Polygon: Interim Report January – December 2014

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Polygon Group (STO:POL)


· Due to the favourable order backlog from the third quarter, sales increased by 5.7% compared with the fourth quarter last year. The pace of the order intake in Q4 was on level with last year´s. Order backlog, excluding the major NYCHA project in the US, was 15% above last year.

· The large project in the US with the New York City Housing Authority (NYCHA) ramped up in the fourth quarter but at a lower gross margin than anticipated. Polygon UK continued its preparations to serve two new contracts, which will generate growth in 2015.

· Operating profit before amortisation and non-recurring items (EBITA before NRI) amounted to EUR 6.5 million (3.9). The main reasons for the positive deviation are the leverage of increased sales and improved performance from countries that underperformed in previous quarters. Operating profit before amortisation (EBITA) amounted to EUR 5.6 million (loss 4.9).

· A new country president was appointed in the Netherlands. At the end of the fourth quarter, it was agreed that the country president in Belgium would step down. The current finance manager is holding the position in the interim. After the closing of the fourth quarter, Luc Hendriks was appointed Chairman of the Board and replaced the previous Chairman. Luc Hendriks joined Triton in 2007 and is currently a Senior Industry Expert at West Park Management Services (WPMS) based in Frankfurt.


· Due to the strong performance at the end of the year, sales were only 0.7% below 2013. Sales increased as the result of rain and flooding in large parts of Europe starting at the end of July and beginning of August, with effects in the fourth quarter. However, the weather conditions on a full-year basis were unfavourable. The number of water-related jobs with higher margins was below last year’s level.

· Operating profit before amortisation and non-recurring items (EBITA before NRI) amounted to EUR 13.7 million (14.8). The decrease is mainly in continental Europe. The Nordics and UK performed well the second half of the year. North America was on level with a weak 2013. Operating profit before amortisation (EBITA) amounted to EUR 6.5 million (4.8). Non-recurring items are mainly attributable to management changes and capacity reductions.

Group Key Figures

For Group Key Figures table, please refer to attached file below.

Comments from the CEO

Our diligent work to get the basics in place is starting to pay off

After two challenging quarters that strained profitability, as well as the necessary replacement of local management in several countries, we are now beginning to reap the benefits of our efforts to run a simpler and more consistent business model.

The order backlog from the third quarter materialised in the fourth quarter. Compared with last year, we have an improved backlog going into 2015, Otherwise, activity has been low in North America. Europe made a strong comeback after an unfavourable period in spring and early summer. Sales in Germany were slightly below the fourth quarter 2013.

In addition to operations in the UK, which continue to grow with favourable results, I am pleased to note the turnaround and the decisive actions that have been taken in countries with underperformance. All of the Nordic countries have experienced a recovery as a result of the actions to improve performance, in addition to more favourable weather conditions.

With the exception of Denmark, all country presidents in the Nordic region have been replaced during 2014. Belgium and the Netherlands, which were experiencing serious difficulties, also received new country management and are showing signs of a turnaround.

Overall, we improved our profit in the last quarter with more than 60%, closing up the gap versus last year’s profit on a full-year comparison. We are not yet where we should be, but the fourth quarter is clearly a step in the right direction. Restructuring costs and non-recurring items were also significantly lower compared with both the beginning of 2014 and with full year 2013.

After the successful bond issue in the second quarter, we have begun to focus again on external growth, primarily low-risk bolt-on targets where we can leverage our structure. We are pleased to have acquired one company in Austria during the fourth quarter and one more in the UK after year-end closing. In Austria we will broaden our scope and offer services to property managers. The acquisition of Harwell in the UK will help us become a leading company in document restoration. By combining Polygon's strong position in document restoration in North America with Harwell's market leadership in Europe, we are well positioned to become the leading global expert in this area, leveraging the respective strengths in the sales and service delivery models of both Polygon and Harwell.

A prerequisite for success in a service company with local management is to have a clear framework with models and principles that our managers can use in everyday business.

