Final Results

RNS Number : 7359B

Headlam Group PLC

07 March 2014

 



7 March 2014

Preliminary Results for the Year Ended 31 December 2013

Headlam Group plc ("Headlam"), Europe's leading floorcoverings distributor, announces its final results for the year ended

31 December 2013.

Financial highlights

Revenue £million

£603.1   2012: £586.0

Underlying Operating Profit £million

£27.7*   2012: £29.3

Operating Profit £million

£22.3   2012: £29.3

Underlying Earnings Per Share pence

24.5*   2012: 25.3**

Earnings Per Share pence

18.0   2012: 25.3**

Dividends paid and proposed pence

15.30   2012: 14.85

*Underlying numbers have been used in order to provide a better understanding of the business performance.  The non-underlying items relate to the impairment of intangible and tangible fixed assets, totalling £5.4 million, the details of which can be found in note 2.

**2012 earnings per share has been restated to reflect the changes for revised IAS 19.

Operational highlights

·      Further gains in UK market share, with like for like revenues increasing by 1.5% despite the difficult start to the year

·      Our businesses in France and the Netherlands continue to face challenging markets and depressed profitability.  As a consequence, an impairment of £5.4 million relating to intangible and tangible fixed assets has been recognised during the year

·      Construction of the Coleshill distribution centre completed on schedule and fully operational from January 2014

·      The group expands its UK presence with the acquisition of Hall's Flooring and Fells Carpets and the establishment of service centres in Coventry, Manchester and Sheffield

·      The introduction of an integrated transport solution for the group's businesses located in Scotland enhances the efficiency and effectiveness of our customer service in the north east of the country

·      The group continues to invest in external training programmes aimed at providing ongoing development for managers and sales representatives and introduces further enhancements to the customer relationship management, ("CRM"), app used on the iPad

Tony Brewer, Headlam's Group Chief Executive, said:

"The final months of 2013 showed progressive improvement and this momentum has carried forward into the first two months of 2014.  Whilst January and February are relatively lower trading months and compared against weaker comparatives from 2013, both months have produced a positive result.  Furthermore, there are indications of a slight improvement in market conditions in the UK and a more stable market in Continental Europe.

This trading improvement has coincided with the increased investment across the various group initiatives aimed at providing our customers with an ever improving overall service proposition and the group with a strong platform for future growth

Therefore, we enter the typically stronger spring selling period in a good position.  Whilst the first two months are a welcome improvement, we believe that given a normal seasonal cycle and a maintained focus on the continued development of the quality of our businesses, we can look forward with cautious optimism to a resumption of profitable growth from the Group in 2014"

Enquiries:

Headlam Group plc             

Tony Brewer, Group Chief Executive                Tel: [phone]

Stephen Wilson, Group Finance Director                                       

For further detail on our business please visit:

www.headlam.com

About Us

Headlam is engaged in the marketing, supply and distribution of an extensive range of floorcovering products.  The group's activities and facilities are located throughout the UK, France, Switzerland and the Netherlands.

Our Purpose

The group's operations are aimed at providing its customers, principally independent floorcovering retailers and contractors, with a comprehensive and up to date range of competitively priced floorcovering products supported by next day delivery.

This approach presents Headlam's suppliers with an opportunity to achieve an unparalleled market access backed by cost effective distribution.

In order to provide this level of service to its customers and suppliers, Headlam has developed a diverse and autonomous operating structure that includes 52 businesses across the UK and a further five in continental Europe.

The autonomous operating structure is a key contributor to the group's success, since it provides an opportunity for experienced management teams to develop the individual identity, market presence and profitability of the business for which they are responsible.

Each business is supported by the group's continuing commitment to investment in people, product, operating facilities and IT. This commitment has underpinned the group's overall development and enabled Headlam to establish itself as Europe's leading floorcovering distributor.

Chairman's Statement

"The board is proposing an increase to the final dividend by 4.4% from 10.20p to 10.65p"

It is particularly pleasing for me, in my first statement as Chairman, to be able to report on a year in which we achieved further progress with group revenue rising to a record level.  This result was achieved despite the trading challenges and uncertainty encountered during the first half of 2013.

Overview

2013 has been a story of continued improvement in operating performance set against a background of uncertainty, variable trading patterns and a continuing competitive environment.

The first half of the year was particularly difficult with trading undermined by unfavourable weather across certain parts of the UK and the Netherlands.  At the time, this only served to exacerbate the fragile nature of the market and was the key cause of revenues contracting during the first six months.

However, a much stronger second half, particularly during the important months of August, November and December, enabled the group to recover the first half revenue deficit and end the year with a positive performance for the year as a whole.

The result for the year provides further confirmation that the decision to maintain our strategy, structure and range of businesses has placed the group in an advantageous position and allowed it to respond positively to improvements in the market.

The board remains committed to investing in those areas of our business that will enable us to drive future growth and enhance market position.

