Final Results 2016

RNS Number : 6809Y

Headlam Group PLC

07 March 2017

 

  7 March 2017

Headlam Group plc

("Headlam" or the "Company")

Final Results for the year ended 31 December 2016

Headlam Group plc (LSE: HEAD), Europe's largest distributor of floorcoverings, is pleased to announce its final results for the year ended 31 December 2016.

Financial Highlights:

·      Total revenue increased by 6.0% to £693.6 million (2015: £654.1 million)

·     Significant outperformance of the 3.8% growth in the UK floorcoverings market* with UK like-for-like** revenue growth of 4.7% in 2016 (2015: UK like-for-like** growth 3.9%)

·      Underlying*** profit before tax increased by 12.6% to £40.1 million (2015: £35.6 million)

·      Statutory profit before tax increased by 7.3% to £38.2m (2015: £35.6 million)

·      Basic underlying*** earnings per share increased by 14.5% to 38.7 pence (2015: 33.8 pence)

·      Total ordinary dividend in respect of the 2016 financial year increased by 8.9% to 22.55 pence (2015: 20.70 pence)

·      Special dividend of 8.0 pence also declared in respect of the 2016 financial year (2015: special dividend of 6.0 pence)

·      Net cash position of £52.6 million as at 31 December 2016, an increase of 19.8% on 2015 (31 December 2015: £43.9 million)

Operational Highlights:

·      Improved operating performance as a consequence of increased revenue and leveraging of the extensive distribution network, with underlying*** operating margin of 5.9% (2015: 5.6% (after adjusting for one-off benefit))

·      No discernible impact on trading following the EU referendum in June 2016, and able to implement price increases to mitigate cost inflation due to a weakening of Sterling

·      Continued expansion of the distribution network with seven service centres opened in 2016, and one post the year-end, bringing the total number of service centres to 55

Post Year-End:

·      Tony Judge, who has worked at Headlam for more than 24 years, will be appointed to the Board as Chief Operating Officer with effect from 31 March 2017

·      Successful acquisition of Mitchell Carpets Limited, a floorcovering distribution business based in Poole, Dorset, bringing the number of wholly-owned businesses to 60

·      2017 to date has shown continued growth in both the UK and Continental Europe, and the Company continues to trade in line with the Board's expectations for the full year

Steve Wilson, Chief Executive, said:

"2016 was another successful year for Headlam and we were able to significantly outperform the steady growth in the UK floorcoverings market and thereby gain market share, further cementing our market leading position in Europe.  The 2016 financial results and overall financial strength of the Company have also allowed us to declare another special dividend, which supplements the Company's progressive ordinary dividend policy.

"We are dedicated to building on our existing business model which has achieved the strong financial results evident to date, whilst beginning to implement plans to further improve the operating performance of the business going forward. 2017 to date has shown continued growth in the UK and Continental Europe, and we look forward to the year with confidence."  

*Source: AMA Research Ltd - Floorcoverings Market Report UK 2016-2020 Analysis

**Like-for-like revenue is calculated based on constant currency from activities and businesses that were in effect in both 2016 and 2015 and adjusting for variances in working days

***Before non-recurring items

Enquiries:

Headlam Group plc
Steve Wilson, Chief Executive Catherine Miles, Director of Communications		Tel: [phone] Tel: [phone]
Investec Bank plc (Joint Corporate Broker)		Tel: [phone]
Garry Levin / David Flin / Alex Wright
Arden Partners plc (Joint Corporate Broker)		Tel: [phone]
Jonathan Keeling / Steve Douglas
Buchanan (Financial PR and IR)		Tel: [phone]
Mark Court / Sophie Cowles / Catriona Flint

Notes for Editors:

Headlam is Europe's largest distributor of floorcoverings having grown significantly via organic growth and acquisition since 1992.

Headlam provides the distribution link between suppliers and customers of floorcoverings, providing suppliers with the greatest coverage and customer penetration for their products across the UK and Continental Europe, and customers with the broadest range of products supported by next day delivery.

The Company is engaged with suppliers across 16 countries whose products cover a significant proportion of the floorcoverings market (including carpet, residential vinyl, wood, laminate, luxury vinyl tile, underlay and commercial flooring). The Company's customers are within the residential and commercial sectors and comprise principally independent retailers and flooring contractors.

The Company currently comprises 60 wholly-owned businesses in the UK and Continental Europe each operating under their own trade brand and utilising their individual sales team which achieves a greater reach into the customer base.

Each of the businesses is supported by the Company's centralised and financial resources and extensive distribution network across the UK and Continental Europe that comprises four distribution hubs, 18 distribution centres, 55 service centres and a corporate showroom.

 

Chairman's Statement

2016 was another successful year for Headlam, with total revenue and underlying profit before tax increasing by 6.0% and 12.6% to £693.6 million and £40.1 million respectively compared with 2015.  We were able to significantly outperform the steady growth in the UK floorcoverings market and thereby gain market share, further cementing our market leading position in Europe.  As a consequence of the increased revenue and leveraging of our extensive distribution network, we were also able to deliver an improved operating performance.

It was especially gratifying that we experienced no discernible impact on trading following the EU referendum in June 2016, and were able to implement price increases in August 2016 to mitigate cost inflation due to a weakening of Sterling.

The 2016 financial results and overall financial strength of the Company have allowed us to declare a further special dividend, which supplements the Company's progressive ordinary dividend policy.  Therefore, dividends declared and proposed in respect of the 2016 financial year, which are a reflection of the cash generative nature of the business, total 30.55 pence, being a combination of a total ordinary dividend amounting to 22.55 pence per ordinary share (2015: 20.70 pence), an increase of 8.9% on 2015, and a special dividend of 8.0 pence per ordinary share (2015: 6.0 pence).

