Final Results

Headlam Group PLC 15 March 2004 15 March 2004 Preliminary Results for the Year Ended 31 December 2003 Headlam Group plc ('Headlam'), the UK's leading floorcoverings distributor, announces its preliminary results for the twelve months ended 31 December 2003. Financial highlights 2003 2002 Change Turnover from continuing operations £412.3m £374.4m +10.1% Operating profit from continuing operations before goodwill amortisation £33.5m £28.8m +16.3% Profit before taxation £32.6m £29.9m +9.0% Adjusted earnings per share 27.3p 24.4p +11.9% Dividend per share 13.85p 12.55p +10.4% Key points • Turnover from continuing operations increased by 10.1% and operating profit before goodwill amortisation improved by 16.3% • Strong cash flow from operating activities amounting to £36.0 million • £21.2 million invested during the year to fund future expansion • Dividend per share increased by 10.4% from 12.55p to 13.85p Tony Brewer, Headlam's Chief Executive, said: '2003 proved to be another successful year by increasing sales throughout our product categories and across all geographical operations. The first 10 weeks of 2004 have again shown a positive trend, both in the UK and Continental Europe. With a constant focus on product development and satisfying our customers' requirements, we look forward to another successful year.' Enquiries: Headlam Group plc Tony Brewer, Chief Executive Tel: 01675 433000 Stephen Wilson, Finance Director Chairman's Statement During a year in which we were able to concentrate exclusively on our floorcoverings business, it is extremely satisfying to report that 2003 was another record performance with both turnover and operating profits reaching new heights. Turnover from continuing operations increased by 10.1% to £412.3 million and operating profits from continuing operations before goodwill amortisation improved by 16.3% to £33.5 million. Earnings and dividend Adjusted earnings per share increased by 11.9% from 24.4p to 27.3p. The board is recommending that the final dividend be increased by 10.2% to 10.25p per share. This will increase the total dividend for the year by 10.4% from 12.55p to 13.85p. If approved, the final dividend will be paid on 1 July 2004 to shareholders on the register at 11 June 2004. Operations We have a clear and focused operating strategy that revolves around the deliberate creation of a diverse and autonomous structure. We now have 44 separate businesses operating in the UK market place. To ensure that our customers and suppliers continue to benefit from high service and cost effective distribution, we have maintained our commitment to improving the base of the business through a progressive investment programme. This has included expenditure on new freehold facilities, extensions to existing centres and new material handling and cutting equipment. When appropriate, we have also acquired the freehold interest in facilities that were formerly leased, leading to improvements in profitability and increased flexibility. During the last two years, we have spent £28.7 million and expect to invest a further £13.9 million during 2004. Board During early February 2004, we announced the appointment of Roger Dickens as a non-executive director. He brings to our board a considerable wealth of business knowledge, financial and management expertise. We are confident that Roger will make a valuable contribution to our team and the development of the business. Employees The continued success of the group is derived from the careful execution of our operating strategy. The quality of our experienced management teams coupled with the dedicated contribution from all our employees provides the foundation for this success. They deserve our warm congratulations for their endeavours throughout the year. Outlook During the forthcoming year, our efforts will remain focused on sustainable organic growth and if the opportunity presents itself, with selective expansion through careful acquisition. All our businesses have made a good start to 2004. The UK operations have continued to perform well and with an improved contribution from Continental Europe, we look forward to another year of growth. Chief Executive's Review 2003 proved to be another successful year for the group with regard to growth in sales and subsequent profitability. The UK business, excluding the benefit of those businesses acquired in 2001 and 2002, showed sales growth of 6.9% on a like for like basis. This was achieved by increasing sales throughout our product categories and across all geographical operations. Operations The UK operating structure incorporates 44 individual businesses located in 20 distribution