Earnings and dividend

Underlying profit before tax for the year, amounting to £26.4 million, was down by 5.1% on the previous year's result of £27.9 million and underlying earnings per share declined by 3.2% from 25.3p to 24.5p.  The board is proposing to increase the final dividend by 4.4% from 10.20p to 10.65p resulting in a total dividend for the year of 15.30p, up 3.0% on 2012.  The final dividend, if approved by shareholders at the Annual General Meeting ("AGM"), will be paid on 1 July 2014 to shareholders on the register at close of business on 6 June 2014.

Governance and Board

Excellent governance has its foundation in an effective board. Headlam seeks to foster a culture of openness and transparency in an environment which encourages participation and contribution from all of the board members.  Strong governance creates high standards and in turn creates confidence amongst our investors, management, employees, suppliers and customers.

2013 was the year in which our previous Chairman, Graham Waldron, decided to retire from the board.  Graham served as a director of Headlam for 22 years and during that time, made a major contribution to the development and success of the group.  We thank Graham for his dedicated service and wish him and his family well for the future.

Employees

The board would like to thank all our employees for their contribution to the continued success of the group, particularly during a year which has required unrelenting determination and focus.  Our businesses flourish as a result of their positive attitude.

Dick Peters
Chairman
7 March 2014

Business Model and Strategy
generating value for the long term

Headlam distributes a wide range of products, sourced from a variety of floorcovering suppliers located around the globe, to its customer base who, in the main, are independent floorcovering retailers and contractors.  In fulfilling this role, Headlam forms an essential link that enables suppliers of floorcovering products to gain extensive access to markets located in Western Europe.

Headlam operates through a number of individual and diverse businesses located in the UK, France, Switzerland and the Netherlands.  Each business has its own trading identity and is operated on an autonomous basis by local management teams.  The autonomous operations are a key contributor to the group's success providing opportunity for experienced management teams to develop the individual identity, market presence and profitability of the business for which they are responsible.

This structure permits broad access to floorcovering markets, allows the group to react swiftly to emerging opportunities and assists with managing downside risks when trading environments are challenging.  Whilst each business is encouraged to adopt an entrepreneurial style, they are operated within a well developed and consistently applied framework of operational and financial control.

Headlam's collection of businesses, assembled over many years, has allowed the group to continually outperform the floorcovering market through various economic cycles.  This has been very evident in recent years when conditions have proved to be particularly demanding and during which time the group has consistently maintained its ability to and achieved an increase in market share.

The group's strategy remains focused on developing its floorcovering distribution businesses in the UK and continental Europe and the continued improvement of the services provided to its customers.  The group's size and structure provide it with a unique competitive advantage that enables it to deliver the benefits of product diversity, sustained product development and marketing and distribution services all of which are aimed at supporting and enhancing its customers' market position.

Each business is supported by the group's commitment to continued investment in people, product, facilities and IT, the commitment providing the foundation underpinning growth and performance and ultimately, the establishment of the group as Europe's leading floorcovering distributor.

Business Review

"Maintaining investment for future growth and service enhancement"

The emphasis this year has been directed at developing and completing a range of investments and initiatives aimed at improving the group's ability to enhance customer service and respond to opportunities for future growth.

 

Overview

Against a backdrop of continued market challenge, the group responded well as the year progressed, recovering from a difficult start and finishing with a strong performance.  Notwithstanding the uncertainties that surrounded markets during 2013, we completed a number of investments aimed at improving product offering and market reach with the objective of improving the level of service we offer our customers.

Investments

The construction project extending our Coleshill distribution hub was substantially completed on schedule by the end of the year and was fully operational from January 2014.  The enlarged 300,073 square foot facility will allow us to enhance our supply chain and inventory management.

We have extended the number of service centres with the establishment of new locations in Coventry, Sheffield and Trafford Park, Manchester.  Our network of service centres and trade counters that now numbers 40 locations across the UK, allows us to support the large number of customers who prefer to collect their product needs rather than using our delivery service.  Notwithstanding our existing coverage, we have a number of geographical voids and are currently exploring several locations across the UK which would complement our existing network and provide further opportunity to increase our market presence.

As reported previously, we completed the acquisition of the business and certain assets of Hall's Floorings Limited on 28 March 2013.  Following the acquisition, the logistics operation of Hall's Floorings was immediately moved to Coleshill, whilst a base was retained in north London to enable the business to retain its autonomous identity and from which to develop its sales and marketing activity to independent flooring retailers throughout most of England.

On 29 November 2013, we then completed the acquisition of the business and certain assets of Roger Fell Limited which trades as Fells Carpets.  The business is a distributor of residential floorcovering, supplying independent floorcovering retailers throughout the north of England.  Following completion, the sales, marketing and logistics activities were transferred from their former location in Whitley Bridge, Yorkshire to the group's existing facility in Gildersome, Leeds without disturbing the autonomous identity of the Fells business.

We are also in the process of establishing a trans-shipping facility in north London.  The facility, which should be fully operational from May 2014, will provide a base for Hall's Floorings, allow us to extend our collection service by creating a trade counter and enable our Specialist Residential businesses to improve their service across the south east of England.