We would like to thank all our employees, without whom this success would not be possible, and again would like to express our appreciation to Tony Brewer who stepped down as Chief Executive during 2016 and was instrumental in building Headlam into the Company it is today.  The Board was delighted that Steve Wilson moved from Finance Director to Chief Executive ensuring continuity and also providing the skillset for the future development of the business.  We are advanced with our search for a Chief Financial Officer and are committed to securing someone of the calibre that Headlam deserves.  We are also pleased to announce that Tony Judge, 52, who has worked at Headlam for more than 24 years, will be appointed to the Board as Chief Operating Officer with effect from 31 March 2017.  Tony has held a number of senior operational roles at the Company, most recently as the UK's Commercial Director.  Tony has 35 years' experience in the floorcoverings industry and brings an abundance of knowledge and expertise to the role of Chief Operating Officer*.

The Board recognises the value derived from good corporate governance and the setting of high standards, not least in the confidence it brings to our shareholders, employees, suppliers and customers. The Board continues to encourage full participation and contributions from all its employees and promotes a culture of openness and transparency.  

We are dedicated to building on our existing business model which has achieved the strong financial results evident to date, whilst beginning to implement plans to further improve the operating performance of the business going forward.

2017 marks our 25^th year as a distributor of floorcoverings and we look forward to continue building on our success.  

Dick Peters

Chairman

7 March 2017

*No further information is required to be disclosed pursuant to LR 9.6.13
 

Chief Executive's Review

Strategy

Our strategic aim is to continue being the pre-eminent distribution link between suppliers and customers of floorcoverings, providing suppliers with the greatest coverage and customer penetration for their products across Continental Europe, and customers with the broadest range of products supported by next day delivery. This is facilitated by our 60 wholly-owned businesses across the UK and Continental Europe and extensive distribution network that comprises four distribution hubs, 18 distribution centres, 55 service centres and a corporate showroom. Each of the Company's distribution businesses operates under its own brand name and utilises its individual sales team, while being supported by the Company's centralised and financial resources, which allows greater reach into the customer base. The Company's customers are within the residential and commercial sectors and comprise principally independent retailers and flooring contractors with whom the Company's businesses typically have long-standing relationships.

Performance

The Company continued to experience better than anticipated trading throughout the year but particularly in the important fourth quarter which accounted for 26.0% of total revenue in 2016 (2015: 25.6%).

Total revenue for the year of £693.6 million was up 6.0% against 2015, approximately 4.5% in constant currency, with a strong performance from both the UK and Continental Europe operations. The second half of the year accounted for 52.6% of revenue (H2 2015: 52.1%) reflecting the traditional weighting of activity to the second half.

We experienced no discernible impact on trading following the EU referendum result in June 2016, and the Company was able to mitigate cost inflation due to a weakening of Sterling following the referendum by implementing price increases to our customers which mirrored those of our suppliers. The price increases were implemented in August 2016 on virtually all residential sector products sourced from Continental Europe. Purchases from suppliers in the Eurozone accounted for roughly 70% of the Company's residential sector purchases in 2016, and the price increases for those products averaged approximately 6%.  The Company's average selling price across the majority of its UK products rose by approximately 1.6% in 2016.

Gross margin was 30.60% versus 30.39% in 2015 (after adjusting for an one-off benefit in 2015) due to product mix variance and rebate benefit. The Company achieved an improved operating performance, with underlying operating profit and underlying profit before tax increasing 11.7% and 12.6% to £41.1 million and £40.1 million respectively against 2015, reflecting utilisation of the existing network and operational gearing from increased revenue.

UK

The UK accounted for 86.8% of total revenue in 2016, a marginal change from the 88.0% in 2015. There were no acquisitions in 2016, and UK like-for-like growth was 4.7%, a significant outperformance of the 3.8% growth in the market (Source: AMA Research Ltd - Floorcoverings Market Report UK 2016-2020 Analysis) and the 3.9% like-for-like growth in 2015.

Continental Europe

During 2016, the Company's three businesses in the Netherlands were amalgamated into one trading name, Headlam BV, so that the Company now has a total of three Continental European businesses located in each of the Netherlands, France and Switzerland. Continental Europe revenue grew by 3.6% to £81.5 million in constant currency, strongly reversing the decline of 3.8% in 2015, and, following translation, accounted for 13.2% of total revenue in 2016 (2015: 12.0%).

Suppliers

We continue to engage with suppliers around the world to provide them with unique access to market for their products and are now engaged with 107 significant suppliers in 16 countries. Our suppliers' products cover a significant proportion of the floorcoverings market (including carpet, residential vinyl, wood, laminate, luxury vinyl tile, underlay and commercial flooring) and we continue to look to supplement product lines either by engaging with suppliers or via acquisition.

Customers

Our customers are within the residential and commercial sectors, and the revenue split between the two sectors has remained broadly similar over the past few years. In 2016 the residential sector accounted for 67.5% of total revenue (2015: 67.2%) and the commercial sector for 32.5% (2015: 32.8%).  The residential sector revenue is principally comprised of sales to independent retailers, and as a consequence is characterised by many smaller orders. In the UK, the Company's average order cut value for residential carpet and residential vinyl in 2016 were £127.44 and £68.03 respectively.

