyber-attack from RYUK ransomware which meant that on the evening of Friday 13 September, we lost nearly all of our operational IT systems alongside our ability to restore from back-ups. However, thanks to the efforts of our IT team, we were able to continue some testing in our laboratories as early as the following Sunday night.

 

NMR did not pay the ransom and engaged cyber-security experts and the National Cyber Security Centre to support our recovery. Senior management enacted a COBRA-style response to the crisis, prioritising services to restore, upgrading the protection and monitoring of these services, and providing cloud-based solutions where applicable. We also prioritised communication with customers although many of the normal communication channels were directly impacted by the RYUK virus.

 

The financial impact was felt almost immediately as we recognised interruptions to services for our customers and issued credit notes accordingly. We also increased the provision of labour in the laboratories and in our IT department to support the recovery. Additionally, we saw an increase in consumables costs as we increased our margin of safety in the number of pots tested to protect the Johne's testing schedule and associated revenue stream.

 

In the wake of the cyber-attack and perhaps with some overlap with COVID-19, we have seen some atypical ageing of our debtors, particularly in farm-gate services. The impact is felt at either end of the chain where some customers have delayed payment, and from our own ability to manage credit issues as they arose, particularly in September and October. This ageing is reflected in a higher doubtful debt provision for the year. Evaluation of the financial impact of the cyber-attack is difficult, not least as a large element is evaluating the size of lost revenues. Overall, given our experience and what we understand of the impacts, we estimate the direct detrimental financial impact of the RYUK cyber-attack on our FY20 EBITDA to be c. £0.9 million.

 

We have been very active since September to harden our software environments against future attack including upgrading back-ups, greater monitoring and intelligent cyber protection, and the gradual removal of older infrastructure from our estate. This is not an overnight exercise and so we have also air-bridged more vulnerable elements with various web-based insulation. I would like to mention the fantastic efforts of the NMR team in our response to the attack. Not only with regards to their additional efforts but also their experience to set-up paper-based systems, resilience and determination, their ingenuity with technical solutions and workarounds, their expertise and determination to beat the virus and restore services to customers was remarkable and very humbling.

 

The impact of COVID-19 on our trading has been less significant. The nationwide lockdown imposed on 23 March 2020 was an immediate challenge to an organisation such as NMR, which provides time-sensitive services such as payment testing. Thanks to our investment in Office 365, we were able to rapidly move to a home-based working model for our office staff. The laboratories themselves have remained open throughout: NMR provides essential testing for the food industry and our staff are key workers and payment testing is a key component in the overall milk supply chain.

 

With regards to the milk recording section of the business, COVID-19 had a slightly larger impact. Some customers simply isolated the farm to all visits, some assessed that their parlours were not suitable for COVID-19 secure working, and some (self-employed) milk recorders stopped providing services. Ad hoc customers could simply stop ordering and some subscription-based customers paused their subscriptions temporarily. The overall impact in the early weeks of lockdown was significant on our primary revenue stream of milk recording and its associated Johne's disease testing and we saw an immediate drop in the number of samples coming into the laboratories, falling by some 30% relative to expectations.

 

During April, the volume of milk recording samples recovered as our customers understood the risks and appreciated the implications of not recording. Since early May we have been back to normal. Whilst the number of samples collected recovered reasonably quickly, the level of service applied to those samples has also changed.  We have seen customers respond to the crisis in a number of ways depending on individual circumstances, this might be to defer services, or to drop down to a lower frequency of service or to opt, in the short term, for data only services with no sampling. The largest shift was from assisted services to a DIY model. We saw a peak shift between these services of c.950 customers. This has dented revenues and as we helped customers maintain the integrity of their milk records, and in the short-term we did not manage to divert the full costs of providing assisted services. As such revenue and margins have been depressed. Again evaluation of the financial impact is difficult as we are mainly testing the absence of revenue, but given our experience and understanding of the situation, we estimate the peak impact of COVID-19 on our earnings was c. £75,000 per month and a total for the year ended 30 June 2020 of c. £200,000.

 

We have seen a recovery from the peak impacts in April and May as customers' confidence returns and they determine the optimum model for working through the pandemic. The current level of customers remaining on their differentiated service is now down to c. 200 and we anticipate that continuing to diminish through the autumn months. The COVID-19 pandemic has highlighted to NMR how important its milk recording service is to our customers; NMR's recording services together with our testing and surveillance services are an essential component of our clients' management system.