The Polygon Model helps us simplify our business through a clear organisation, consistent service delivery and a well-defined corporate identity and customer segments. The model is based on our core values of integrity, excellence and empathy, which are the heart of everything we do.

The model will be launched for approximately 100 managers during the first quarter 2015 and rolled out to the rest of the organisation in subsequent months. I am convinced that this platform will help taking Polygon to the next level.

Short term outlook

The current order backlog is approximately equivalent to 1.5 months of sales. Therefore we expect sales in the first quarter to increase compared with last year. Our efforts to improve operational processes together with restructuring activities should lead to positive effects in 2015.

Market development

Our long-term outlook on the property damage restoration market is positive, with weather conditions gradually increasing the damage caused by water, fire, wind and climate change.

Part of Polygon’s business is dependent on extraordinary weather conditions. Markets such as the US normally incur several hurricanes each year, with ensuing property damage. The low hurricane levels in 2013 and 2014 impacted Polygon’s business negatively.

Net sales and profit for the fourth quarter 2014

Consolidated sales for the fourth quarter 2014 amounted to EUR 119.0 million, an increase of 5.7% compared with the same period last year. Sales in the Nordic and UK regions were strong with a growth rate of 7.8%. Europe as a whole showed an increase of 2.5%. North American sales were up by 45.7% due to the NYCHA project.

Operating profit before amortisation and non-recurring items (EBITA before NRI) amounted to EUR 6.5 million (3.9). Profitability in the Nordics and UK were up by 23.0% with generally favourable external conditions. Continental Europe increased by 28.5% versus last year, mainly attributable to increased activity in Germany. Profitability in North America improved compared with last year but from a low level. NYCHA brought significant sales to US but at a very low margin. Profits in Canada were improved even considering a decline in sales by -36.7%.

Operating profit before amortisation (EBITA) amounted to EUR 5.6 million (loss 4.9). Non-recurring items amounted to a net cost of EUR 0.9 million (8.8). Non-recurring items in the fourth quarter were primarily severance pay in conjunction with restructuring programs and costs related to the legal review in Germany, which was closed in December. The forensic investigation in Germany proved no wrongdoing by Polygon. Based on the findings it was decided to implement an “integrity line” or whistle-blowing function, as well as update and re-launch our Code of Conduct.

Net financial expenses for the period amounted to EUR 4.0 million (1.8). Loss before tax for the period amounted to EUR 0.1 million (loss 7.9) and net profit was EUR 1.8 million (loss 4.4).

Net sales and profit for January-December 2014

Consolidated sales for the full year were EUR 420.2 million, just 0.7% below the same period 2013 after a strong fourth quarter. Sales in Europe decreased by 0.7% and North American sales were also slightly under last year sales, NYCHA compensated a drop in Canadian sales.

Operating profit before amortisation and non-recurring items (EBITA before NRI) amounted to EUR 13.7 million (14.8). The leverage from the improved sales in the fourth quarter decreased the gap versus last year to EUR 1.1 million from EUR 3.7 million after Q3. The Nordics and the UK were on par with 2013, while Continental Europe was EUR 0.8 million below last year, mainly due to difficulties in the Netherlands. North America was EUR 0.5 million above last year due to improvements in the US. Operating profit (EBITA) for the Group amounted to EUR 6.5 million (4.8). Non-recurring items totalled EUR 7.1 million (10.0). Non-recurring items are mainly costs for management replacement and capacity reduction in specific areas.

Net financial expenses for the period amounted to EUR 11.5 million (12.4). Loss before tax for the period amounted to EUR 10.7 million (loss 13.7) and net loss was EUR 8.5 million (loss 10.5).

Cash flow and financing

Cash flow from operating activities during the fourth quarter of 2014 amounted to EUR 10.3 million (15.8), and cash flow before financing activities amounted to EUR 4.3 million (13.2). Cash flow from operating activities during 2014 amounted to EUR 7.9 million (28.1), and cash flow before financing activities was negative amounting to EUR 4.0 million (positive 21.7).