Operational Gearing and Investments

One of the focuses for 2017 and beyond is the operational gearing of the business above and beyond that which comes from additional revenue and growing our market leading position. In relation to this we are looking at the refinement and more effective and efficient utilisation of our distribution network.  Initiatives already undertaken at negligible cost include merging IT platforms and de-duplication of inventory in instances where two distribution centres are located in close proximity to each other, which has effectively created growth capacity.   This can be replicated across other parts of the network in 2017 and 2018 and it is our intention to examine other straightforward initiatives as well as longer-term plans. No job losses are anticipated as part of these future initiatives and they will also improve service for customers.

We have re-examined the plans for our proposed purpose built distribution centre in Ipswich for Faithfulls Floorcovering, one of our regional multi-product businesses which has experienced good growth and has outgrown its existing premises in nearby Hadleigh.  Whilst we have received planning permission for our initial proposed site we are now considering an alternative site also in the Ipswich area that will better suit our needs and is more in line with our strategy of making our network ultimately more efficient while creating growth capacity. This potential new site is in a purpose-built distribution park, offers a quicker build and operational timeline, and 33% more cubic capacity in the same footprint as the initial site.  The anticipated total cost, including land cost and warehouse equipment, is slightly higher at £17 million compared with the approximate £15 million for the initial site, but it is hoped that, due to its simpler nature, the distribution centre can be operational during the first half of 2018. There is also scope in the future for the new Ipswich site to support other Company businesses in the area.

Customer service is of paramount importance to our business model and we continue to develop our low-cost service centre network allowing ease of customer collection and ordering. Seven new service centres were opened in strategic locations in 2016, six in the UK and one in the Netherlands, and a further one in the UK post the year end bringing the total to 55 across the Company. This service centre network has led to the number of customer collections in the UK increasing by 29,528 in 2016 to 953,428 (2015: 923,900) which has the added benefit of reducing distribution costs.

Acquisitions

We continue to pursue growth both organically and via bolt-on acquisitions to build on our market leading position, and assess acquisitions on a continual basis utilising strict criteria.  While no acquisitions were completed during 2016, since the year-end the Company has completed the acquisition of Mitchell Carpets Limited, a regional floorcovering distribution business based in Poole, Dorset. This has brought the total number of wholly-owned businesses in the UK and Continental Europe to 60, and all our businesses benefit from being part of the Company through our continued financial and centralised support and purchasing economies of scale.

Ordinary and Special Dividends

With the existing capital expenditure plans largely aligned with previous guidance, coupled with the robust financial performance and strength of the business, we are pleased to be able to declare a further special dividend. The special dividend is our mechanism of returning surplus cash to shareholders when it is not currently required due to our strong cashflow, cash balances and already well-invested extensive distribution network. Therefore, total dividends in respect to the 2016 financial year increased by 14.4% to 30.55 pence per ordinary share (2015: 26.70 pence). We shall continue to consider future special dividend payments in conjunction with potential acquisitions and future capital expenditure plans.

Current Trading

2017 to date has shown continued growth in both the UK and Continental Europe, and the Company continues to trade in line with the Board's expectations for the full year. UK like-for-like revenue growth was 0.23% and 2.10% in January and February 2017 respectively, with January and February 2016 being particularly strong comparators having recorded like-for-like growth of 9.18% of 3.33% respectively.

Continental Europe grew by 0.25% and 4.63% in January and February 2017 respectively in constant currency continuing the positive performance seen in 2016.

We implemented further price increases in January 2017 averaging approximately 3% across the majority of our residential sector products purchased from Continental Europe, again mirroring those of our suppliers and with no detrimental effect on trading to date. We will continue to monitor movements in currency and pricing and endeavour to implement price increases accordingly.

As stated above, a focus of 2017 is the network's effectiveness and efficiency, and also overheads so that incremental revenue has a greater impact on operating margin going forward, and we look forward to the year with confidence.

Steve Wilson

Chief Executive

7 March 2017

 

 

Financial Review

Revenue

During the year, revenue increased by £39.5 million from £654.1 million to £693.6 million, an improvement of 6.0%.

The Company's UK organic like-for-like growth of 4.7% once more outperformed forecasted annual market growth (Source: AMA Research Ltd) with the like-for-like performance of 5.1% during the second half accelerating ahead of the first half performance of 3.4%. UK residential revenues accounted for 70.1% of total UK revenues in 2016 and achieved an annual like-for-like performance of 5.3% benefiting from the stronger showing during the second half of 5.8%, compared with the first half of 4.7% as markets strengthened during the course of the year.

Commercial revenues in the UK, representing 29.9% of total UK revenues in 2016, increased by 1.9% on a like-for-like basis with a second half of 3.4% versus 0.4% in the first half.

			£000	%		£000	%
Revenue for the year ended 31 December 2015
	UK		575,341	88.0
	Continental Europe		78,737	12.0
						654,078	100.0
	Items contributing to growth during the
		twelve-month period to 31 December 2016
		Like for like UK organic growth	24,356	4.3
		Additional working day	2,290	0.4
		Acquisition	117	-
						26,763	4.7
		Growth in Continental Europe	2,798	3.6
		Translation effect	9,933	-
						12,731	16.2
	Total movement					39,494	6.0
Revenue for the year ended 31 December 2016
	UK		602,104	86.8
	Continental Europe		91,468	13.2
						693,572	100.0

The revenue from the Continental European businesses improved during the year with the first half like-for-like improvement of 2.8% increasing to 4.3% during the second half giving rise to an annual increase of 3.6% in constant currency. 

Both the Netherlands and France businesses contributed to the increase, with the Swiss business in line with its performance in 2015.