 

The essential nature of NMR's services is reflected in the fact that we are reporting positive EBITDA of £1.437 million in a year in which we suffered a significant cyber-attack and a global pandemic. This demonstrates the underlying resilience of our business model. Year on year, recording revenues fell by 8.6% and payment testing by 6.6%, but we continued to see growth in services for Johne's disease, now our second biggest revenue stream. We also enjoyed growth in our surveillance services, FarmAssist and Fusion, in our Nordic Star ear tags business and in our support of on-farm software which is an increasingly important revenue stream as we seek to integrate data flows in the sector. Heat Detection and Genomics both saw year-on-year declines following their well-documented boosted sales in the prior year.

 

This year, as part of the development of our strategic plan, we have developed our KPI reporting into a cohesive single report, using Kaplan and Norton's Balanced Scorecard methodology. This looks at performance across four quadrants: People; Process; Customers; and Finance. We have defined sixteen measures in total across this scorecard. We believe the three most fundamental KPI's from an investor's perspective are: 1. The number of cows on NMR's database; 2. The turnaround time for recording services; 3. The average revenue per milk producer.

Average revenue per producer has grown by 2% in the year to June 2020. Turnaround time has remained the 'best of class' at 2.1 days (2019: 2.0 days). However, the number of cows on the Company's database stands at 671,811 a fall of 7.5%. We believe that this fall in the number of cows reflects our service issues in the year rather than market opportunity. Nevertheless, it is an important measure, and one we are determined to grow. In my report last year, I highlighted the organisation of our field operations as a key component of growing cow numbers. We have created a new role on our Executive Leadership Team this year, Group Operations Director. Kevin Ridley was recruited in February and is focused on the structure and function of field operations with the aim of delivering improvements. Kevin's experience is outlined in his biography in our Annual Report.

 

Duty to promote the success of the company

 

The Directors of the Company must act in accordance with their duties under the Companies Act 2006 ("The Act"). Section 172 of the Act sets out the fundamental duty to promote the success of the Company for the benefit of the members as a whole. I am also pleased to say that we have recently outlined how the Company has adopted the principles outlined in the Quoted Companies Alliance Corporate Governance Code (the "QCA Code"), and this can be found on our website at www.nmr.co.uk. The following section describes how, in performing their duties in the year, the Directors have had regard to the matters set out in s.172 of the Act, and constitutes the Directors' Section 172 statement for 2020:

Section 172 (a): Long term decision making

The Strategy Committee of the Board, led by James Andrews, has recently articulated a three-year strategic plan to deliver long-term shareholder value set round four strategic pillars: 1. Focus on NMR's core business of milk testing; 2. Grow NMR's suite of new milk-based tests; 3. Drive food supply chain and provenance services; and 4. Identify opportunities for complementary step change.

The delivery of the Strategy is monitored by the Executive Leadership Team ("ELT") and reviewed quarterly by the Strategy Committee.

Section 172 (b): Employees

The Directors place considerable value on the involvement of its employees and has continued to keep them informed on matters affecting them as employees and on the various factors affecting the performance the Company. This is achieved through formal and informal meetings, Company bulletins and the distribution of the annual and interim financial statements. A company-wide employee engagement survey is run annually, and there are regular drop-in sessions, run independently of local management, to provide staff with the opportunity to voice their opinion and provide feedback. The Managing Director and senior managers use video technology to provide regular updates to employees on current issues. The employee share scheme has been running successfully since its inception in 2004. It is open to all employees and includes provision for matching and free shares provided by the Company.

The Gender diversity of employees is examined in the following table:

 

Section 172 (c): Suppliers, Customers and Others

NMR's core business is part of an extremely important and ever-changing national food supply chain.  NMR takes very seriously the critical nature of all its various functions in ensuring that the integrity of that supply chain is maintained.  Whilst engagement with suppliers and customers takes place mainly at an operational level, the Directors maintain intelligence on the latest market developments and stakeholders via members of the ELT, Non-Executive Directors and employees within the field.

Section 172 (d): Community and the Environment

The role played by NMR in the dairy supply chain is, in itself, a key component of measuring the impact and sustainability of the dairy sector as a whole. Closer to home, there are various initiatives around the Group concerning issues on environment and community. Whilst the Directors recognise that we have some catching-up to do, the relationship between the Company, our environment and our communities is being addressed by the Board Committee for Environment, Social and Governance, chaired by Andy Warne.