Customers

Whilst markets continue to present our customers with challenges, they have managed to maintain an improving trading trend as evidenced by the group's increase in revenue.  Credit taken at 40.1 days, (2012: 41.3) combined with a continued reduction in the incidence and cost of bad debts, points to a sector that remains financially robust and resourceful.

Contact with our customers is a vital aspect of our business and during the year, our sales representatives collectively made 520,434 (2012: 515,339) customer visits.  We also managed to increase the number of active accounts from 44,086 to 45,720 and in return, our customers placed 4,331,886 (2012: 3,973,351) orders on our businesses across the UK.

Marketing

Lifestyle Floors is now firmly established as the most comprehensive display and marketing concept within UK independent floorcovering retailers.  The extensive product portfolio of carpet, vinyl, wood, laminate and luxury vinyl tile displayed within the various point of sale modules will be enhanced further during the spring of 2014, with the launch of additional products.  This is another area where the group's investment continues to develop our relationship with independent floorcovering retailers and ultimately contributes to our mutual gains in market share.

During the autumn of 2013, we combined the sales and marketing activities of Kingsmead Carpets and Georgian Carpets in order to significantly increase the retail presence of their complementary product portfolio of wool and polypropylene carpets.  During 2014, further investment in sales resource, display and marketing will elevate the combined business to be one of the most prominent carpet suppliers to independent retailers in the UK.

Continental Europe

Our continental European businesses are also contending with challenging markets but, on a positive note, there appear to be tentative signs that the rate of decline in these markets may be slowing based on recent performance.

As reported previously, we have implemented limited restructuring in our Dutch businesses in order to improve efficiency and reduce the downside risk on declining performance arising from further market contraction.

With LMS, our business based in France, we continue to evaluate the revenue benefits that could arise as a result of training initiatives and the introduction of a CRM system based on the UK platform.

Belcolor continues to achieve a satisfactory performance but as with our other businesses on the continent is having to contend with a difficult market.

Our continental businesses are managed by experienced teams.  As with the UK, the performance of their businesses would be elevated if markets resumed growth.

Revenue and operating profit

Group revenue increased during the year by 2.9% from £586.0 million to £603.1 million.  UK like for like revenue increased by 1.5% from £491.5 million to £498.9 million and on the continent, collective like for like performance declined by 3.7%.  The revenue from acquisitions during the year amounted to £10.4 million compared with £0.7 million in the previous year.

The group's gross margin edged up during the year to 30.1% compared with 30.0% for the previous year.  Achieving an increase in gross margin is one of the performance indicators targeted for improvement.  Whilst gains were evident earlier in the year, they were substantially eroded due to shifts in product mix and sustained pricing pressure from the market.  We will continue with our efforts and initiatives to maintain further progress in this area of the business.

Underlying overhead cost increased by 4.9% during the year to £153.6 million compared with £146.4 million in the previous year.  As a percentage of revenue, underlying overhead cost increased to 25.5% compared with 25.0% for the previous year.  The two key areas contributing to the movement were the incremental overhead costs arising from the businesses acquired during the year amounting to £3.3 million and the general cost of living increase for employees, implemented from 1 January 2013, amounting to 2.0%.

As mentioned above, the group continues to invest in the Lifestyle Floors concept.  During the year, a further £1.1 million was incurred on providing additional marketing and point of sale material to support the ongoing development of the brand.

The group's underlying operating profit declined by £1.6 million from £29.3 million for the previous year to £27.7 million because the growth in underlying overhead costs outpaced the improvement in gross profit.  Whilst additional overhead cost increases are anticipated for 2014, principally due to the continued investment in the group's distribution capability and Lifestyle Floors, growth in employment cost will be substantially less than 2013 and the contribution from the acquisitions completed during 2012 and 2013 should move from earnings diluting to enhancing.

Non-underlying items

As a consequence of the ongoing challenges associated with the floorcovering markets in France and the Netherlands, our businesses in these two countries have continued to experience a decline in profitability.  The impairment test conducted during the year for these entities has revealed a shortfall in their recoverable value when compared with their carrying value.  This has resulted in the goodwill attaching to the French business, amounting to £3.2 million, being written down in full and the freehold distribution centre in the Netherlands being impaired by £2.2 million.

The non-underlying items are non-cash items and have been excluded from the group's underlying profit and earnings measures.

IAS 19

Following the introduction of the amendment to IAS 19, notably relating to the measurement of the expected return on assets, we have restated the result for the 2012 twelve month period.  In the Consolidated Income Statement, the restatement relates to net finance cost and taxation.  The net adjustment to the Consolidated Income Statement is matched by an equal and opposite adjustment relating to the re-measurement of defined benefit plans in the Consolidated Statement of Comprehensive Income.  As a result of these changes, basic earnings per share for 2012 reduced from 25.8p to 25.3p.

The net effect to comprehensive income attributable to the equity shareholders for the period was nil.

Net finance costs

Net finance costs reduced during the year by £0.3 million from £1.5 million to £1.2 million.  There was a gain on net bank interest with cost reducing by £292,000 and an increased cost of £70,000 attributable to the net movement in cash flow and interest rate hedges and the defined benefit plan obligation.