centres. Of these businesses, 31 distribute an extensive range of all types of floorcovering. The other 13 are suppliers of specific types of floorcovering, targeting certain market sectors. A key factor in the success of all of our businesses, is the individuality of experienced management teams responsible for their market presence, business development and ultimate profitability. Whilst encouraging their autonomy, these businesses utilise an identical IT platform to comply with the group's operating policies and strict financial procedures. Suppliers Each of our businesses, in co-ordination with the group strategy, have a continual product development programme with the leading floorcovering manufacturers. This ensures that our customers in both the residential and commercial sectors are at the forefront of all the latest product innovations. During 2003, this activity resulted in the launch of 2,700 new product lines. Product Carpet continues to be the largest individual product area, accounting for 53% of total UK turnover and achieved 7% like for like sales growth in the year. Products suitable for various types of commercial locations grew at 8% and contributed 21% of our total UK turnover. Sales of residential vinyl were stable, although showed an 8% increase in the independent sector. Wood and laminate products continued their growth and now account for 6.6% of total sales. Sales Presence All of our Sales Managers and external Sales Representatives now operate with IPAQ hand-held computers. This enables them to access up to the minute information with regard to their customers' trading position; also allowing them to establish stock availability and place orders, both during and out of business hours. This immediate access to customer and internal information, significantly improves the service we are able to offer to our customers. Customers Our customers, primarily independent floorcovering retailers and contractors, continue to trade positively. An important element is our ongoing launch of new products and to support this, we have placed over 650,000 point of sale items during the year, principally display stands and sample books, ensuring our customer is able to meet the latest consumer trends. During 2003, the UK businesses received over 4,000,000 orders. These were processed on a daily basis and subject to the customers' requirement, delivered the following working day. Acquisitions The 10 businesses acquired in 2001 and 2002 contributed £21.7 million in sales and produced an operating profit of £2.4 million, therefore realising a successful initial return on total consideration of £4.3 million. During October 2003, the acquisition of Manx Carpets was completed, further strengthening our position in high quality woollen carpet. We continue to evaluate other opportunities and look forward to businesses joining the group to complement and enhance our position in both residential and commercial flooring. Investments During 2003, the construction of a number of new freehold distribution centres was completed. Our largest business, Mercado in Leeds, moved into its new 185,000 square feet distribution centre in the autumn and was fully operational for the final quarter of 2003. The Mercado business in Belfast also relocated to purpose built premises in the summer of 2003. We completed extensions to our Glasgow and Nottingham distribution centres, giving these businesses increased capacity, of 50% and 33% respectively, to further enhance their market position. Developments are under way this year to extend our facility in Thatcham and also to construct a new distribution centre to house the businesses currently located in Tamworth. It is intended that both these projects will be completed by the end of 2004. Preliminary planning is also being undertaken, to extend our distribution centre in Stockport and also re-house our regional distribution business, Wilkies, in Leeds. Continental Europe Whilst experiencing more difficult trading conditions than in the UK, our businesses in France, Holland and Switzerland have delivered positive performances in the year and increased their profitability. This was contributed to by an improved trend in the second half of 2003, which has continued into 2004. Along with the local management, we strive for an ongoing improvement in their market position and subsequent profitability. Outlook The first 10 weeks of 2004 have again shown a positive trend, both in the UK and Continental Europe. With a constant focus on product development and satisfying our customers' requirements, we look forward to another successful year. Financial review Trading performance Group turnover