The weighting between combined residential and commercial revenue in Continental Europe showed a slight movement to commercial with 49.3% of revenue (2015: 48.8%).

Gross Margin

Gross margin decreased marginally during the year from 30.7% in 2015 to 30.6%.  However, the gross margin achieved during 2015 included a one-off benefit amounting to 31 basis points and totalling £2.0 million, which arose during 2015 because of the rapid appreciation of Sterling against the Euro during the first quarter of the year. After adjusting for this one-off benefit, underlying gross margin in 2016 improved 21 basis points against 2015, attributable to product mix variance of 9 basis points and a rebate benefit of 12 basis points.

Expenses

Combined distribution and administrative expenses increased by 5.9%, up by £9.7 million, from £163.7 million to £173.4 million. The percentage proportions of distribution and administration expenses of total expenses for 2016 remained largely unaltered compared with 2015, with 2016 being 73.8% and 26.2% respectively (2015: 73.3% and 26.7%).

				Total expenses			Distribution			Administration
				£000	%		£000	%		£000	%
Expenses for 2015				163,733			120,070	73.3		43,663	26.7
	Significant movements in 2016:
		People cost		5,596	78.4		4,444	79.2		1,152	75.7
		Commercial vehicle expenses		801	11.2		801	14.3		-	-
		Carriage costs		330	4.6		330	5.9		-	-
		Packaging costs		251	3.5		251	4.5		-	-
		Sampling investment		366	5.1		366	6.5		-	-
		Bad debts		(723)	(10.1)		(723)	(12.9)		-	-
		Depreciation		472	6.6		2	-		470	30.9
		Ipswich		305	4.3		-	-		305	20.1
		Occupancy		(232)	(3.2)		-	-		(232)	(15.2)
		Share based payments		139	1.9		-	-		139	9.1
		Intangibles		(375)	(5.3)		-	-		(375)	(24.6)
		Warehouse repairs		236	3.3		236	4.2		-	-
		Discounts		496	7.0		-	-		496	32.6
		Foreign exchange gains		(471)	(6.6)		-	-		(471)	(30.9)
		Other		(57)	(0.7)		(95)	(1.7)		38	2.3
				7,134	100.0		5,612	100.0		1,522	100.0
		Currency translation		2,492			2,300			192
Expenses for 2016				173,359			127,982	73.8		45,377	26.2

 

The increase in people cost, £5.6 million (2015: increase of £3.0 million), was once more the largest component increase, being 78.4% of the gross expenses increase before currency translation.  The increase was fuelled by the cost of living increase of 2.5% awarded to all UK employees, a modest increase in people numbers, incentive awards relating to annual performance targets, and non-recurring costs relating to personnel changes of £1.9 million.

Costs relating to the currency translation of the Continental European businesses amounted to £2.5 million, reflecting the degree to which Sterling depreciated against the Euro and Swiss Franc in 2016.

The remaining expenses movements were directly linked to the increase in revenue during 2016 compared with 2015.

Operating profit

The underlying operating profit for 2016 increased by 11.7% compared with 2015 and the underlying operating margin improved to 5.9%, up from 5.6% (after adjusting for the one-off benefit), reflecting the absolute gain in gross margin due to the volume benefits on the additional revenue, product mix variance and rebate benefit. The operating margin generated by the incremental year-on-year revenue improvement amounted to 10.9% compared with 28.2% in 2015 due to a substantial increase in overhead costs primarily related to people and the cost of living award.

		£000
Operating profit 2015		36,777
Gross margin improvement in 2016
	Volume benefit	11,986
	Pricing benefit	2,008
	Currency one-off benefit in 2015	(2,000)
		11,994
Expenses increase in 2016
	Distribution	(7,912)
	Administration	213
	Total increase	(7,699)
Underlying operating profit 2016		41,072
Drop through rate - %		10.9
Operating margin - %		5.9
Improvement - %		11.7

Tax

The underlying effective tax rate for 2016 was 18.9% which is lower than the headline rate of corporation tax in the UK of 20%. The main reason for this difference is due to a release in provisions for uncertain tax positions following a reassessment of the level of tax risks in the Company. The anticipated effective underlying rate for 2017 is expected to be 19%.

The Company is committed to being fully compliant with the relevant tax laws and compliance obligations regarding the filing of tax returns, payment and collection of tax. The Company maintains an open relationship with HM Revenue & Customs and currently operates with a level of tax compliance risk that is rated as "low".

The Company does not undertake any form of artificial tax planning but, does seek to maximise tax reliefs available, for example by making capital allowance claims on fixed asset expenditure.

Earnings and dividend

Ordinary dividends

The Board's ordinary dividend policy is aimed at improving dividends annually, such that the total of the interim and final dividends for any particular financial year increases in line with the basic earnings per ordinary share for that year.

When declaring the interim and recommending the final dividend, the Board considers the Company's cash resource, adequacy of distributable reserves and the expected cash requirements of the Company.

Basic underlying earnings per share for the year increased to 38.7 pence, representing an improvement of 14.5% on basic earnings of 33.8 pence for 2015.  Total ordinary dividends declared and proposed in relation to 2016 have increased by 8.9% from 20.7 pence to 22.55 pence which represents a cover ratio of 1.63 based on basic earnings per share of 36.8 pence.

The Board believes that whilst there is a continuing underlying risk relating to potential volatility around future growth in European floorcovering markets and, as a consequence, a lack of predictability around future earnings, it is nonetheless of the view that the current dividend policy will continue during the medium term. Additionally, and subject to the nature and term of any adverse movement in earnings, financial strength, cash resource and the assessment of future trading, the Board has the option to allow a temporary fall in the cover ratio in order to maintain the dividend.