Taxation

The effective underlying rate of taxation reduced to 23.25% during the year, reflecting the decrease in UK headline corporation tax rate and also the further future reductions, already enacted, that impact upon deferred taxation.  The anticipated effective underlying rate for 2014 is expected to reduce to 21.5% due to further UK rate reductions which have now been enacted.

Earnings per share

Underlying basic earnings per share, declined by 3.2% during the year from 25.3 pence to 24.5 pence.  The underlying diluted earnings per share declined by 3.6% from 25.2 pence to 24.3 pence.

Dividends

Total dividends paid and proposed for 2013 have increased by 3.0% from 14.85 pence to 15.30 pence. Dividend cover reduced to 1.3 times but, when measured against underlying basic earnings per share, dividend cover is 1.6 times.  This is a small reduction compared with the sustained position over the last few years but, a ratio the board feels comfortable with maintaining in the future.

Cash flows

Net cash flow from operating activities

Net cash flow from operating activities decreased during the year by £1.9 million from £25.9 million to £24.0 million.

The two key items contributing to the decline are profit before tax, which reduced by £6.8 million year on year, and the adjustments for depreciation, amortisation and impairment which increased by £5.5 million with the common cause for the two large movements being the inclusion of the non-underlying items.  Adjusting for the total underlying amount of £5.4 million gives a decline of £1.4 million for profit before tax which net of the reduction in depreciation, £0.1 million, gives rise to a movement of £1.3 million.

The remainder of the annual movement is principally attributable to a reduction in share based payments, £0.9 million, which when netted with the decrease in interest and tax paid totalling £0.5 million gives a movement of £0.4 million.

The net reduction in working capital of £2.2 million was broadly in line with last year.  The year on year movements for each individual component of working capital were a reduction of £2.5 million for inventory, an increase in trade and other receivables of £12.6 million and an increase in trade and other payables of £10.2 million with the movements in all three elements related to the increasingly buoyant trading during the final quarter of the year.

Cash flows from investing and financing activities

The net cash movement for the year in relation to property, plant and equipment was a £12.8 million cash outflow.  This compares with a net cash outflow for the previous year of £6.5 million.  The additional outflow during the current year occurred because of the extension to the Coleshill distribution centre.

The acquisition of Hall's Floorings and Fells Carpets amounting to £2.0 million exceeded the £0.8 million invested during the previous year for Flooring Accessories and C.K. Davie.

Cash outflows from financing activities increased by £1.3 million due to a smaller release of treasury shares as a result of a reduction in the exercise of SAYE options and a modest increase in dividends paid during the year.

Net debt

Group net funds at the end of the year reduced by £2.2 million compared with the previous year from £16.2 million to       £14.0 million as detailed in the table below.

	At 1 January 2013 £000	Cash flows £000	Foreign exchange translation £000	At 31 December 2013 £000
Cash at bank and in hand	49,798	(2,402)	81	47,477
Debt due within one year	(213)	-	(5)	(218)
Debt due after one year	(33,371)	223	(91)	(33,239)
	16,214	(2,179)	(15)	14,020

Funding and going concern

The group maintains sufficient banking facilities to fund its operations and investments and as illustrated below, at 31 December 2013, 61.5% of the group's facilities were undrawn.

Barclays Bank and The Royal Bank of Scotland have each provided the group with a £20.0 million facility which will fall due for renewal during March 2017.  As at 31 December 2013, the utilisation of the group's total facilities was as follows.

Maturity date	Drawn £000	Undrawn £000	Total facility £000
Less than one year	-	43,386	43,386
Over one year and less than five years	31,092	10,000	41,092
Over five and less than seven years	2,366	-	2,366
	33,458	53,386	86,844

Having reviewed the group's resources and a range of likely out-turns, the directors believe there are reasonable grounds for stating that the group has adequate resources to continue in operational existence for the foreseeable future and it is appropriate to adopt the going concern basis in preparing the group's financial accounts.

Employee benefits

As at 31 December 2013, the group's net pension liabilities totalled £15.6 million representing a decrease of £1.8 million on the previous year.  The reduction in the deficit is due to the growth in plan assets during the year outpacing the rise in the value of the plan obligations.  The value of the plan obligations has been affected by an adverse movement in the inflation rate assumption but, this has been partly offset by an increase in the discount rate assumption.

The company has continued to pay additional contributions into the UK plan, as per its agreement with the trustee.  The additional deficit reduction contributions amounted to £2.7 million during the year and are expected to remain at £2.8 million for 2014.  However a triennial review of the UK defined benefit plan as at 31 March 2014 may have a bearing on the amount due for 2014 and future periods.

Outlook

The final months of 2013 showed progressive improvement and this momentum has carried forward into the first two months of 2014.  Whilst January and February are relatively lower trading months and compared against weaker comparatives from 2013, both months have produced a positive result.  Furthermore, there are indications of a slight improvement in market conditions in the UK and a more stable market in Continental Europe.

