TANFIELD GROUP PLC

Regulatory Filings • Nov 1, 2018

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RNS Number : 0185G

Tanfield Group PLC

01 November 2018

The information contained within this announcement is deemed by the Company to constitute inside information under the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement via a Regulatory Information Service ("RIS"), this inside information is now considered to be in the public domain.

Tanfield Group Plc

("Tanfield" or the "Company")

Snorkel Investment Update

The Board of Tanfield (the "Board") is pleased to update the market on its investment in Snorkel International Holdings LLC ("Snorkel"), the aerial work platform business.

Business Update

Tanfield continues to own 49% of Snorkel, which it has held since the joint venture was formed between Tanfield Group Plc and Xtreme Manufacturing LLC ("Xtreme") in October 2013.

Snorkel's sales in the third quarter of 2018 were US$56.4m (Q3 2017: US$44.3m), an increase of 27% in comparison to the same period in 2017, with an operating profit, excluding depreciation, of US$2.1m (Q2 2017: US$1.1m profit). Sales for the first 9 months of 2018 were US$152.7m (to 30 Sep 2017: US$124.1m), an increase of 23% in comparison to the same period in 2017, with an operating profit, excluding depreciation, of US$2.9m (to 30 Sep 2017: US$2.6m). The Board continues to believe that sales in 2018 could be in excess of US$200m if these trends continue (2017: US$166m).

Under the terms of the operating agreement, as well as providing the Board with Snorkel's financial results each quarter, SKL Holdings (a Company owned by Xtreme) were also obliged to provide an EBITDA certificate each quarter confirming the EBITDA value for the last twelve month period just completed. Since the joint venture was entered in to in October 2013, no certificate has ever been provided to the Board, until now. The certificate provided states that the last twelve month EBITDA value at 30 September 2018 was US$1.8m.

As reported in the Snorkel investment update on 21 June 2018, a material increase in selling, general and administrative ("SG&A") costs took place in Q1 2018, a 34% increase compared to Q1 2017. The Board remains uninformed as to why Snorkel only invested in these key resources at the start of the fifth year, resulting in the material increase in SG&A costs 12 months before it will have the ability to exercise its call option. The Board is also unable to ascertain what impact these resources may have had on the current performance of Snorkel had they been made available to Snorkel progressively from the start of the joint venture.

Below is a summary of the 2017 consolidated operating statement, as reported to shareholders on 10 April 2018 so that they could better understand the impact of the variances that occurred since the beginning of the fourth quarter of 2017, being the beginning of the last twelve month period before which Xtreme have the ability to exercise their call option, should they choose to:

US$000's	Mar-17	Jun-17	Sep-17	Dec-17	2017 Year
Net sales	34,878	44,870	44,316	41,746	165,811
Cost of goods sold	30,097	39,084	38,464	37,183	144,828
Gross profit	4,781	5,786	5,852	4,563	20,983
Margin	13.7%	12.9%	13.2%	10.9%	12.7%
Selling, general & administrative costs	4,355	4,715	4,730	5,545	19,345
Operating profit/(loss) excl depreciation	426	1,071	1,122	(982)	1,638

The following is a summary of the first three quarters of 2018, as well as the year to date consolidated operating statement, comparing it to the same period in 2017:

US$000's	Mar-18	Jun-18	Sep-18	YTD 2018	YTD 2017
Net sales	44,535	51,766	56,406	152,708	124,064
Cost of goods sold	38,924	45,109	49,185	133,218	107,645
Gross profit	5,611	6,658	7,221	19,490	16,420
Margin	12.6%	12.9%	12.8%	12.8%	13.2%
Selling, general & administrative costs	5,849	5,609	5,159	16,617	13,800
Operating profit/(loss) excl depreciation	(238)	1,049	2,062	2,873	2,620

As reported in the Snorkel investment update on 6 September 2018, a material restatement of the Snorkel balance sheet resulting in a significant increase in the value of non-current liabilities from US$27m at 31 March 2018 to US$79m at 30 June 2018 took place. The Board requested information as to the reason for the restatement but no explanation has been provided.