In implementing the policy, the Board ensures the parent company has sufficient distributable reserves available from which to make the distribution. Details of current year distributable reserves are shown in the retained earnings column in the Statement of Changes in Equity.

Dividend announcements, approvals and payments are typically expected to be as follows:

Dividend	Status and date Announced	Approval	Approximate payment date
Ordinary interim	Declared August	The August Board meeting	January in the year following announcement
Ordinary final	Recommended March	AGM by shareholders - May	July

Special dividends

The Board gives consideration to the distribution of surplus capital by the use of special dividend payments. As first stated in the 2015 Annual Report, the circumstances that apply to any special dividend declaration are: firstly, the Company's forecast average net debt in the year in which the special dividend is paid should be approximately equal to or less than 0.5 of earnings before interest, tax, depreciation and amortisation; secondly, the cover ratio of the aggregated ordinary and special dividends when expressed in terms of dividend cover will not be less than one; and thirdly, the payment must be made from available distributable reserves. The Board believes this approach provides a flexible mechanism for managing the maintenance and expansion of the Company's asset base.

The Board have decided to declare a special dividend of 8.0 pence per ordinary share (2015: special dividend of 6.0 pence per ordinary share).  The payment will be made on 24 April 2017 to shareholders on the register at 31 March 2017.

 

Employee benefits

The liability attaching to employee benefits is as follows:

	2016 £000	2015 £000
Current liabilities	2,169	2,171
Non-current liabilities	20,781	16,843
Total	22,950	19,014

Whilst the liability relates to both the UK and Swiss defined benefit pension plans, its composition is dominated by the UK plan. The year-on-year increase in the deficit amounts to £3.9 million. This was mainly caused by the increase in the liabilities of the UK defined benefit pension plan resulting from the decrease in the discount rate assumption from 3.7% per annum to 2.7% per annum over the year. This decrease was a consequence of the significant fall over the year in UK corporate bond yields, which are used to derive this assumption.

Cash flow

Net cash flow from operating activities

During the year, net cash flow from operating activities decreased by £3.9 million from £36.5 million to £32.6 million. The elements contributing to the movement are shown in the table below.

	£000
2015 net cash flow from operating activities	36,506
Operating profit	2,368
Depreciation and amortisation	97
Profit on asset disposals	16
Share based payments	139
Working capital	(5,916)
Interest paid	135
Taxation	(1,458)
Lower pension contributions	754
2016 net cash flow from operating activities	32,641

As with previous years, two key contributors to the year-on-year movement were the operating profit increase of £2.4 million and the net working capital investment of £5.9 million.  In addition, there was a significant increase in the tax payment during the year.

The working capital movement of £5.9 million is due to a cash inflow of £3.9 million reported in 2015 and the more normal working capital profile of 2016 giving a cash outflow of £2.0 million.  The increase in inventory and receivables, £5.9 million and £6.5 million respectively, was driven by the revenue activity and supported by a £10.4 million rise in payables.

The increase in the tax payment is solely due to the timing of tax payments.

Cash flows from investing and financing activities

The table below summarises the cash flow movements arising from investing and financing activities during the year. The overall net cash outflow from the two activities was £38.0 million, with the two main factors being a reduction in debt through the repayment of borrowings and the additional dividend payment as a result of last year's maiden special dividend payment.

 

	£000
2015 cash flows from investing activity	(3,830)
2015 cash flows from financing activity	(16,467)
	(20,297)
Movement in investing activity:
Net reduction in capital expenditure	17
Interest received	26
Acquisitions	1,977
	2,020
Movement in financing activity:
Treasury share issues	(582)
Share purchase	(647)
Repayment of borrowings	(10,727)
Dividends paid	(7,809)
	(19,765)
Net movement	(17,745)
2016 cash flows from investing activity	(1,810)
2016 cash flows from financing activity	(36,232)
	(38,042)

Net debt

As detailed in the table below, Company net funds at the end of the year increased by £8.7 million, 19.8%, from £43.9 million to £52.6 million.

Group	At 1 January 2016 £000	Cash flows £000	Translation differences £000	At 31 December 2016 £000
Cash at bank and in hand	63,932	(5,397)	808	59,343
Bank overdraft	-	(4)	-	(4)
Debt due within one year	-	(215)	(9)	(224)
Debt due after one year	(20,000)	13,759	(252)	(6,493)
	43,932	8,143	547	52,622

Funding and going concern

The Company completed a refinancing of its UK banking facilities, which were due for renewal on 8 March 2017, on 14 December 2016. The Company has entered into two separate agreements with Barclays Bank PLC and HSBC Bank Plc and include both Sterling and Euro term facilities. The new banking arrangements, which run to 14 December 2021, increase the level of Sterling committed facilities from £40 million to £47.5 million, and have additional Euro facilities of €8.6 million.  The Company also has short-term uncommitted facilities which amount to £25 million, and are renewable on an annual basis.  In addition, the group has existing facilities of £7.8 million in Continental Europe.

The Company maintains sufficient banking facilities to fund its operations and investments, and as at 31 December 2016 92.3% of the total facilities were undrawn as shown below.

	Drawn £000	Undrawn £000	Total facility £000
Less than one year	228	32,819	33,047
Over one year and less than five years	6,493	48,111	54,604
	6,721	80,930	87,651

Having reviewed the Company's resources and a range of likely outcomes, the Board believes there are reasonable grounds for stating that the Company has adequate resources to continue in operational existence for a period no shorter than twelve months from the date of this financial review and it is appropriate to adopt the going concern basis in preparing the Company's financial accounts.