The former bank financing of EUR 103 million was replaced in April with a Senior Secured Floating Rate Note of EUR 120 million which will mature in 2019 and runs with a floating rate of 500 basis points spread over 3 months EURIBOR. The bond was issued by Polygon AB and is granted on a senior level by Polygon Holding AB and selected subsidiaries. Polygon Holding AB has pledged its shares in Polygon AB and Polygon AB has pledged its shares in subsidiaries. In addition to the bond a Revolving Credit Facility Agreement of EUR 14 million was signed which will be used for short-term financing and guarantees. The loan expenses are disclosed in the balance sheet as a reduction from the debt and the costs are allocated in the income statement over the duration of the loan. The loan was listed in December 2014.

Total interest-bearing net debt amounted to EUR 101.7 million (December 2013: 89.9).

Equity amounted to EUR 44.4 million (December 2013: 53.9).

The Group’s liquidity buffer amounted to EUR 31.9 million (December 2013: 17.5), comprising cash and cash equivalents of EUR 21.5 million (December 2013: 15.8) and unutilised contracted loan commitments of EUR 10.4 million. (December 2013: 1.7)

Capital expenditure

Capital expenditure during 2014 amounted to EUR 12.4 million (8.2).

Parent company

The consolidated figures in the report are presented at the consolidated level of Polygon AB. The parent company, Polygon AB (corporate registration number 556816-5855), directly and indirectly holds 100% of the shares in all subsidiaries in the Group, except for the company in Denmark of which the non-controlled interest is 24.2% Net income for Polygon AB for the fourth quarter amounted to EUR 5.4 million (1.3).

Most significant risks and uncertainty factors

The business carried out by the Group, property damage restoration after events such as flooding and fires, is to some extent dependent on the occurrence of property damage. The frequency of property damage can vary depending on circumstances beyond Polygon’s control, the outdoor temperature and weather. Since part of Polygon’s cost structure is fixed, the proceeds of the operations are to some extent unpredictable and vary from time to time. However the majority of the business (estimated at around 80%) is related to damage independent of weather.

Polygon is to a large extent dependent on its key customers, the insurance companies, and must maintain mutually beneficial relationships with them to compete effectively. Our top ten customers comprise about 30% of Polygon´s sales, with the newest customer on the top-ten list representing a seven-year relationship.

For further elaboration of the Group’s risk and uncertainty factors, please refer to the 2013 Annual Report.

Polygon’s view is that there have not been any significant changes during the reporting period with regards to risks and factors of uncertainty that were presented in the Annual Report.

Related-party transactions

The Group is under the controlling influence of Polygon Holding AB, the Parent Company of Polygon AB. Polygon Holding AB is under the controlling influence of MuHa No2 LuxCo S.á.r.l. There are no material transactions with companies in which MuHa No2 LuxCo S.á.r.l has significant or controlling influence.

Accounting policies

The interim report for the Group has been prepared in accordance with IAS 34 Interim Reporting. The interim report for the Parent Company has been prepared in accordance with the Swedish Annual Accounts Act.

The Group applies the International Financial Reporting Standards (IFRS) as adopted by the EU, and the Swedish Annual Accounts Act.

The accounting policies applied in this interim report is the same as those applied in the consolidated annual accounts for 2013. More specified accounting policies can be found on page 11-20 in the Annual Report for 2013.

A number of standards and changes of standards are in effect from January 1, 2014. Polygon does not intend to apply them beforehand and the overall assessment is that they will have no major impact on the Group’s result or position.

The term “IFRS” used in this document comprises the application of IAS and IFRS as well as the interpretation of these standards published by IASB’s Standards Interpretation Committee (SIC) and International Reporting Interpretations Committee (IFRIC).

The undersigned assures that this interim report gives a true and valid overview of the Parent Company and the Group’s business, position and results, describing essential risk and uncertainty factors that the Parent Company and its subsidiaries face.

Stockholm, 24 February 2015

Erik-Jan Jansen President and CEO

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Polygon Group
Mats Norberg, CFO
+ 46 70 331 65 71
Email address: ir@polygongroup.com


Polygon Group
Mats Norberg, CFO
+ 46 70 331 65 71
Email address: ir@polygongroup.com