Airea plc

Final results for the year ended 31st December 2021

Strategic Report

Neil Rylance

It is impossible to review 2021 without referring to the untimely death of Neil Rylance in March 2022. Neil had been the CEO of Airea plc for 13 years. Those shareholders who have supported the company during his tenure will understand, first hand, the impact of Neil's contribution to this Company's success. Without his focus, tenacity, and deep understanding of the sector we would not be the profitable business we are today.

It is easy to forget the changes that Airea has undergone, when we see the stable, profitable business we have today. Neil led the programme of change and, had the patience, foresight, and dogged determination, to follow these challenges to a successful conclusion. He did this with a Liverpudlian wit, a no-nonsense approach and an unswerving self-belief. Neil led from the front and was able to attract like-minded executives whom he mentored to assist in shouldering the burden of change for the better. He has left us with a platform for growth. He has also left a management team who are capable of delivering on that promise. In Neil's memory we must do so, because Neil is a man who is not easy to forget.

The search for Neil's successor has begun.

Highlights for the year

−  Recovery in revenue; however, not yet at pre-pandemic levels.

−  Continued profitability during the COVID-19 pandemic.

−  Underlying gross profit margins (revenue less cost of sales) increased year on year.

−  Utilising our new equipment to enable the launch of a further three products during the year.

−  Improvement in pension funding position.

The board is pleased with the group's resilience in the face of the challenges of the COVID-19 pandemic and its impact on all aspects of our business. We continue to focus on improving our operational and supply chain processes which are imperative when facing the uncertainty regarding labour and raw material availability and the unprecedented increases in raw material prices.

Principal activity and strategy

The group remains focused on the design, manufacture, marketing and distribution of floor coverings. Our approach to strategy is uncomplicated; to develop products that sell, exploit the strength of our combined manufacturing and distribution operation and deliver robust cash flows to support the ongoing investment in the business.

Overview

The group's performance during the 12 months ended 31st December 2021 has continued to be impacted by the COVID-19 pandemic and the related lockdown restrictions. Access to our export business was most severely impacted by the lockdown restrictions coupled with the additional complications trading overseas following the post Brexit transition period.

We continue to maintain our cash reserves and strong balance sheet position to enable us manage the impact of the continued uncertainty in the economy and the related risks on the business.

The group increased the level of inventory on hand to help mitigate against the supply chain tensions which continue to put a strain on the availability of materials and the costs of obtaining them.

Our investment in the development of our product range continues with launches of new products into the market throughout 2021, supported by our new equipment, which is now fully operational. Feedback from customers has been extremely positive and the specification of our products bodes well for our continued success. The new product lines resulted in an increase in inventory at the year-end due to putting new product lines into stock.

The defined benefit pension scheme deficit reduced from £1.8m to an unrecognised surplus of £5.1m. The surplus has been restricted from being recognised as an asset on the balance sheet due to the group not having an unconditional right to a refund. The group contributions to the scheme have been reduced from £0.4m per year to

£nil (for the financial year 2022) based on the latest agreed schedule of contributions between the group and the scheme's trustees. There continues to be volatility in global equity markets with the scheme's investment strategy constantly under review to mitigate the scheme's long-term risk profile as much as possible.

The value of our investment property increased from £3.7m to £4.0m. The gain is highlighted separately in the income statement.

Group results

Revenue for the year was above prior year at £15.9m (2020: £14.6m) with home sales recovering, however the COVID-19 pandemic continued to reduce our access to export markets and constrained growth. Operating profit before valuation gain nevertheless increased to £1.3m (2020 Restated: £0.7m). Underlying gross profit margins increased year on year due to the increased level of sales and the group also continued to benefit from furlough savings of £0.3m (2020: £0.5m).

There was an unrealised valuation gain on the investment property of £0.3m (2020: £0.1m) giving an operating profit after valuation gains of £1.6m (2020 Restated: £0.8m).

Other finance costs relating in the main to the defined benefit pension scheme were £0.3m (2020: £0.4m).