Section 172 (e): High Standards of Business Conduct

The Directors are responsible for promoting a corporate culture that demonstrates high standards of integrity and transparency. NMR has recently relaunched our values, centred round Trust. These are: - Open and purposeful; - Expert and accountable; - Can do and collaborative. Key policies which support the Company values include Anti- Corruption and Bribery policy and NMR Whistleblowing policy.

Section 172 (f): Shareholders

NMR possesses a diverse shareholder base that may differ in attitude and objectives regarding their investment in the business. It is therefore seen as a priority to ensure the Non-Executive Directors in particular, are fully cognisant of these perspectives. To that end, the current Non-Executive Directors represent a range of business and industry backgrounds and, along with the Managing Director and Finance Director, maintain regular contact with the main shareholders. The Board welcomes questions and feedback from all shareholders throughout the year and specifically at the Annual General Meeting.

 

The Directors anticipate that whilst the Company will continue to comply with the QCA Code where possible, it will endeavour to have regard to corporate governance to the extent appropriate for a company of its size and nature.

 

Outlook

 

I mentioned that we internally launched our Strategic Plan in March this year. Whilst the evolution of the strategy has been ongoing since we exited the Milk Pension Fund in June 2017, we have recently been supported by Independent Non-Executive Director James Andrews to better articulate the strategy in order to provide more focus and engagement as we convert intention into reality. Broadly we have categorised the initiatives into four areas: Core Business, Expanding Milk Testing, Provenance/Supply Chain and Complementary Step Change. Kevin's work in Field operations is an illustration of this focus, as is the recent signing of an agreement with Seenergi, a French company specialising in dairy farm consulting, for the exclusive rights to the patent and know-how for use of "Genocells" technology in the UK. NMR considers that the Genocells offering could become one of the most significant developments in the milk recording sector for 25 years. In order to exploit this technology NMR intends to build genotyping capability within its laboratories. The contract with the supplier of this equipment has been agreed, and a purchase order signed. It is anticipated the first meaningful revenues from Genocells will be in the spring of 2021.

 

Alongside the investment in Genocells, NMR continues our strategic relationship with Foss to upgrade our core milk testing laboratory equipment, with an agreement for phased replacement over the next three years. We are also rebuilding our billing systems as part of our Finance and CRM replacement on Microsoft's Dynamics 365. This will reduce the complexity of the billing system, making our billing more automated and transparent and our system management more robust. This system will go live during the 2021 financial year. We also recently agreed an extension of scope with our Dynamics 365 partners to upgrade our Sale and Marketing systems using the same platform.

 

Summary

 

Despite the challenges faced this financial year, NMR has continued to deliver essential services to our customers and in so doing delivered EBITDA of £1.437 million. As we move forward, the Board is confident that we have the opportunity, determination, skills, experience and people to execute our strategic plan and restore improving total returns to our shareholders.

 

 

 

Andy Warne

Managing Director

 

 

STRATEGIC REPORT - Group Financial Review

 

Summary

 

§ Group revenue of £21.6 million (2019: £22.8 million)

§ Operating Profit of £0.8 million (2019: £2.3 million) a reduction of 66%

§ Dual impact of RYUK cyber-attack and COVID-19 directly reducing EBITDA by an estimated £1.1 million

§ Diluted EPS of 4.7 pence (2019: 9.4 pence)

§ Net debt decreased to £1.4 million, (2019: £1.7 million), 1.0 times EBITDA

§ Proposed dividend of 1.25 pence per share

 

Group Results

 

Effective comparison of year on year performance is complicated by the operational and financial impacts of the September cyber-attack and more recently the coronavirus pandemic. We do know that the FY19 revenues figures were bolstered in Genomics and Heat Detection by a discrete contract with AHDB and grant supported purchases of heat detection systems. Revenue in these categories fell by c. £0.35 million compared to the prior year. Exact amounts are difficult to quantify but based on our modelling and experience, our best estimate is that the direct impact of the cyber-attack is c.£0.9 million affecting revenues and costs, and that the impact of COVID-19 is c.£0.2 million affecting mainly revenue.

 

Group revenue reduced by 5.3% to £21.6 million (2019: £22.8 million) and Earnings before interest, tax, depreciation and amortisation (EBITDA) fell by 48% to £1.437 million (2019: £2.761 million), the proportional fall lower than Operating Profit is due to increases in depreciation and, in particular, amortisation as the investment in our laboratories and systems comes into its useful life. However, we can report on the resilience of the NMR business model and the sector more widely. Cows are milked every day and NMR played its part in the integrated UK dairy sector to rebalance milk supply during the COVID-19 related lockdown. Over a three-day period, the milk entering the food-service sector (normally 10% of UK output) dropped to zero and the demands from some retailers increased by 40%. This resulted in only 0.6% of one week's milk production being wasted. For NMR whilst revenue opportunities were lost and credit was applied for reduced service levels, the demand for testing and surveillance services continues to grow. In particular, revenues from our Johne's testing services grew by 6.5% compared to 2019, in a year when laboratory systems were significantly impaired for weeks. This did come at a cost with additional labour and consumables costs in the labs to minimise this disruption.