Consolidated Income Statement

for the year ended 31 December 2016

	Note	Underlying 2016 £000	Non-underlying 2016 £000	Total 2016 £000	2015 £000
Revenue	1	693,572	-	693,572	654,078
Cost of sales		(481,068)	-	(481,068)	(453,568)
Gross profit		212,504	-	212,504	200,510
Distribution costs		(127,982)	-	(127,982)	(120,070)
Administrative expenses	2	(43,450)	(1,927)	(45,377)	(43,663)
Operating profit	1	41,072	(1,927)	39,145	36,777
Finance income		756	-	756	738
Finance expenses		(1,722)	-	(1,722)	(1,891)
Net finance costs		(966)	-	(966)	(1,153)
Profit before tax		40,106	(1,927)	38,179	35,624
Taxation		(7,601)	385	(7,216)	(7,213)
Profit for the year attributable to the equity shareholders		32,505	(1,542)	30,963	28,411
Dividend paid per share	5			26.70p	17.50p
Earnings per share
Basic	4	38.7p		36.8p	33.8p
Diluted	4	38.5p		36.6p	33.7p

All group operations during the financial years were continuing operations.

 

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2016

		2016 £000	2015 £000
Profit for the year attributable to the equity shareholders		30,963	28,411
Other comprehensive income:
Items that will never be reclassified to profit or loss
Remeasurement of defined benefit plans		(4,336)	1,292
Related tax		961	(231)
Impact of change in UK tax rates on deferred tax		(183)	(323)
		(3,558)	738
Items that are or may be reclassified to profit or loss
Foreign exchange translation differences arising on translation of overseas    operations		1,707	6
Effective portion of changes in fair value of cash flow hedges		572	(556)
Transfers to profit or loss on cash flow hedges		175	172
Related tax		(148)	66
Impact of change in UK tax rates on deferred tax		(3)	(8)
		2,303	(320)
Other comprehensive (expense)/income for the year		(1,255)	418
Total comprehensive income attributable to the equity shareholders for the year		29,708	28,829

 

Statements of Financial Position

at 31 December 2016

		Restated*		Restated*
	Note	2016 £000	2015 £000	2014 £000
Assets
Non-current assets
Property, plant and equipment		102,934	104,677	106,875
Investment properties		-	-	-
Intangible assets		10,388	10,388	10,013
Investments in subsidiary undertakings		-	-	-
Deferred tax assets		1,138	629	515
		114,460	115,694	117,403
Current assets
Inventories		126,037	118,165	115,591
Trade and other receivables		128,934	120,300	118,962
Cash and cash equivalents		59,343	63,932	47,589
		314,314	302,397	282,142
Total assets	3	428,774	418,091	399,545
Liabilities
Current liabilities
Bank overdraft		(4)	-	-
Other interest-bearing loans and borrowings		(224)	-	(204)
Trade and other payables		(183,304)	(171,375)	(165,240)
Employee benefits		(2,169)	(2,171)	(2,933)
Income tax payable		(6,824)	(6,974)	(6,073)
		(192,525)	(180,520)	(174,450)
Non-current liabilities
Other interest-bearing loans and borrowings		(6,493)	(20,000)	(22,818)
Provisions		(1,531)	(1,087)	(787)
Deferred tax liabilities		(4,077)	(4,533)	(3,931)
Employee benefits		(20,781)	(16,843)	(18,803)
		(32,882)	(42,463)	(46,339)
Total liabilities	3	(225,407)	(222,983)	(220,789)
Net assets		203,367	195,108	178,756
Equity attributable to equity holders of the parent
Share capital		4,268	4,268	4,268
Share premium		53,512	53,512	53,512
Other reserves		2,272	(275)	(1,721)
Retained earnings		143,315	137,603	122,697
Total equity		203,367	195,108	178,756

*See note 1.

These financial statements were approved by the board of directors on 7 March 2017 and were signed on its behalf by:

 

 

 

 

Steve Wilson

Director

Company Number: 460129

 

Statement of Changes in Equity

for the year ended 31 December 2016

	Share capital £000	Share premium £000	Capital redemption reserve £000	Translation reserve £000	Cash flow hedging reserve £000	Treasury reserve £000	Restated* Retained earnings £000	Restated* Total equity £000
Balance at 1 January 2015	4,268	53,512	88	5,423	(132)	(7,100)	126,018	182,077
Restatement	-	-	-	-	-	-	(3,321)	(3,321)
Restated balance at 1 January 2015	4,268	53,512	88	5,429	(132)	(7,100)	122,697	178,756
Profit for the year attributable to the equity shareholders	-	-	-	-	-	-	28,411	28,411
Other comprehensive income	-	-	-	6	(384)	-	796	418
Total comprehensive income/(expense) for the year	-	-	-	6	(384)	-	29,207	28,829
Transactions with equity shareholders, recorded directly in equity
Share-based payments	-	-	-	-	-	-	1,100	1,100
Share options exercised by employees	-	-	-	-	-	1,824	(819)	1,005
Current tax on share options	-	-	-	-	-	-	95	95
Deferred tax on share options	-	-	-	-	-	-	(22)	(22)
Dividends to equity holders	-	-	-	-	-	-	(14,655)	(14,655)
Total contributions by and distributions to equity shareholders	-	-	-	-	-	1,824	(14,301)	(12,477)
Balance at 31 December 2015	4,268	53,512	88	5,429	(516)	(5,276)	137,603	195,108
Balance at 1 January 2016	4,268	53,512	88	5,429	(516)	(5,276)	137,603	195,108
Profit for the year attributable to the equity shareholders	-	-	-	-	-	-	30,963	30,963
Other comprehensive income	-	-	-	1,707	747	-	(3,709)	(1,255)
Total comprehensive income/(expense) for the year	-	-	-	1,707	747	-	27,254	29,708
Transactions with equity shareholders, recorded directly in equity
Share-based payments	-	-	-	-	-	-	1,239	1,239
Share options exercised by employees	-	-	-	-	-	740	(317)	423
Consideration for purchase of own shares	-	-	-	-	-	(647)	-	(647)
Current tax on share options	-	-	-	-	-	-	21	21
Deferred tax on share options	-	-	-	-	-	-	(21)	(21)
Dividends to equity holders	-	-	-	-	-	-	(22,464)	(22,464)
Total contributions by and distributions to equity shareholders	-	-	-	-	-	93	(21,542)	(21,449)
Balance at 31 December 2016	4,268	53,512	88	7,136	231	(5,183)	143,315	203,367

