Increase in 2015 warranty provision

Sprue (AIM: SPRP), one of Europe’s leading home safety products suppliers, announces that the Company has recently identified an issue in certain batteries supplied by a third party supplier that may cause a premature low battery warning chirp in certain of its smoke alarm models sold in the UK and in Continental Europe.

The Board is keen to stress that this is not a safety critical issue.

As a result, to support the Company’s customer service obligations, the Board proposes to increase the Group’s warranty provision as at 31 December 2015 by £5.5m to £6.8m (2014: £0.9m). Consequently, further to the Company’s trading update released on 20 January 2016, the Board now expects the Company’s operating profit* for the year ended 31 December 2015 to be approximately £7.3m compared to the previously announced expected operating profit* of £12.1m.

The cash cost of dealing with this issue is expected to be incurred over the next six years. As at 31 December 2015, the Company had cash of £22.4m and no debt. These figures remain subject to final audit and, as a result, the Company now expects to release its audited final results for the year ended 31 December 2015 during the week commencing 25 April 2016.

Commenting on the increase in warranty provision, Graham Whitworth, Executive Chairman of Sprue said: “I am deeply disappointed about the impact this third party component issue is having and I wish to reassure customers and all stakeholders that the Company takes the quality of all of its products very seriously. The failure mode in the battery in affected smoke alarms has only recently become apparent and typically occurs after around three years from the date of battery manufacture. To prevent the issue happening in the future and to ensure all the Group’s smoke products perform to the highest standards, the Group has introduced additional screening processes on the production line prior to the battery being fitted into finished smoke alarms and we are reviewing, and, if necessary, will enhance our internal operational controls and processes.”

Trading Statement

Challenging trading conditions in France, principally due to overstocking, and weaker sales in Germany, due to product certification delays, are likely to significantly adversely impact the Group’s expected results for this year. Consequently, the Board has revised its guidance for the full year 2016. Subject to no major changes in exchange rates, the Board now expects a first half operating loss* of approximately £1.9m (which includes a restructuring charge of £0.2m as a result of reducing certain fixed overheads), and an operating profit* in the second half of approximately £3.8m with sales and operating profit* in the full year of approximately £55.0m and £1.9m respectively. The estimated saving in 2017 from the fixed cost reduction is approximately £0.8m.

Graham Whitworth, Executive Chairman of Sprue, said: “Unfortunately, overstocking in France and weaker sales into Germany, have resulted in us issuing revised guidance for this year. We expect to rebuild trading momentum in the second half of 2016 with certified new products and enter 2017 with normal levels of trading.

Whilst regrettable, the overhead reductions will put the Group onto a lower cost base saving an estimated £0.8m in 2017 and keep the Group on the right course to deliver our longer term strategic objectives as set out last year by Neil Smith, the Group CEO. The Board’s priority remains to continue to improve the operational and financial performance of the Group and deliver value for our customers and shareholders.

Subject to final approval by the Board, it is still the intention to recommend the payment of a final dividend for the year ended 31 December 2015 as planned.”

Operating profit* is stated before share-based payments charge