This trading improvement has coincided with the increased investment across the various group initiatives aimed at providing our customers with an ever improving overall service proposition and the group with a strong platform for future growth

Therefore, we enter the typically stronger spring selling period in a good position.  Whilst the first two months are a welcome improvement, we believe that given a normal seasonal cycle and a maintained focus on the continued development of the quality of our businesses, we can look forward with cautious optimism to a resumption of profitable growth from the Group in 2014.

Measuring our Performance

The group uses the following indicators when assessing annual progress towards its medium term strategic objectives.

Like for Like Revenue Growth
Measurement	Why
Like for like revenue growth measures changes in revenue in the current year compared with the previous year.  It excludes the effects of acquisitions and the movement in working days and currency.	The group targets an increase in like for like revenue above anticipated market growth with the objective of maintaining growth in market share.
Gross Profit Margin
Measurement	Why
The ratio of gross profit to revenue.	Gross profit margin is a primary indicator of business performance and market competitiveness. A movement in gross margin generally reflects a change in the business product mix or market pricing or a combination of both.
Operating Profit
Measurement	Why
Operating profit is determined by adding back finance, income and expense to profit before tax.	The majority of the group's operating costs are fixed and the group therefore obtains a substantial benefit from operational gearing as revenues increase.
Earnings Per Share
Measurement	Why
Earnings per share, ("EPS") is calculated by reference to post tax profit divided by the weighted average number of issued shares during the year.	EPS and EPS growth are widely used measures of company performance. EPS growth forms the basis of the group's current dividend policy since the board anticipates dividend growth to be broadly in line with the growth in EPS.
Return on Capital Employed
Measurement	Why
Return on capital employed is derived from operating profit divided by the simple average of the net assets plus average debt at the start and end of the year.	Return on capital employed provides an indication of whether the group's performance is creating value for its shareholders.
Credit Taken by UK Customers and Bad Debt Percentage
Measurement	Why
Credit taken is calculated by reference to trade receivables net of impairment provisions expressed as a proportion of current and prior months revenue inclusive of VAT. Bad debts are calculated by expressing the annual impairment loss as a percentage of revenue.	These two indicators provide an accurate representation of the independent customer's financial health.

Managing our Risk

The group's business, results and financial condition are influenced by a range of risks and uncertainties, a number of which remain beyond the control of the board.  The board reviews key risks and controls and, whilst the following highlights some of the key risks, it is not intended to provide an exhaustive analysis of the risks that may affect or influence the conduct of the business.

Area of Risk	Description	Potential Impact	Mitigation
Market demand	A significant proportion of the group's revenue arises from trade with independent retailers and flooring contractors.  The activity levels within this customer base are determined by consumer demand created through residential property refurbishment or moves, new residential housing developments and a wide range of commercial refurbishment and building projects.	Periods of recession that create reduced consumer confidence or contraction in the construction industry and changes in trends and preferences all have the potential to affect market activity and demand for products supplied by the group.	Market activity is monitored daily in each individual business and collectively at group. This visibility allows prompt response to factors adversely affecting trading. Furthermore, since the group's principal activities are supply and distribution, the group has the ability to quickly react to market changes. In addition, the development of a range of regional, national and specialist businesses provides the group with broad market penetration and protection against market contractions.
Competitor risk	The group operates across four geographical markets each of which has similar trading characteristics. Within each market, the group competes directly with a variety of regional and national distributors and manufacturers selling directly to its customer base and indirectly with multiple retail chains.	The emergence of a competitor with a strong business model could undermine the group's growth objectives.	The group seeks to sustain its competitive position by maintaining close relationships with its supplier and customer base. Substantial and continued investment in management and facilities, an extensive product offering, a knowledgeable selling resource, stock availability, IT, efficient material handling and logistics enables the group to continue to improve its market position.
Technology	The software platform is a vital component of the group's operating strategy underpinning the delivery of operational objectives and providing the framework for the maintenance of financial control.	Given its importance, any prolonged system failure has the potential to adversely affect business performance.	Each business has its own dedicated hardware and failure in one will not interrupt another. Furthermore, the group operates well defined back up procedures and has contingency plans in place to enable swift recovery from a failure of this nature.
People	The group's ability to deliver continued success is very dependent upon its people.	An inadequate pool of suitably qualified and talented people can disrupt business development and undermine the group's ability to deliver sustainable growth.	Recruitment, training and development are aimed at ensuring the group has suitably skilled and qualified people to meet the current and future operational needs of its businesses. Furthermore, the group is committed to creating opportunities for individuals to progress their careers.
Employee benefits	There are ongoing risks that could result in the costs associated with funding the group's defined benefit plans increasing due to a decline in investment returns, movement in interest rates and longer life expectancy.	An increasing deficit in the plans could result in the group having to increase financial support thereby reducing its ability to fund operational investment.	As a result of the triennial actuarial valuation of the UK plan undertaken at 31 March 2011, the group agreed to maintain its deficit reduction contributions until December 2015, at which point the plan deficit should have been removed. The outcome from future scheme valuations, the next being 31 March 2014, could result in the deficit reduction contributions increasing or decreasing.
Legislation and regulation	The group's operations are regulated by a variety of laws and regulations, the principal ones relating to health and safety, the environment, employment, commerce, corporate, financial reporting and taxation.	Failure to comply could lead to serious civil or criminal proceedings causing disruption to the group's operations, financial loss and reputational damage.	The group manages its obligations through a framework of set policies and procedures and, where appropriate, engages the services of competent third party advisers.