*See note 1.

 

Cash Flow Statements

for the year ended 31 December 2016

		2016 £000	2015 £000
Cash flows from operating activities
Profit before tax for the year		38,179	35,624
Adjustments for:
Depreciation, amortisation and impairment		5,276	5,179
Finance income		(756)	(738)
Finance expense		1,722	1,891
(Profit)/loss on sale of property, plant and equipment		(15)	(31)
Share-based payments		1,239	1,100
Operating cash flows before changes in working capital and other payables		45,645	43,025
Change in inventories		(5,895)	(1,827)
Change in trade and other receivables		(6,467)	(1,524)
Change in trade and other payables		10,365	7,270
Cash generated from the operations		43,648	46,944
Interest paid		(1,133)	(1,268)
Tax paid		(7,703)	(6,245)
Additional contributions to defined benefit plan		(2,171)	(2,925)
Net cash flow from operating activities		32,641	36,506
Cash flows from investing activities
Proceeds from sale of property, plant and equipment		401	277
Interest received		752	726
Dividends received		-	-
Acquisition of subsidiaries, net of cash acquired		-	(1,977)
Acquisition of property, plant and equipment		(2,963)	(2,856)
Net cash flow from investing activities		(1,810)	(3,830)
Cash flows from financing activities
Proceeds from the issue of treasury shares		423	1,005
Payment to acquire own shares		(647)	-
Repayment of borrowings		(20,000)	(2,817)
Drawdown of loans		6,456	-
Dividends paid		(22,464)	(14,655)
Net cash flow from financing activities		(36,232)	(16,467)
Net (decrease)/increase in cash and cash equivalents		(5,401)	16,209
Cash and cash equivalents at 1 January		63,932	47,589
Effect of exchange rate fluctuations on cash held		808	134
Cash and cash equivalents at 31 December		59,339	63,932

 

 

Notes

1 Accounting Policies

Basis of preparation

The comparative balance sheet has been restated in order to; align certain accounting policies of overseas companies, better reflect the net value of certain inventory product lines, reassess deferred tax in relation to property, and to reclassify certain balances in order to present them in a consistent manner with the current year.

The net impact of these changes has been to change the Statement of Financial Position as follows:

	£000
Property plant and equipment	3,414
Deferred tax	(6,142)
Inventory	(978)
Trade and other receivables	146
Trade and other payables	239
Brought forward reserves	3,321

 

2 Non-underlying items

Non-underlying items relate to non-recurring people costs paid out during the year and the related tax on these costs.

3 Segment reporting

At 31 December 2016, the Company has 56 operating segments in the UK and three operating segments in Continental Europe. On 28 February 2017, the group acquired Mitchell Carpets Limited taking the total to 60 operating segments. Each segment represents an individual trading operation, and each operation is wholly aligned to the sales, marketing, supply and distribution of floorcovering products. The operating results of each operation are regularly reviewed by the Chief Operating Decision Maker, which is deemed to be the Chief Executive. Discrete financial information is available for each segment and used by the Chief Executive to assess performance and decide on resource allocation.

The operating segments have been aggregated to the extent that they have similar economic characteristics. The key economic indicators considered by management in assessing whether operating segments have similar economic characteristics are the products supplied, the type and class of customer, method of sale and distribution and the regulatory environment in which they operate.

As each operating segment is a trading operation wholly aligned to the sales, marketing, supply and distribution of floorcovering products, management consider all segments have similar economic characteristics except for the regulatory environment in which they operate, which is determined by the country in which the operating segment resides.

The Company's internal management structure and financial reporting systems differentiate the operating segments on the basis of the differing economic characteristics in the UK and Continental Europe and accordingly present these as two separate reportable segments. This distinction is embedded in the construction of operating reports reviewed by the Chief Executive, the Board and the executive management team and forms the basis for the presentation of operating segment information given below.

	UK		Continental Europe		Total
	2016 £000	Restated* 2015 £000	2016 £000	Restated* 2015 £000	2016 £000	Restated* 2015 £000
Revenue
External revenues	602,104	575,341	91,468	78,737	693,572	654,078
Reportable segment underlying operating profit	40,944	37,363	793	575	41,737	37,938
Reportable segment assets	263,968	255,189	44,516	36,030	308,484	291,219
Reportable segment liabilities	(167,755)	(158,859)	(23,801)	(13,087)	(191,556)	(171,946)

 

During the year, there were no inter-segment revenues for the reportable segments (2015: £nil).

