Eurocell's window of opportunity

Three main problems have impeded Eurocell’s performance in recent years: insufficient production capacity to meet demand; higher virgin plastic prices; and ongoing logistics issues. A backlog of unfulfilled sales orders in 2018 hindered the group’s ability to implement price increases to offset cost inflation. This weighed on gross margins. With subsequent investment to add more manufacturing lines – the group is guiding for £5m for the full year – a December trading update indicated that foam and ‘co-extrusion’ capacity has increased by 15 per cent and 30 per cent, respectively. With the ability to lift prices restored, the gross margin improved by 1.1 percentage points in the first six months of the year to 51.1 per cent.

Of this margin recovery, 0.6 percentage points came from switching to cheaper recycled PVC. The £5m purchase of Ecoplas in August 2018 elevated Eurocell to the leading UK recycler of PVC windows. With £3.5m spent on improving capacity in the first half of 2019, the group’s use of recycled material in its manufactured goods increased from 17 per cent to 22 per cent of overall material consumption.

Eurocell's business is cyclical, but despite Brexit uncertainty driving a construction slowdown in 2019, the group’s performance remained resilient in the first half of the year. With higher demand from new and existing customers and market share gains, profiles revenue increased by 14 per cent to £57.6m. While higher overheads kept the segment’s adjusted cash profits flat at £11.6m, investment in improving operational efficiency should promote future growth.

Benefiting from maturing of branches and better stock availability, the building plastics division saw 11 per cent like-for-like sales growth, with cash profits rising by nearly a fifth to £3.2m.

The building plastics division is set to benefit from expansion. Targeting a nationwide network of 350 locations in the medium term, the group opened three new sites in the first half, bringing the total to 207. Eurocell expects new branches to break even within two years, achieving an adjusted cash profit margin in the mid-teens from year four. With 27 branches under two years old at the end of June 2019, this holds promise for earnings growth.

With half its material purchases originating in Europe, the group stockpiled £3m of finished goods in the first half of the year, pushing up stock days – the time taken to convert inventory into sales – from 58 to 67. Together with higher capital expenditure, net debt (excluding £32.6m in lease liabilities) jumped by over 50 per cent from the 2018 year end to £37m. Debt and working capital needs to be watched, but Canaccord Genuity forecasts that net borrowings will dip to £34m for the full year, falling to £29m in 2020.