from continuing operations increased by 10.1% from £374.4 million to £412.3 million and operating profit from continuing operations, before goodwill amortisation, increased by 16.3% from £28.8 million to £33.5 million. Approximately 84% of the group's turnover arises from its activities based in the UK and currency translation has not had a significant impact on the group's reported results. Interest and taxation Average net funds remained at a neutral level over the course of the year and consequently, net interest payable was virtually eliminated. The effective total rate of taxation remains at 32% giving rise to a charge for the year of £10.5 million. The rate continues to exceed the standard UK rate of 30% because of the affects of foreign tax and non-deductible items. Cash flows and net funds Net cash flow from operating activities Net cash inflow from operating activities during 2003 amounted to £36.0 million compared with £38.8 million in 2002. The year on year decrease of £2.8 million was attributable to the net effect of a £3.1 million increase in operating profit less a £5.9 million movement in net working capital. Shown below, are the cash flows associated with working capital during 2003 and 2002 and the net variance arising between the two years. 2003 2002 Variance £'000 £'000 £'000 Stock (5,619) (2,910) (2,709) Debtors (3,667) 733 (4,400) Creditors 8,897 7,718 1,179 Net working capital cash flow (389) 5,541 (5,930) In 2003, the net working capital cash flow equated to a net investment of £0.4 million compared with a net reduction in investment of £5.5 million in 2002. The higher level of investment in stock and particularly debtors in 2003, together totalling £9.3 million, occurred because of increased sales activity during the last quarter of the year. This was partially balanced by an increase in amounts due to suppliers of £8.9 million caused by higher purchases during that period. Capital expenditure The businesses operate from twenty principal distribution centres in the UK, two main centres in France and one centre in both the Netherlands and Switzerland. At 31 December 2003, the group held a freehold or long leasehold interest in fourteen of the twenty centres in the UK with the remaining centres occupied on a short lease. The centres in France and Switzerland are freehold and the Dutch centre is a short lease. In order to provide our customers with high levels of service, minimise operating expenses and increase capacity, the group has, for a number of years, adopted a policy of continually improving its distribution centres. The group initiated its freehold new build programme during 1993 when work commenced on the construction of the distribution centre in Thatcham. Since then, seven further centres have been built and as already mentioned in the Chief Executive's Review, it is intended to complete the construction of a further centre, located in Tamworth, by the end of 2004. During the last two years, development has not only accelerated, but expenditure has broadened to include extensions to existing facilities and the purchase of freehold interests in centres that were formerly occupied on a leasehold basis. The table below illustrates the number of projects either initiated or completed during 2003 and 2002. 2003 2002 Total £'000 £'000 £'000 Mercado warehouse and distribution facility 10,536 964 11,500 Belfast warehouse and distribution facility 1,768 231 1,999 Purchase of the Stockport freehold interest 3,934 - 3,934 Glasgow extension 833 8 841 Nottingham extension 680 51 731 Thatcham extension 507 10 517 Purchase of land in Tamworth 2,924 - 2,924 Purchase of the Bristol freehold interest - 515 515 Purchase of the Nottingham freehold interest - 2,781 2,781 Purchase of the Leeds freehold interest - 1,890 1,890 Newcastle warehouse and distribution facility - 1,071 1,071 Maintenance expenditure 1,704 3,577 5,281 22,886 11,098 33,984 Disposals (5,934) (506) (6,440) 16,952 10,592 27,544 Net expenditure in 2002 amounted to £10.6 million. Gross capital expenditure during 2003 amounted to £22.9 million which net of the £5.9 million received from disposals, resulted in expenditure of £17.0 million. Forecast gross expenditure during 2004, including £1.1 million for maintenance, is expected to be approximately £15.0 million. This level of expenditure reflects the board's commitment to relocating operations into new facilities or extending existing facilities where there are sound operational and financial reasons to support the investment. The forecast may be exceeded if a worthwhile opportunity presents itself ahead of schedule. Acquisitions During October 2003, the group acquired the business