*See note 1.

 

Reconciliations of reportable segment profit, assets and liabilities and other material items:

	2016 £000	2015 £000
Profit for the year
Total profit for reportable segments	41,737	37,938
Non-underlying items	(1,927)	-
Unallocated expense	(665)	(1,161)
Operating profit	39,145	36,777
Finance income	756	738
Finance expense	(1,722)	(1,891)
Profit before taxation	38,179	35,624
Taxation	(7,216)	(7,213)
Profit for the year	30,963	28,411

	2016 £000	Restated* 2015 £000
Assets
Total assets for reportable segments	308,484	291,219
Unallocated assets:
Properties, plant and equipment	90,981	93,242
Deferred tax assets	1,138	629
Cash and cash equivalents	28,171	33,001
Total assets	428,774	418,091
Liabilities
Total liabilities for reportable segments	(191,556)	(171,946)
Unallocated liabilities:
Employee benefits	(22,950)	(19,014)
Other interest-bearing loans and borrowings	-	(20,000)
Income tax payable	(6,824)	(6,974)
Derivative liabilities	-	(516)
Deferred tax liabilities	(4,077)	(4,533)
Total liabilities	(225,407)	(222,983)

	UK £000	Continental Europe £000	Reportable segment total £000	Unallocated £000	Consolidated total £000
Other material items 2016
Capital expenditure	1,808	872	2,680	283	2,963
Depreciation	2,388	732	3,120	2,156	5,276
Non-underlying items	-	-	-	1,927	1,927
Other material items 2015
Capital expenditure	2,064	543	2,607	287	2,894
Depreciation	2,246	538	2,784	2,020	4,804
Amortisation	-	-	-	375	375

 

In the UK the Company's freehold properties are held within Headlam Group plc and a rent is charged to the operating segments for the period of use. Therefore, the operating reports reviewed by the Chief Executive show all the UK properties as unallocated and the operating segments report a segment result that includes a property rent. This is reflected in the above disclosure.

Each segment is a continuing operation.

 

The Chief Executive, the Board and the senior executive management team have access to information that provides details on revenue by principal product group for the two reportable segments, as set out in the following table:

Revenue by principal product group and geographic origin is summarised below:

	UK		Continental Europe		Total
	2016 £000	2015 £000	2016 £000	2015 £000	2016 £000	2015 £000
Revenue
Residential	422,048	399,453	46,337	40,281	468,385	439,734
Commercial	180,056	175,888	45,131	38,456	225,187	214,344
	602,104	575,341	91,468	78,737	693,572	654,078

 

*See note 1.

4 Earnings per share

	2016 £000	2015 £000
Earnings
Earnings for underlying basic and underlying diluted earnings per share	32,505	-
Earnings for basic and diluted earnings per share	30,963	28,411

	2016	2015
Number of shares
Issued ordinary shares at 31 December	85,363,743	85,363,743
Effect of shares held in treasury	(1,330,339)	(1,331,576)
Weighted average number of ordinary shares for the purposes of basic earnings per share	84,033,404	84,032,167
Effect of diluted potential ordinary shares:
Weighted average number of ordinary shares at 31 December	84,033,404	84,032,167
Dilutive effect of share options	458,697	282,078
Weighted average number of ordinary shares for the purposes of diluted earnings per share	84,492,101	84,314,245

5 Dividends

	2016 £000	2015 £000
Interim dividend for 2015 of 6.00p paid 2 January 2016	5,048	-
Special dividend for 2015 of 6.00p paid 25 April 2016	5,048	-
Final dividend for 2015 of 14.70p paid 1 July 2016	12,368	-
Interim dividend for 2014 of 5.20p paid 2 January 2015	-	4,355
Final dividend for 2014 of 12.30p paid 1 July 2015	-	10,300
	22,464	14,655

The final proposed dividend of 15.85 pence per share (2015: 14.70 pence per share) will not be provided for until authorised by shareholders at the forthcoming AGM. There are no income tax consequences.

Interim dividends of 6.70 pence per share (2015: 6.00 pence per share) are provided for when the dividend is paid. The dividend was paid on 3 January 2017 and totalled £5,637,000.

The total value of dividends proposed but not recognised at 31 December 2016 is £18,974,000 (2015: £17,416,000).

A special dividend has been declared of 8.00 pence per share that will be paid on 24 April 2017 to shareholders on the register at 31 March 2017.

6 Subsequent events

Management have given due consideration to any events occurring in the period from the reporting date to the date these financial statements were authorised for issue and have concluded that there are no material adjusting or non-adjusting events to be disclosed in these financial statements, with the exception of the acquisition of Mitchell Carpets Limited.  On 28 February 2017, a group subsidiary company acquired 100% of the issued share capital of Mitchell Carpets Limited, a floorcovering distribution business based in Poole, Dorset, for a consideration of £1,980,000, subject to finalising the net assets position.  

7 Additional information

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2016 or 2015 but is derived from those accounts. Statutory accounts for 2015 have been delivered to the registrar of companies, and those for 2016 will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

We anticipate that the Company's statutory accounts will be posted to shareholders during April 2017 and will be displayed on the Company's website at www.headlam.com at the same time.  Copies of the statutory accounts will also be available from the Company's registered office at Headlam Group plc, PO Box 1, Gorsey Lane, Coleshill, Birmingham, B46 1LW.

This final results announcement for the year ended 31 December 2016 was approved by the Board on

7 March 2017.

 

END

 

 

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