 

The corporation tax charge in the year is actually a release in the tax provision of £0.08 million, giving an effective tax rate of -8.3% (2019: 17.5%). The principal differences year on year were the impact of the increased future corporation tax rate on our deferred tax asset in the Finance Act 2020 (now 19.0%) and increased credits from research and development expenditure, relating mainly to claims in the 2018 financial year.

 

Basic earnings per share ("EPS") fell by almost half to 4.8 pence (2019: 9.5 pence). The proposed final dividend per share is 1.25 pence (2019: 1.25 pence). The proposed dividend, approximately a quarter of EPS, reflects that we are confident in the future opportunities for the business, the fact that we still enjoy a corporation tax holiday from the deferred tax asset on exiting the Milk Pension Fund, and that we believe shareholders should be acknowledged for their continued support during a challenging year.

 

Balance Sheet Summary

 

Net Assets increased in the year to £4.92 million (2019: £4.03 million). This reflects the disrupted trading performance during the year, with profits of £1.0 million (2019: £1.99 million) less dividend paid of £0.26 million (2019: £0.52 million). 

 

Fixed Assets increased significantly by 19.7% to £5.67 million (2019: £4.73 million).  Working capital in the year includes an increase in creditors, caused mainly by our taking advantage of the VAT holiday offered by the government as part of the response to the COVID-19 pandemic. This increased the VAT creditor by c.£0.69 million which we will carry on the balance sheet until it is repaid in March 2021. This provides the company with a margin of safety in our liquidity as we determine the most appropriate source of funding for our investment programme in the 2021 financial year, examined later in this report. The Chancellor recently announced the potential deferral of VAT payments due to coronavirus, with the ability to make smaller payments until March 2022. The Company will monitor cash flows in the run-up to March 2021 to evaluate to what extent we make use of this additional scheme.

 

During the year we conducted a share forfeiture exercise with our Share registrar. This enabled us to identify those shares where the holders had been untraced for a period of 12 years or more. Subject to a proactive search on our part, again delivered by the registrar, we were able to forfeit any remaining shares on the share register and sell the shares on the market, using any proceeds for the purposes of the business. We sold a total of 79,680 shares in July 2019, raising funds after registrar charges of c.£44,000. We are obliged to hold a creditor in our accounts for a period of three years should any untraced shareholders subsequently recover their share certificates.

 

The deferred tax asset created on the losses sustained when we exited the Milk Pension Fund in June 2017 (MPF exit), now stands at £1.36 million (2019: £1.32 million), with the movement reflecting the absorption of the corporation tax charge for the year together with an increase in value after the Finance Act of 2020 increased the future rate of corporation tax to 19.0% from the 17.0% planned in the previous act.

 

Trade debtors include an increased provision for doubtful debt to reflect an increase in debtor ageing in line with our accounting policy. The cyber-attack disrupted services to customers leading to some delay in payment, whilst at the same time taking down our finance and CRM systems, and therefore our ability to manage this ageing. The Finance system was restored in time for month-end, but the CRM system came back some time later. When systems were restored, we were able to go about our normal account management, but a backlog had established. This was swiftly followed by the nationwide lockdown which led to a large number of service changes, more account queries, and further ageing. The implementation of Dynamics 365 will significantly improve our account management, to the benefit of the Company and our customers. Meanwhile we are taking all the steps necessary to manage the aged debt and bring it back to a more normal profile. The provision for doubtful debt increased by £0.25 million to stand at £0.38 million at year end.

 

Net debt at June 2020 was £1.39 million (2019: £1.66 million), a reduction of £0.27 million, and now represents 1.0x our reduced EBITDA this year. 

 

 

Cashflow and banking facilities

 

We estimate that operating cashflows were impeded by the cyber-attack and COVID-19 by c. £1.1 million in the year. We have benefited from the VAT holiday and from a substantial €200,000 dividend from our Independent Milk Laboratories joint venture.