and assets less certain liabilities of Manx Carpets for a cash consideration of £0.5 million. The business was subsequently transferred to the distribution centre located at Coleshill. The contribution from Manx during 2003 has been included in continuing activities because its contribution during the period was not sufficiently material to warrant separate disclosure. Turnover from Manx during 2003 amounted to £0.6 million. Net funds The net cash outflow before financing for 2003 amounted to £1.5 million. Financing cash outflows of £1.4 million relating to the repayment of debt and hire purchase gave rise to a decrease in cash balances of £2.9 million. The group's net cash declined from £29.9 million to £28.6 million. Capital and treasury Shareholder returns and dividends Adjusted earnings per share for the year, calculated on profit after taxation but before goodwill, increased by 11.9% from 24.4p to 27.3p. The board is proposing a final dividend of 10.25p giving a total dividend for the year of 13.85p which represents an increase of 10.4% over the previous year. Dividend cover remains at 1.9. It is the board's intention to maintain dividend increases generally in line with earnings growth. Dividend cover of 1.9 leaves the group with sufficient resource to fund its investment programme in the operational infrastructure. Total shareholder return, being the increase in the share price plus reinvested dividends, has been 65.1% over the last five years compared to the FTSE Mid 250 average of 39.9%. Over the last three years, it has been 174.1% compared with the FTSE Mid 250 average of (0.87%) and during the last year, 51.7% compared with the FTSE Mid 250 average of 38.4%. Treasury management Financial instruments The group's financial instruments, other than derivatives, comprise cash, borrowings and various items that arise directly from its operations such as trade debtors and trade creditors. The main purpose of these financial instruments is to raise finance for and support the group's trading operations. Derivative transactions relate to forward foreign currency contracts used to manage the currency risks arising from the group's selling and buying activities. The main risks arising from the group's financial instruments are interest rate risk, liquidity risk and foreign currency risk. The board reviews and agrees policies for managing each of these risks and these policies have remained unchanged throughout the year. Furthermore, trading in financial instruments is not permitted. Interest rate risk The group is exposed to interest rate fluctuations on its borrowings and deposits. It borrows principally in sterling, euros and Swiss francs at both fixed and floating rates of interest and places deposits in sterling and euros at floating rates. During the year, with the exception of a fixed interest term facility amounting to £1.8 million denominated in Swiss francs, the group maintained its policy of borrowing at floating rates. Liquidity risk The board's policy on liquidity is to ensure that sufficient facilities are available to fund the group's trading and investment requirements. In recent years, reliance on uncommitted facilities has increased and greater emphasis placed on the flexibility associated with bank overdraft. This move away from committed facilities has been possible because of the group's strong cash flow and neutral net funding. Foreign currency risk The group is exposed to movements in currency exchange rates arising from transaction currency cash flows and the translation of the results and net assets of overseas subsidiary operations. These risks however, presently do not have any significant affect on the results and financial position of the group overall. The majority of the day-to-day transactions of the group's operations are denominated in the currency of the countries in which they are located, as illustrated by the table below, Domestic Foreign % % UK - sterling 97.4 2.6 France - euro 99.1 0.9 Switzerland - Swiss franc 76.1 23.9 The Netherlands - euro 99.8 0.2 Transactions analysed by currency are as follows, % Sterling 82.3 Euro 13.6 Swiss francs 3.7 Other 0.4 100.0 The two tables illustrate that foreign currency cash flows arising from transactions are not material. Furthermore, the foreign currency earnings generated by overseas subsidiary operations are reinvested into the businesses. At 31 December 2003, 11.7% of the group's operating net assets related to overseas subsidiary operations. Given the relative size, there are no arrangements in place to hedge the net assets and cash flows of overseas operations other than natural hedging arising by virtue of local borrowings. International