Consolidated Income Statement

for the year ended 31 December 2013

		Underlying	Non-underlying items* (note 2)	Total	Restated±
	Note	2013			2012
		£000	£000	£000	£000
Revenue	1	603,051	-	603,051	585,984
Cost of sales		(421,796)	-	(421,796)	(410,251)
Gross profit		181,255	-	181,255	175,733
Distribution expenses		(115,067)	-	(115,067)	(109,621)
Administrative expenses		(38,508)	(5,352)	(43,860)	(36,798)
Operating profit	1	27,680	(5,352)	22,328	29,314
Finance income		629	-	629	783
Finance expenses		(1,870)	-	(1,870)	(2,246)
Net finance costs		(1,241)	-	(1,241)	(1,463)
Profit before tax		26,439	(5,352)	21,087	27,851
Taxation		(6,146)	-	(6,146)	(6,939)
Profit for the year attributable to the equity shareholders		20,293	(5,352)	14,941	20,912
Dividend paid per share	4			14.85p	14.15p
Earnings per share
Basic	3	24.5p	-	18.0p	25.3p
Diluted	3	24.3p	-	17.9p	25.2p

* Non-underlying items comprise the impairment of intangible and tangible fixed assets see note 2.

± Restated to reflect the changes for revised IAS19.

All group operations during the financial years were continuing operations.

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2013

			Restated±
		2013 £000	2012 £000
Profit for the year attributable to the equity shareholders		14,941	20,912
Other comprehensive income:
Items that will never be reclassified to profit or loss
Remeasurement of defined benefit plans		450	(4,984)
Related tax		(529)	928
		(79)	(4,056)
Items that are or may be reclassified to profit or loss
Foreign exchange translation differences arising on translation of overseas operations		397	(389)
Effective portion of changes in fair value of cash flow hedges		115	(383)
Transfers to profit or loss on cash flow hedges		137	44
Related tax		(65)	86
		584	(642)
Other comprehensive income/(expense) for the year		505	(4,698)
Total comprehensive income attributable to the equity shareholders for the year		15,446	16,214

± Restated to reflect the changes for revised IAS19.

Statements of Financial Position

at 31 December 2013

			Note	2013 £000	2012 £000
	Assets
	Non-current assets
	Property, plant and equipment			103,079	96,182
	Intangible assets			10,013	13,210
	Deferred tax assets			2,388	2,376
				115,480	111,768
	Current assets
	Inventories			115,678	115,332
	Trade and other receivables			119,488	108,070
	Cash and cash equivalents			47,477	49,798
	Assets held for sale			-	212
				282,643	273,412
	Total assets		1	398,123	385,180
	Liabilities
	Current liabilities
	Other interest-bearing loans and borrowings			(218)	(213)
	Trade and other payables			(164,519)	(153,755)
	Employee benefits			(2,842)	(2,754)
	Income tax payable			(7,022)	(7,117)
				(174,601)	(163,839)
	Non-current liabilities
	Other interest-bearing loans and borrowings			(33,239)	(33,371)
	Employee benefits			(12,780)	(14,641)
				(46,019)	(48,012)
	Total liabilities		1	(220,620)	(211,851)
	Net assets			177,503	173,329
Equity attributable to equity holders
of the parent
Share capital				4,268		4,268
Share premium				53,512		53,512
Other reserves				(4,742)		(5,812)
Retained earnings				124,465		121,361
Total equity				177,503		173,329

These financial statements were approved by the board of directors on 7 March 2014 and were signed on its behalf by:

Tony Brewer                                      Steve Wilson

Director                                                Director

Company Number: 460129

Statement of Changes in Equity

for the year ended 31 December 2013

	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	Total equity £000
Balance at 1 January 2012	4,268	53,512	88	6,157	-	(13,258)	115,778	166,545
Profit for the year attributable to the equity shareholders	-	-	-	-	-	-	20,912	20,912
Other comprehensive income	-	-	-	(389)	(339)	-	(3,970)	(4,698)
Total comprehensive income for the year	-	-	-	(389)	(339)	-	16,942	16,214
Transactions with equity shareholders, recorded directly in equity
Share-based payments	-	-	-	-	-	-	1,183	1,183
Share options exercised by employees	-	-	-	-	-	1,929	(1,013)	916
Deferred tax on share options	-	-	-	-	-	-	134	134
Dividends to equity holders	-	-	-	-	-	-	(11,663)	(11,663)
Total contributions by and distributions to equity shareholders	-	-	-	-	-	1,929	(11,359)	(9,430)
Balance at 31 December 2012	4,268	53,512	88	5,768	(339)	(11,329)	121,361	173,329
Balance at 1 January 2013	4,268	53,512	88	5,768	(339)	(11,329)	121,361	173,329
Profit for the year attributable to the equity shareholders	-	-	-	-	-	-	14,941	14,941
Other comprehensive income	-	-	-	397	252	-	(144)	505
Total comprehensive income for the year	-	-	-	397	252	-	14,797	15,446
Transactions with equity shareholders, recorded directly in equity
Share-based payments	-	-	-	-	-	-	288	288
Share options exercised by employees	-	-	-	-	-	421	(178)	243
Deferred tax on share options	-	-	-	-	-	-	497	497
Dividends to equity holders	-	-	-	-	-	-	(12,300)	(12,300)
Total contributions by and distributions to equity shareholders	-	-	-	-	-	421	(11,693)	(11,272)
Balance at 31 December 2013	4,268	53,512	88	6,165	(87)	(10,908)	124,465	177,503