 

The operational challenges this year are a reminder of the essential nature of our services up and down the supply chain, and despite reduced earnings, NMR continues to invest significantly in our capability and infrastructure with overall capital expenditure of £1.52 million (2019: £1.26 million). Principal projects include the Inspire automation platform for Johne's disease testing, three Microlab Star liquid handlers, deposit on the next laboratory analyser from Foss, the exclusive UK licence for Genocells, and the Dynamics 365 project to replace our Finance and CRM systems. Given our capital investment of £1.52 million from EBITDA of £1.44 million the additional cashflow benefits of VAT holiday, dividend receipts and share forfeiture receipts have enabled us to reduce net debt in the year.

 

NMR's investment ambition has not been diminished by the experiences of RYUK and COVID-19 this year. If anything, it reminds us that we must continue to invest. With our lower net debt at June 2020 and a Net Debt to EBITDA ratio of 1.0x, we have examined additional debt finance options to support our investment plans for 2021. We want to continue with our IT and laboratory improvement programmes and invest in new laboratory facilities to support our Genocells business plan. In addition, the launch of Microsoft Dynamics 365 enables us to move to an invoicing in-arrears basis. Whilst this change in invoicing has a cashflow impact on working capital, we believe this will significantly improve our customer account and relationship management, including aged debts. It also supports our ambition of growing the number of cows within our recording services. Our liquidity planning has looked at Asset finance and the government backed Coronavirus Business Interruption Loan scheme ("CBILS"), which aligns completely to supporting our situation of pursuing investment plans following reduced cashflows post COVID-19.

 

The proposed final dividend for the year ended June 2020 is 1.25 pence per share (2019: 1.25 pence). Holding in line with 2019 allows us to continue our investment programme whilst acknowledging the continued support of our shareholders during the year.

 

Principal Risks and Uncertainties

 

The Group's principal financial assets are buildings, plant and equipment, trade and other receivables. The Group's credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful debts. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of cash flows.

 

The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers.

 

Following the RYUK cyber-attack in September 2019, NMR has been accelerating our programme of digital transformation, upgrading older unsupported IT platforms, improving least-privilege access management alongside geofenced firewalls and provision of third-party Security Operations Centre and Security Event Management. We have also improved our Disaster Recovery, upgrading and testing the verified back-up / restore functionality and process. The business approach must be to expect an attack and be ready to respond in the most effective way possible.

 

NMR recognises the potential disruptive outcome of BREXIT and the difficulty around EU trade negotiations. We continue to hold additional stocks of European sourced laboratory consumables. Our advice remains the same in that over a 3-year period the NMR board is optimistic in the future of the UK dairy sector and is investing appropriately to capitalise on this optimism.

 

Finally, the risk of failure to attract or retain skills and experience within the Executive and Management teams is managed by external consultation on Executive and Senior Management pay levels led by the Remuneration Committee that also monitors Senior Management performance.

 

Risks considered following the COVID-19 outbreak are set out separately under Going Concern below.

 

Going Concern

 

We have reviewed the current liquidity and debt facilities against the projected budget for year ended 30 June 2021 and the subsequent financial plan for years ended June 2022 and June 2023 and have run various sensitivity analyses, including trading, investment, and financing cash flows, including those for potential impacts of further disruption caused by COVID-19.

 

We believe our experience in 2020 holds us in good stead, coupled with our essential-worker status in the laboratories and flexibility in our field operations in terms of staff-cover and different options of service-level available to our customers. Our assessment of the greatest risk potential to NMR would be an outbreak of COVID-19 amongst the staff in one of our laboratories. This would potentially require the closure of the laboratory, to allow deep-cleaning and for staff to self-isolate. In this scenario we would route the samples to the alternative laboratory for testing, with a likely knock-on impact in terms of reduced service levels for some customers. We would prioritise the time-sensitive Payment Testing regime, and lower service levels for milk-recording samples, which may lead to some level of credit notes required to compensate customers for reduced service. Given a fourteen-day COVID-19 isolation period and a scenario based on a conservative total of four weeks interruption to service, our estimate of this impact is £200,000 and well within our facilities headroom.

 

The provision of new debt facilities has already been agreed in principle with our lenders, including CBILS and asset finance. Both facilities have approval from bank credit committees. Our existing asset finance matures in November 2020, so the new arrangements are, in part, a replacement of an existing facility and credit line. The combined new facilities allow NMR to fulfil our investment ambition in fixed and working capital, and whilst neither has banking covenants attached, net debt is not projected to be any higher than 2.1 times EBITDA on a rolling 12-month basis.