Financial Reporting Standards From 1 January 2005, the consolidated financial statements of the group must comply with International Financial Reporting Standards (IFRS). The initial assessment of the differences between UK GAAP and IFRS has indicated that it should be possible to make the transition to the new reporting requirements with minimal amendment to existing systems and processes. The actual impact on the consolidated financial statements of the adoption of IFRS will depend on the Standards applicable and particular circumstances prevailing on adoption of IFRS on 1 January 2005. However, there have been no differences identified to date as potentially having a significant effect on the consolidated financial statements. The group has not yet completed the process of identifying all disclosure, presentation or classification differences that would affect the manner in which transactions or events are processed nor has it completed its quantification of the differences. Consolidated profit and loss account for the year ended 31 December 2003 2003 2002 £'000 £'000 Turnover Continuing operations 412,295 374,404 Discontinued operations - 21,319 412,295 395,723 Cost of sales (289,315) (279,902) Gross profit 122,980 115,821 Net operating expenses (90,301) (86,284) Operating profit Continuing operations 32,679 27,957 Discontinued operations - 1,580 Operating profit before goodwill amortisation 33,514 30,362 Goodwill amortisation (835) (825) 32,679 29,537 Profit on disposal of operations excluding goodwill - 861 Profit on ordinary activities before interest 32,679 30,398 Net interest payable and other similar charges (86) (521) Profit on ordinary activities before taxation 32,593 29,877 Taxation on profit on ordinary activities (10,464) (9,335) Profit for the financial year 22,129 20,542 Dividends paid and proposed on equity shares (11,657) (10,550) Retained profit for the financial year 10,472 9,992 Earnings per share Basic 26.3p 24.4p Diluted 25.9p 24.1p Adjusted 27.3p 24.4p Consolidated balance sheet at 31 December 2003 2003 2002 £'000 £'000 Fixed assets Intangible assets 13,210 13,767 Tangible assets 64,236 44,607 77,446 58,374 Current assets Stock 73,889 66,951 Debtors: amounts falling due within one year 72,419 72,696 Debtors: amounts falling due after more than one year 1,500 1,500 Total debtors 73,919 74,196 Cash at bank and in hand 32,336 35,522 180,144 176,669 Creditors: amounts falling due within one year (147,378) (135,287) Net current assets 32,766 41,382 Total assets less current liabilities 110,212 99,756 Creditors: amounts falling due after more than one year (1,175) (1,670) Provisions for liabilities and charges (777) (676) Net assets 108,260 97,410 Capital and reserves Called up share capital 4,213 4,209 Share premium account 49,061 48,899 Revaluation reserve 2,844 4,042 Profit and loss account 52,142 40,260 Equity Shareholders' funds 108,260 97,410 Consolidated cash flow statement for the year ended 31 December 2003 2003 2002 £'000 £'000 Net cash inflow from operating activities 36,046 38,825 Returns on investments and servicing of finance (105) (578) Taxation (8,750) (7,476) Capital expenditure (16,952) (10,592) Acquisitions and disposals (1,189) 7,075 Equity dividends paid (10,550) (9,555) Cash (outflow)/inflow before financing (1,500) 17,699 Financing (1,360) (25,691) Decrease in cash in year (2,860) (7,992) Reconciliation of net cash flow to movements in net cash 2003 2002 £'000 £'000 Decrease in cash in year (2,860) (7,992) Cash outflow from reduction in debt 1,526 26,008 Change in debt resulting from cash flows (1,334) 18,016 Debt disposed of with subsidiaries - - New finance leases and similar hire purchase contracts - (129) Translation difference 75 (370) Movement in net cash in the year (1,259) 17,517 Net cash at 1 January 29,875 12,358 Net cash at 31 December 28,616 29,875 Consolidated statement of total recognised gains and losses for the year ended 31 December 2003 2003 2002 £'000 £'000 Profit for the financial year 22,129 20,542 Currency translation differences on foreign currency net investments 212 (1,150) Total recognised gains and losses for the financial year 22,341 19,392 Note of consolidated historical cost profits and losses For the year ended 31 December 2003 2003 2002 £'000 £'000 Reported profit on ordinary activities before taxation 32,593 29,877 Difference between an historical cost depreciation charge and the actual depreciation charge calculated on the revalued amount 59 60 Realisation of property revaluation gains 1,139 - Historical cost profit on ordinary activities before taxation 33,791 29,937 Historical cost profit for the year retained after taxation