± Restated to reflect the changes for revised IAS19.

Cash Flow Statements

for the year ended 31 December 2013

				Restated±
			2013 £000	2012 £000
Cash flows from operating activities
Profit before tax for the year			21,087	27,851
Adjustments for:
Depreciation, amortisation and impairment			10,136	4,695
Finance income			(629)	(783)
Finance expense			1,870	2,246
Profit on sale of property, plant and equipment			(177)	(185)
Share-based payments			288	1,183
Operating cash flows before changes in working
capital and other payables			32,575	35,007
Change in inventories			1,967	(491)
Change in trade and other receivables			(9,114)	3,498
Change in trade and other payables			9,421	(819)
Cash generated from the operations			34,849	37,195
Interest paid			(1,565)	(1,682)
Tax paid			(6,344)	(6,766)
Additional contributions to defined benefit plan			(2,913)	(2,839)
Net cash flow from operating activities			24,027	25,908
Cash flows from investing activities
Proceeds from sale of property, plant and equipment			479	1,530
Interest received			613	768
Acquisition of subsidiaries, net of cash acquired			(1,974)	(771)
Acquisition of property, plant and equipment			(13,267)	(7,999)
Net cash flow from investing activities			(14,149)	(6,472)
Cash flows from financing activities
Proceeds from the issue of treasury shares			243	916
Repayment of borrowings			(223)	(213)
Dividends paid			(12,300)	(11,663)
Net cash flow from financing activities			(12,280)	(10,960)
Net (decrease)/increase in cash and cash equivalents			(2,402)	8,476
Cash and cash equivalents at 1 January			49,798	41,494
Effect of exchange rate fluctuations on cash held			81	(172)
Cash and cash equivalents at 31 December			47,477	49,798

± Restated to reflect the changes for revised IAS19.

Notes

1 Segment reporting

The group has 52 operating segments in the UK and 5 operating segments in Continental Europe.  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 Group Chief Executive.  Discrete financial information is available for each segment and used by the Group 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, with relevance to products and services, type and class of customer, methods of sale and distribution and the regulatory environment in which they operate.  The group'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 Group 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
	2013 £000	2012 £000	2013 £000	2012 £000	2013 £000	2012 £000
Revenue
External revenues	509,340	492,256	93,711	93,728	603,051	585,984
Reportable segment operating profit	26,877	28,275	1,678	2,036	28,555	30,311
Reportable segment assets	233,913	226,595	35,708	39,583	269,621	266,178
Reportable segment liabilities	(148,457)	(137,563)	(15,975)	(15,853)	(164,432)	(153,416)

During the year there are no inter-segment revenues for the reportable segments (2012: £nil).

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

												Restated±
									2013 £000			2012 £000
Profit for the year
Total profit for reportable segments											28,555	30,311
Impairment of intangibles and assets										(5,352)		-
Unallocated expense											(875)	(997)
Operating profit											22,328	29,314
Finance income											629	783
Finance expense											(1,870)	(2,246)
Profit before taxation											21,087	27,851
Taxation											(6,146)	(6,939)
Profit for the year											14,941	20,912

± Restated to reflect the changes for revised IAS19.

Notes continued

1 Segment reporting - continued

									2013 £000		2012 £000
Assets
Total assets for reportable segments									269,621		266,178
Unallocated assets:
Properties, plant and equipment									93,883		87,651
Deferred tax assets									2,388		2,376
Assets held for sale									-		212
Cash and cash equivalents									32,231		28,763
Total assets									398,123		385,180
Liabilities
Total liabilities for reportable segments									(164,432)		(153,416)
Unallocated liabilities:
Employee benefits									(15,622)		(17,395)
Other interest-bearing loans and borrowings									(33,457)		(33,584)
Income tax payable									(7,022)		(7,117)
Derivative liabilities									(87)		(339)
Total liabilities									(220,620)		(211,851)
			UK £000	Continental Europe £000		Reportable segment total £000			Unallocated £000		Consolidated total £000
Other material items 2013
Capital expenditure			3,043	649		3,692			9,847		13,539
Depreciation			2,171	666		2,837			1,797		4,634
Amortisation			-	-		-			150		150
Impairment of assets			-	-		-			2,155		2,155
Impairment of intangible assets			-	-		-			3,197		3,197
Other material items 2012
Capital expenditure			2,008	271		2,279			5,720		7,999
Depreciation			2,193	648		2,841			1,764		4,605
Amortisation			-	-		-			90		90