After a tax charge of £0.2m primarily due to deferred tax on the property plant equipment and changes in tax rate at which deferred tax is recognised (2020: £0.1m) profit attributable to shareholders of the group for the year was £1.0m (2020: £0.3m). Earnings per share were 2.70p (2020 Restated: 0.89p).

Operating cash flows before movements in working capital and other payables were £1.7m (2020 Restated: £1.4m). Working capital increased by £0.3m (2020 Restated: £0.7m decrease) following a increase in inventories, trade and other receivables and trade and other payables. Contributions of £0.4m (2020: £0.4m) were made to the defined benefit pension scheme in line with the agreement reached with the trustees based on the 2017 actuarial valuation. Capital expenditure of £1.3m (2020 Restated: £0.2m) related to the group's investment new machinery to help with the development of new product ranges.

The group had £5.7m of cash on hand as at 31st December 2021 (2020: £6.6m). In 2020 the group borrowed £2.75m under the government Coronavirus Business Interruption Loan Scheme, as of 31st December 2021 the amount outstanding was £2.4m (2020: £2.75m). Following the six-month capital repayment holiday, the group recommenced repayments on the existing long-term loan taken out to acquire shares for the Employee Benefit Trust, with £0.8m of the loan repaid during the year. This loan is unsecured and repayable over three years in equal quarterly instalments with two instalments remaining. The group has access to further liquidity of £1.0m via our unutilised facility (2020:

£1.0m unutilised).

We continue to preserve cash to protect against unforeseen circumstances in these difficult times. However, as an appreciation of our shareholder support and patience, through these exacting trading periods, we propose a total dividend of £0.2m or 0.4p per share (2020: £nil). This proposal is subject to shareholder approval.

Key performance indicators

As part of its internal financial control procedures the board monitors the key financial metrics of revenue, operating profit, gross margin, working capital (debtor and creditor days), inventory turns and cash. These KPI's are reviewed in comparison to previous year and the budget and analysis undertaken to establish trends and variances. For the year ended 31st December 2021, operating profit return on sales was 8.3% (2020: 4.8%), return on net operating assets was 6.7% (2020: 3.8%) and working capital to sales percentage was 57.7% (2020: 63.5%).

Principal risks and uncertainties

The board has responsibility for determining the nature and extent of the risks it is willing to take in achieving its strategic objectives and ensuring that risks are managed effectively across the group. The board and the management team meet regularly to discuss the business and the risks that it faces. Risks are identified as being principally based on the likelihood of occurrence and potential impact on the group. The group's principal risks, which remain consistent with the prior year, are identified below, together with a description of how the group mitigates those risks.

The key operational risk facing the business continues to be the competitive nature of the markets for the group's products. To mitigate this risk the group seeks to improve existing products, introduce new products and achieve high levels of customer service and efficiency to attempt to differentiate from the competition.

The current unrest in Ukraine presents significant uncertainty for the upcoming financial year with an unknown impact of the conflict, particularly on international sales performance and on the costs and availability of raw materials and their impact on the group's performance. However, the group is well placed to mitigate these risks through its diversified sales base and by drawing on the experience gained navigating similar supply chain issues during the past 2 years when the group was able to remain open for business.

Most of the group's revenue arises from trade with flooring contractors and fit out companies. The activity levels within this customer base are determined by consumer demand which is created through a wide range of commercial refurbishment and new build projects. The general level of activity in these underlying markets has the potential to affect the demand for products supplied by the group and is subject to seasonal variations and the economic environment. The group mitigates these factors by closely monitoring sales trends and taking appropriate action early, along with strengthening the product range and developing new channels to market, both at home and abroad, to grow demand across a wider range of markets and help negate the impact of seasonality.