Below is a summary of the consolidated balance sheet of Snorkel since the joint venture was entered into at the end of each subsequent financial year to better understand the balance sheets presented to the Board throughout the period:

US$000's	Oct-13	Dec-14	Dec-15	Dec-16	Dec-17
Current Assets	27,548	48,810	52,485	57,276	59,072
Non Current Assets	5,850	5,725	2,712	4,253	2,444
Total Assets	33,398	54,535	55,197	61,529	61,516
Current Liabilities	15,817	23,949	29,570	24,657	21,778
Non Current Notes Payable	0	19,500	23,679	25,064	26,390
Non Current Cash injections from Parent	0	0	0	0	0
Total Liabilities	15,817	43,449	53,249	49,721	48,168
Members Equity	17,581	11,086	1,948	11,808	13,348
Total Liabilities & Members Equity	33,398	54,535	55,197	61,529	61,516

In contrast, the following is a summary of the first three quarters of 2018, including December 2017 for reference, showing the material restatement that took place in June 2018 which has not been explained to the Board:

US$000's	Dec-17		Mar-18	Jun-18	Sep-18
Current Assets	59,072		65,264	70,076	71,412
Non Current Assets	2,444		2,484	2,380	2,336
Total Assets	61,516		67,748	72,456	73,748
Current Liabilities	21,778		27,800	31,303	32,533
Non Current Notes Payable	26,390		26,724	17,412	17,754
Non Current Cash injections from Parent	0		0	61,646	60,075
Total Liabilities	48,168		54,524	110,361	110,362
Members Equity	13,348		13,224	(37,905)	(36,614)
Total Liabilities & Members Equity	61,516		67,748	72,456	73,748

Investment Background

·     Tanfield is a 49% shareholder in the equity of Snorkel following the joint venture between Tanfield Group Plc and Xtreme Manufacturing LLC, a Company owned by Don Ahern of Ahern Rentals Inc ("Ahern"), relating to Snorkel, in October 2013.

·     As reported in the Interim Results on 28 September 2018, the Board impaired the Snorkel investment value from £36.3m to £19.1m (US$25.3m), which is underpinned by the contractual adjusted priority amount (US$22.5m) and the preferred return, being 2.5% interest charged annually on the priority amount, which at 30 September 2018 will be US$2.8m. This represents approximately 12p per share.

·     In June 2018, Snorkel indicated to the Board that it expects Xtreme will cause SKL Holdings to exercise its call option at the earliest opportunity in October 2018. Since June 2018, the Board has received no further indication from either Snorkel or Xtreme as to the intent of SKL Holdings.

·     The Board reported in the 2017 Annual Report that entering into the next phase would bring with it a level of uncertainty. In the event that the call option is exercised in October 2018, the Board anticipates that there will most likely be a period of negotiation - potentially protracted - prior to any financial realisation and the Board will need to assess the Company's position and, if necessary, take appropriate advice and initiate an audit at or prior to that time.

·     Based on the information currently available to the Board, it is likely that the trailing 12 month EBITDA to 30 September 2018 will result in the price of the call option being at best a modest amount, possibly nil, but this will need to be validated at the time and consequently the Board has restricted its current valuation of the Company's interest in Snorkel to the priority amount and preferred return values only.

·     As reported in the Snorkel Investment Update on 20 September 2018, Charles Brooks, the former Chief Financial Officer of Tanfield Group Plc, who had significant input into the key documents pertaining to the joint venture between Tanfield and Xtreme and whose employment transferred following the joint venture to become the Chief Financial Officer of both Snorkel and Xtreme, has made assertions that the preferred interest position is only applicable until 30 September 2018, after which date the value will be nil. The Board does not agree with the assertions made by Mr Brooks and is of the belief that the intent of the agreement requires the payment of the preferred interest position prior to or in conjunction with Xtreme seeking to exercise the call option to acquire Tanfield's equity in Snorkel. 

·     Whilst there is no formal dispute with Xtreme currently, the Board has inferred from its correspondence with Mr Brooks that this may occur in due course. Should Xtreme attempt to exercise its call option and dispute that the adjusted preferred interest position is payable, the Board will vigorously defend its position that the preferred interest is payable.

The Board of Tanfield has sought - and is continuing to seek - advice in order to clearly define the effect of the agreement on Tanfield's investment, and will update shareholders further as and when appropriate.

Some of the information provided in this announcement is inferred by the Board of Tanfield based on information it has been presented with.

For further information:

Tanfield Group Plc                                                                        020 7220 1666

Daryn Robinson                                                                                                 

WH Ireland Limited - Nominated Advisor / Broker

James Joyce / Chris Viggor                                                          020 7220 1666

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