 

We have reverse stress-tested our liquidity planning against our base plan and associated sensitivity analysis, and the pinch-point of our liquidity becomes relevant once we shift invoicing pattern, with plenty of facilities headroom prior to that point. In terms of managing our cashflows, we would respond to COVID-19 trading shortfalls with an examination of discretionary expenditure, such as training and marketing - well before making adjustments to recruitment and replacement of staff. In addition, we can affect the phasing of investment, speeding-up or slowing down as appropriate - there is c. £800,000 of investment planned between March and June 2021 that can be phased differently if trading in the first half of the 2021 financial year differs from the plan. Subsequent to the change in invoicing pattern, our assessment is that the business could bear up to 10 months of distressed operations and earnings before having to address any financing concerns. Based on the current planning, the invoice-pattern change is scheduled in late spring 2021; therefore, the assessment of 10 months additional headroom pushing a stress-tested liquidity horizon into the backend of 2021, approximately 15 months from the date of this report. Ultimately, management could defer the implementation of the invoice-pattern change were that required, but the significant benefits for customer recruitment and customer retention would be similarly delayed.

 

Based on our conservative EBITDA planning trajectory, the headroom in our finance facilities, our ability to change the phasing of our investment programme as well as responding to trading issues, and in particular the work done on COVID-19 mitigation planning, the NMR Board is confident it has adequate liquid resources to support operational planning for at least 12 months from the date of this report and is in a position to discharge our liabilities as they fall due. As such, the Directors continue to adopt and consider appropriate the going concern basis in preparing the Annual Report.

 

 

 

Mark Frankcom

Finance Director
 

CONSOLIDATED PROFIT AND LOSS ACCOUNT

YEAR ENDED 30 JUNE 2020

 

 

2020

 

2019

 

£'000

 

£'000

 

 

 

 

Revenue

21,590

 

22,798

Cost of sales

(12,751)

 

(13,066)

Gross profit

8,839

 

9,732

Administrative expenses

(8,064)

 

(7,463)

Operating Profit

775

 

2,269

Share of operating profit in joint ventures

258

 

265

 

1,033

 

2,534

Net finance cost

(114)

 

(126)

Other gains and losses

10

 

  -

Profit Before Tax

929

 

2,408

Tax

77

 

(420)

Profit for the year

1,006

 

1,988

 

 

 

 

Earnings per share (pence)

 

 

 

Basic

4.8

 

9.5

Diluted

4.7

 

9.4

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

YEAR ENDED 30 JUNE 2020

 

 

 

2020

 

2019

 

 

£'000

 

£'000

 

 

 

 

 

Profit for the year

 

1,006

 

1,988

Exchange rate gain on foreign currency net investment

 

22

 

7

Total comprehensive income for the period

1,028

 

1,995

 

 

 

 

 

 

 

CONSOLIDATED BALANCE SHEET

AS AT 30 JUNE 2020

 

 

Note

2020

 

2019

Restated

 

 

£'000

£'000

 

£'000

£'000

FIXED ASSETS

 

 

 

 

 

 

Intangible assets

10

 

1,418

 

 

803

Tangible assets

11

 

3,067

 

 

2,849

Investments

12

 

1,183

 

 

1,081

 

 

 

5,668

 

 

4,733

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

Stock

13

397

 

 

417

 

Debtors - due within one year

14

3,171

 

 

3,303

 

Debtors - due after one year

14

766

 

 

657

 

Cash at bank and in hand

1,146

 

 

1,412

 

 

 

5,480

 

 

5,789

 

 

 

 

 

 

 

 

CREDITORS AMOUNTS FALLING DUE WITHIN ONE YEAR

15

(4,259)

 

 

(4,026)

 

NET CURRENT ASSETS

 

1,221

 

 

1,763

TOTAL ASSETS LESS CURRENT LIABILITIES

6,889

 

 

6,496

 

 

 

 

 

 

 

CREDITORS AMOUNTS FALLING DUE AFTER ONE YEAR

15

 

(1,925)

 

 

(2,416)

 

 

 

 

 

 

 

PROVISION FOR LIABILITIES

19

 

(47)

 

 

(47)

 

 

 

 

 

 

 

NET ASSETS

 

 

4,917

 

 

4,033

 

 

 

 

 

 

 

CAPITAL AND RESERVES

 

 

 

 

 

Called-up share capital

20

 

53

 

 

53

Own shares

21

 

(195)

 

 

(195)

Profit and loss account

21

 

5,059

 

 

4,175

SHAREHOLDERS FUNDS

 

4,917

 

 

4,033

 

 

The year ended 30 June 2019 has been restated to offset balances for deferred tax assets and liabilities.
 