The group operates a defined benefit pension scheme. At present, in aggregate, there is an actuarial surplus between the value of the projected liabilities of this scheme and the assets they hold. This actuarial surplus has been fully provided for and not recognised due to the group not having an unconditional right to the funds. The amount of the assets and liabilities may be adversely affected by changes in several factors, including investment returns, long-term interest rate and price inflation expectations and anticipated members' longevity. Adverse changes in the pension scheme position may require the group to recommence cash contributions to the scheme, thereby reducing cash available to meet the group's other operating, investing and financing requirements. The performance and risk management of the group's pension scheme and recovery plan are regularly reviewed by both the group and the trustees of the scheme, taking actuarial and investment advice as appropriate. The results of these reviews are discussed with the board and appropriate action taken. Following the triennial funding valuation of the group's pension scheme as at 1st July 2020, a revised deficit recovery plan was agreed. Under the plan the company are not required to make any annual contributions and to continue a strategy of gradual reduction in investment risk. The next triennial funding valuation will be due up to 1st July 2023.

Other risks

Raw material costs are a significant constituent of overall product cost and are impacted by global commodity markets. Significant fluctuations in raw material costs can have a material impact on profitability. The group continuously seeks out opportunities to develop a robust and competitive supply base, substitute new materials, agree fixed pricing where possible, source material with improved and shortened lead times and closely monitors selling prices and margins adjusting when necessary.

The global nature of the group's business means it is exposed to volatility in currency exchange rates in respect of foreign currency denominated transactions, the most significant being the euro. In order to protect itself against currency fluctuations the group has taken advantage of the opportunity to naturally hedge euro revenue with euro payments utilising foreign currency bank accounts. No transactions of a speculative nature are undertaken. Other risks include the availability of necessary materials, business interruption and the duty of care to our employees, customers and the wider public. These risks are managed through the combination of quality assurance and health and safety procedures and insurance cover.

Management and personnel

We continue to recognise the hard work and dedication our staff have applied during the continued challenges of working through the COVID-19 pandemic and uncertainty it has brought to them and their families. We look forward to the contribution they can make going forward in the future of the company.

Current trading and future prospects

The continued investment in our successful commercial flooring business provides significant opportunities for profitable growth; however, the current economic environment and the Ukrainian conflict continue to put global raw material prices and supply chains under pressure. The group has flexibility and can continue to adapt to these unprecedented times and will continue to invest in new products throughout 2022 based upon our confidence in the prospects of the business.

MARTIN TOOGOOD                                    RYAN THOMAS

Chairman                                                     Group Finance Director                                                 12^th April 2022

Enquiries:

Ryan Thomas                                                                                                                                                                         01924 266561

Group Finance Director

Peter Steel                                                                                                                                                                            020 7496 3061

Singer Capital Markets

This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014.

The financial information set out in the announcement does not constitute the group's statutory accounts for the 12 month period ended 31 December 2021 or the 12 month period ended 31 December 2020.  The financial information for the 12 month period ended 31 December 2020 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies.  The auditors reported on those accounts; their report was unqualified and did not include any statement under s498(2) or s498(3) of the Companies Act 2006.  The consolidated balance sheet at 31 December 2021, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated cash flow statement, the consolidated statement of changes in equity and the segmental reporting for the 12 month period then ended have been extracted from the Group's 2021 statutory financial statements upon which the auditor's opinion is unqualified and does not include any statement under s498(2) or s498(3) of the Companies Act 2006.

The announcement has been agreed with the company's auditor for release.

Consolidated Income Statement

Year ended 31 December 2021

Consolidated Statement of Comprehensive Income

Year ended 31 December 2021

Consolidated Balance Sheet

Year ended 31 December 2021

Consolidated Cash Flow Statement

Year ended 31 December 2021

Consolidated Statement of Changes in Equity

Year ended 31 December 2021

In accordance with Rule 20 of the AIM Rules, Airea confirms that the annual report and accounts for the year ended 31 December 2021 and notice of Annual General Meeting ("AGM") and related proxy form will be available to view on the Company's website at www.aireaplc.co.uk on 12 April 2022 and will be posted to shareholders by 21 April 2022. The AGM will be held on 17th May 2022, at 2.00 p.m. at the Cedar Court Hotel (Huddersfield), Lindley Moor Road, Ainley Top, Huddersfield, HD3 3RH. Further details are set out in the notice of the AGM available within the financial statements which can be viewed on the group's website.