In the UK the group'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 Group 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 Group 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:

Notes continued

1 Segment reporting - continued

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

	UK		Continental Europe		Total
	2013 £000	2012 £000	2013 £000	2012 £000	2013 £000	2012 £000
Revenue
Residential	350,020	337,569	47,608	43,959	397,628	381,528
Commercial	159,320	154,687	46,103	49,769	205,423	204,456
	509,340	492,256	93,711	93,728	603,051	585,984

2 Non-underlying items

Non-underlying items comprise:

	2013 £000	2012 £000
Impairment of property held in fixed assets	2,155	-
Impairment of goodwill held in intangible assets	3,197	-
	5,352	-

The group presents underlying measures of performance in order to better reflect the financial performance of the group over time.

Impairment of property, plant and equipment

In the Netherlands, management obtain an annual market value of the property for local rates purposes.  The latest valuation obtained indicated the carrying value of the property exceeded its market value.  Management considered this to represent an indicator of impairment and therefore performed an impairment review to establish the value in use for the Dutch cash generating unit ('CGU') which represents an operating segment.  The future cash flows used in the value in use calculation were based on forecast operating results per the 2014 approved business plan with a growth rate assumption of 2.5% over a period of five years.  These were discounted at a pre-tax discount rate of 13.3%.

The outcome of the impairment review concluded that the carrying value of the assets of the Dutch CGU were less than their recoverable amount by £2,155,000 which was not less than the amount by which the market value of the property exceeded its carrying value.  This is a reflection of the ongoing challenging market conditions in the Netherlands.  As a consequence, a £2,155,000 impairment loss has been recognised in the income statement during the year and disclosed as a non-underlying item.  Non-underlying items are not attributable to reportable segments.  If they were the impairment would be attributable to the Continental Europe segment.

Impairment of Goodwill

In line with the requirements of IAS 36, impairment reviews are required to be completed annually for CGU's to which goodwill is allocated.  In performing these impairment reviews management assesses the value in use for each CGU based on actual reported results for 2013 with a growth rate assumption of 0% over a period of five years.  These were discounted at a pre-tax discount rate of 13.3%.

Notes to the Financial Statements continued

2 Non-underlying items - continued

The outcome of the impairment review concluded that the carrying value of the assets of the LMS CGU in France, which represents an operating segment, were less than their recoverable amount by £3,197,000, equivalent to the goodwill attributed to the CGU.  This is a reflection of the ongoing challenging market conditions in France.  As a consequence, a £3,197,000 impairment loss has been recognised in the income statement during the year and disclosed as a non-underlying item.  Non-underlying items are not attributable to reportable segments.  If they were the impairment would be attributable to the Continental Europe segment.

3 Earnings per share

		Restated±
	2013 £000	2012 £000
Earnings
Earnings per underlying basic and underlying diluted earnings per share	20,293	-
Earnings for basic and diluted earnings per share	14,941	20,912
	2013	2012
Number of shares
Issued ordinary shares at 31 December	85,363,743	85,363,743
Effect of shares held in treasury	(2,383,937)	(2,672,553)
Weighted average number of ordinary shares for the purposes of basic earnings per share	82,979,806	82,691,190
Effect of diluted potential ordinary shares:
Weighted average number of ordinary shares at 31 December	82,979,806	82,691,190
Dilutive effect of share options	646,209	446,420
Weighted average number of ordinary shares for the purposes of diluted earnings per share	83,626,015	83,137,610

At 31 December 2013, the company held 2,337,520 (2012: 2,427,794) shares which have been disclosed in the treasury reserve and these are excluded from the calculation of earnings per share.

± Restated to reflect the changes for revised IAS19.

Notes to the Financial Statements continued

4 Dividends

	2013 £000	2012 £000
Interim dividend for 2012 of 4.65p paid 2 January 2013	3,850	-
Final dividend for 2012 of 10.20p paid 1 July 2013	8,450	-
Interim dividend for 2011 of 4.30p paid 3 January 2012	-	3,544
Final dividend for 2011 of 9.85p paid 2 July 2012	-	8,119
	12,300	11,663

The final proposed dividend of 10.65p per share (2012: 10.20p per share) will not be provided for until authorised by shareholders at the forthcoming AGM.  There are no income tax consequences.

Interim dividends of 4.65p per share (2012: 4.65p per share) are provided for when the dividend is paid.  The dividend was paid on 2 January 2014 and totalled £3,856,000.

The total value of dividends proposed but not recognised at 31 December 2013 is £12,688,000 (2012: £12,300,000).

5. Additional information

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2013 or 2012 but is derived from those accounts. Statutory accounts for 2012 have been delivered to the registrar of companies, and those for 2013 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 2014 and will be displayed on the company's website at www.headlam.com early April 2014.  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 preliminary announcement of results for the year ended 31 December 2013 was approved by the board on

7 March 2014.

 

END

 

 

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