CONSOLIDATED STATEMENT OF CASH FLOWS

YEAR ENDED 30 JUNE 2020

 

2020

 

2019

 

£'000

£'000

 

£'000

£'000

 

 

 

 

 

Operating Profit

 

775

 

 

2,269

Amortisation of intangible assets

137

 

 

43

 

Amortisation of loan expenses

12

 

 

11

 

Depreciation of tangible assets

525

 

 

449

 

Loss on disposal of tangible assets

1

 

 

-

 

Increase in trade and other debtors

(43)

 

 

(97)

 

Decrease/(Increase) in stocks

20

 

 

(195)

 

Increase/(Decrease) in creditors

407

 

 

(403)

 

 

 

1,059

 

 

(192)

Income taxes refunds received

 

144

 

 

188

Cash from operations

 

1,978

 

 

2,265

 

 

 

 

 

 

 

 

 

 

 

Dividend received from Joint Venture

178

 

 

53

 

Investment income

10

 

 

  -

 

Purchase of tangible assets

(870)

 

 

(774)

 

Purchase of intangible assets

(654)

 

 

(488)

 

Proceeds from sale of tangible assets

28

 

 

  -

 

 

 

(1,308)

 

 

(1,209)

 

 

 

 

 

Dividends paid

(262)

 

 

(521)

 

Lease finance paid down

(148)

 

 

(148)

 

Interest paid

(114)

 

 

(129)

 

Loan repayments

(530)

 

 

(513)

 

Proceeds on exercise of share options

118

 

 

116

 

 

 

(936)

 

 

(1,195)

Net (decrease)/increase in cash and cash equivalents

(266)

 

 

(139)

Cash and cash equivalents at beginning of year

1,412

 

 

1,551

Cash and cash equivalents at end of year

1,146

 

 

1,412

                   

 

 

 

 

 

Notes

1.    General Information

The basis of preparation of this preliminary announcement is set out below.

 

The financial information in this announcement, which was approved by the Board of Directors on 07 October 2020, does not constitute the Company's statutory accounts for the year ended 30 June 2020 nor the year ended 30 June 2019, but is derived from these accounts.

 

Statutory accounts for the year ended 30 June 2019 have been delivered to the Registrar of Companies and those for the year ended 30 June 2020 will be delivered following the Company's Annual General Meeting.  The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under S498 (2) or (3) of the Companies Act 2006.

 

Whilst the financial information included in this preliminary announcement has been completed in accordance with United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice 'UKGAAP'), this announcement itself does not contain sufficient information to comply with UKGAAP.

 

The financial information has been prepared on the historical cost basis.

 

Copies of the announcement can be obtained from the Company's registered office at Fox Talbot House, Bellinger Close, Chippenham, SN15 1BN

 

It is intended that the full financial statements, which comply with UKGAAP, will be posted to shareholders in due course and will be available to members of the public at the registered office of the Company from that date and available on the Company's website: www.nmr.co.uk 

 

2. Going concern

We have reviewed the current liquidity and debt facilities against the projected budget for year ended 30 June 2021 and the subsequent financial plan for years ended June 2022 and June 2023 and have run various sensitivity analyses, including trading, investment, and financing cash flows, including those for potential impacts of further disruption caused by COVID-19.

 

Based on our conservative EBITDA planning trajectory, the headroom in our finance facilities, our ability to change the phasing of our investment programme as well as responding to trading issues, and in particular the work done on COVID-19 mitigation planning, the NMR Board is confident it has adequate liquid resources to support operational planning for at least 12 months from the date of this report and is in a position to discharge our liabilities as they fall due. As such, the Directors continue to adopt and consider appropriate the going concern basis in preparing the Annual Report.

 

Further details regarding the adoption of the going concern basis can be found in the Group Financial Review.

 

3. Dividends

The Directors recommend the payment of a dividend of 1.25 pence per ordinary share in relation to the year ended 30 June 2020 (2019: 1.25 pence).

 

4. Earnings Per Share

 

Basic EPS is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.

 

Diluted EPS is calculated using the weighted average number of shares adjusted to assume the conversion of all dilutive potential ordinary shares.

 

The shares held by the Employee Share Option Plan are deducted from total shares in arriving at the weighted average number of ordinary shares used in the EPS calculation.