and dividends 11,630 10,052 Reconciliation of movements in consolidated shareholders' funds For the year ended 31 December 2003 2003 2002 £'000 £'000 Profit for the financial year 22,129 20,542 Dividends on equity shares (11,657) (10,550) Retained profit for the financial year 10,472 9,992 Equity share capital issued 166 307 Preference share capital redeemed - (4) Currency translation differences on foreign currency net investments 212 (1,150) Net addition to shareholders' funds 10,850 9,145 Shareholders' funds at 1 January 97,410 88,265 Shareholders' funds at 31 December 108,260 97,410 Segmental Analysis Turnover Profit before Operating net assets interest and taxation 2003 2002 2003 2002 2003 2002 £'000 £'000 £'000 £'000 £'000 £'000 By activity Floorcoverings 412,295 374,404 34,464 29,603 99,653 78,707 Discontinued operations - 21,319 - 1,580 - 4,571 412,295 395,723 34,464 31,183 99,653 83,278 Central operations (950) (821) Less: goodwill amortisation (835) (825) Less: exceptional items - 861 32,679 30,398 By origin UK 345,300 330,933 31,974 28,895 87,949 71,361 Continental Europe 66,995 64,790 1,540 1,467 11,704 11,917 412,295 395,723 33,514 30,362 99,653 83,278 Less: goodwill amortisation (835) (825) Less: exceptional items - 861 32,679 30,398 Earnings per share The calculation of earnings per share is based on the average number of ordinary shares in issue during the year of 84,203,287 (2002: 84,087,778). The weighted average number of ordinary shares used for the diluted earnings per share calculation is 85,572,233 (2002: 85,071,792). The calculation of profit for the financial period used for the adjusted earnings per share is shown below. Adjusted earnings per share 2003 2002 £'000 £'000 Operating profit before goodwill amortisation 33,514 30,362 Net interest payable (86) (521) Profit on ordinary activities before taxation 33,428 29,841 Taxation on profit on ordinary activities (10,464) (9,335) Adjusted profit for the financial period 22,964 20,506 Reconciliation of group operating profit to net cash inflow from operating activities 2003 2002 £'000 £'000 Profit on ordinary activities before interest 32,679 30,398 Exceptional items - (861) Operating profit 32,679 29,537 Depreciation of tangible fixed assets 2,947 2,976 Goodwill amortisation 835 825 Profit on sale of fixed tangible assets (26) (54) Movement in stocks (5,619) (2,910) Movement in debtors (3,667) 733 Movement in creditors 8,897 7,718 Net cash inflow from operating activities 36,046 38,825 Gross cash flows 2003 2002 £'000 £'000 Returns on investments and servicing of finance Bank interest received 881 1,393 Bank and loan interest (864) (1,856) Interest payable on finance leases and similar hire purchase contracts (122) (115) (105) (578) Capital expenditure Purchase of tangible fixed assets (22,886) (11,098) Sale of tangible fixed assets 406 87 Sale of assets held for resale 5,528 419 (16,952) (10,592) Acquisitions and disposals Sale of subsidiary undertakings - 7,723 Net overdrafts disposed of with subsidiaries - 2,799 Net cash outflow from purchase of businesses (522) (3,447) Net overdraft acquired with businesses (667) - (1,189) 7,075 Financing Issue of ordinary share capital 166 307 Repayment of amounts borrowed (591) (24,612) Redemption of preference shares - (4) Capital element of finance leases and similar hire purchase contract payments (935) (1,382) (1,360) (25,691) Analysis of changes in net funds At At 1 January Cash Translation 31 December 2003 flows differences 2003 £'000 £'000 £'000 £'000 Cash at bank and in hand 35,522 (3,321) 135 32,336 Bank overdraft (635) 461 (43) (217) 34,887 (2,860) 92 32,119 Debt due within one year (2,403) 591 (17) (1,829) Finance leases and similar hire purchase contracts (2,609) 935 - (1,674) 29,875 (1,334) 75 28,616 The financial information set out in the financial statements and notes above does not constitute the Company's statutory accounts for the years ended 31 December 2003 or 2002. The financial information for 2002 is derived from the statutory accounts for 2002 which have been delivered to the registrar of companies. The auditors have reported on the 2002 accounts; their report was unqualified and did not contain a statement under section 237 (2) or (3) of the Companies Act 1985. The statutory accounts for 2003 will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the registrar of companies following the company's annual general meeting. The financial statements for the year ended 31 December 2003 will be posted to shareholders shortly. This information is provided by RNS The company news service from the London Stock Exchange JBBJI

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