 

Reconciliations are set out below.

 

 

2020

 

Earnings
£'000

Weighted average
 number of shares

EPS

Basic

1,006

20,939,702

4.8

Dilution

 

                             300,000

 

Diluted EPS

1,006

21,239,702

4.7

 

 

 

 

 

2019

 

Earnings
£'000

Weighted average
 number of shares

EPS

Basic

1,988

20,939,702

9.5

Dilution

 

                             300,000

 

Diluted EPS

1,988

21,239,702

9.4

 

 

There have been no transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of these financial statements.

 

5. Related Party Transactions

Transaction with related parties are undertaken on standard National Milk Records PLC terms and conditions. All balances are settled in cash. No balances are secured, and no guarantees have been given or received.

 

The Group provides services to some of its shareholders however due to their insignificant shareholdings they are not considered to be related parties.    One of the Directors is also a customer of National Milk Records PLC and services provided during the year totalled £7,802 (2019: £8,667).  The outstanding balance due from Directors at 30 June 2020 was £1,274 (2019: £1,401).

 

Independent Milk Laboratories Limited

 

During the year the Group traded with Independent Milk Laboratories Limited (IML).  This entity is a Joint Venture investment held by National Milk Records PLC and an entity outside the group.  At the year end the following balances arising from sales and purchases of goods and services existed with IML:

 

                                                                                2020       2019

                                                                                £'000      £'000

Trade debtors                                                       7              7

Trade creditors                                                     41           47

 

 

During the year the group traded with IML as follows:                   

                                                                                               

                                                                                2020       2019

                                                                                £'000      £'000

Sales to IML                                                          31           21

Purchases from IML                                            212         229

 

 

 

 

6. Intangible Assets

 

Group and Company

Software development

Licences

Intangibles under construction

Total

 

£'000

£'000

£'000

£'000

Cost

 

 

 

 

At 30 June 2019

755

  -

99

854

Additions

99

99

456

654

Reclassifications

252

  -

  -

252

At 30 June 2020

1,106

99

555

1,760

Amortisation

 

 

 

 

At 30 June 2019

51

  -

  -

51

Reclassification

154

  -

  -

154

Charge for the year

137

  -

  -

137

At 30 June 2020

342

  -

  -

342

Net book value

 

 

 

 

At 30 June 2019

704

0

99

803

At 30 June 2020

764

99

555

1,418

 

 

The amortisation charge is included within Administrative expenses on the Consolidated Profit and Loss Account.

 

The reclassifications relate to system and software development costs which had previously been reported within computer equipment and machinery and arise as a result of a detailed review of the fixed asset register. The largest proportion of cost and net book value for these reclassifications are for an application used to handle payment testing milk samples within the laboratories.

 

Included within Intangible Assets are several significant projects:

 

The current customer relationship management and finance systems will be replaced and development costs of £555,000 (2019 £99,000) have been incurred. As the replacement system is not yet operational, no amortisation has been charged.

 

A new laboratory management system (LIMS) has been developed and brought into use in the year. At year end, LIMS had a net book value of £188,000 (2019 £195,000). Amortisation of this system commenced in September 2019 on a straight-line basis over five years.

 

A licence has been purchased during the year to allow the business the exclusive right to use Genocells technology within the UK. At the year end the net book value was £99,000 (2019 nil). The licence is not yet available for use and no amortisation has been charged during the year.

 

 

 

 

7. Key Financial Indicators

 

Key financial indicators are shown for the NMR group for the 6 months ended:

 

£'000

Jun-20

Dec-19

Jun-19

Dec-18

Jun-18

Dec-17

Turnover

10,932

10,658

11,064

11,734

10,873

10,532

EBITDA

793

644

1,382

1,379

1,213

1,187

EBITDA %

7.3%

6.0%

12.5%

11.8%

11.2%

11.3%

Diluted EPS (pence)

4.7

 

9.4

 

8.6

 

Net Assets

4,917

4,075

4,033

2,832

2,443

1,043

Net Debt

(1,387)

(2,422)

(1,656)

(2,064)

(2,147)

(3,311)

Net Debt: EBITDA (times)

1.0

1.2

0.6

0.8

0.9

1.5

 

Reconciliation of operating profit to EBITDA

Group

2020

 

2019

 

£'000

 

£'000

Operating profit

775

 

2,269

Add back:

 

 

 

Depreciation

525

 

449

Amortisation

137

 

43

EBITDA

1,437

 

2,761

 

 

 

 

 

 

Ends.

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