Final Results
5 March 2020
Headlam Group plc
('Headlam' or the 'Company')
Final Results
Headlam Group plc (LSE: HEAD), Europe's leading floorcoverings distributor, is pleased to announce its final results for the year ended 31 December 2019.
Highlights:
Financial¹
· Revenue increased by 1.5% to £719.2 million (2018: £708.4 million) despite a soft market backdrop and weakness in the UK residential sector
· Like-for-like² revenue increased by 0.3% and 3.2% in the UK and Continental Europe respectively, resulting in an overall like-for-like² revenue increase of 0.7%
· Gross margin of 31.9% (2018: 32.3%) was fairly resilient despite the expected shift in business mix towards the commercial sector as a result of market conditions
· Underlying³ distribution costs and administrative expenses were marginally up at £187.3 million (2018: £184.8 million, not restated), and flat as a proportion of revenue (2019: 26.0%; 2018: 26.1%)
· U nderlying³ operating profit of £42.2 million (2018: £44.3 million, not restated) and statutory operating profit of £38.3 million (2018: £41.3 million, not restated) were lower than 2018 and in-line with guidance given in January 2019
· U nderlying ³ profit before tax of £39.5 million (2018: £43.4 million, not restated) and statutory profit before tax of £35.2 million (2018: £40.4 million, not restated)
· Cash generation remained strong, with cash generated from operations representing 146% of statutory operating profit, equating to 107% (2018: 121%, not restated) after adjusting for the IFRS 16 lease principal repayments
· Net funds of £27.0 million at year-end (2018: £36.7 million) following an increase in net cash outflows, including £13.4 million outflow on new Ipswich regional distribution centre
· Final ordinary dividend maintained at 17.45 pence per share (2018: 17.45 pence per share) giving a full year dividend of 25.00 pence per share (2018: 25.00 pence per share), in-line with previous guidance
Operational
· Strategic focus on improving, growing and broadening position within the floorcoverings industry
· Scope of ongoing operational improvement programme enlarged, with the constituent projects designed to grow revenue and improve the customer service proposition, operating performance and margin
o Roll-out of inventory management and automated stock re-ordering system completed as planned in 2019, with benefits including improved product availability and warehouse capacity becoming increasingly evident
o Trial successfully completed in 2019 under the transport consolidation project, with phased roll-out stage now commenced ultimately leading to a decrease in the cost to serve
o New regional distribution centre in Ipswich remains on track, with the facility due to become operational next month at a total cost of approximately £26.0 million
· ISO 45001:2018 accreditation, the world's first international standard for occupational health and safety management, achieved across all 18 UK national distribution hubs and regional distribution centres
Current Trading and Outlook
· No direct impact from the spread of Coronavirus to date, with mitigation plans in place supported by extensive inventory position and large geographical spread of suppliers
· Continue to anticipate 2020 financial performance to show a modest improvement compared with 2019 despite trading to date in 2020 being marginally below the Board's expectations
Steve Wilson, Chief Executive, said:
"Against a backdrop of general softness in the market, it was encouraging to have recorded revenue growth on both an absolute and like-for-like² basis during the year and, despite the reduced profit performance in-line with the guidance we gave in January 2019, maintained the full year dividend with that of 2018.
"We have in place a strategy that will support the delivery of revenue growth and an improvement to both customer service and profitability, and are pleased with the enlarged scope and increasing momentum of the supporting activities.
" Trading to date in 2020 has been marginally below the Board's expectations. Nevertheless, subject to no deterioration in market conditions or disruption, we continue to anticipate that this year's financial performance will show a modest improvement compared with 2019. "
A meeting for analysts will be held at 10.00am this morning (5 March 2020) at the offices of Buchanan, 107 Cheapside, London EC2V 6DN. For further details, please contact Buchanan on 020 7466 5000 or email headlam@buchanan.uk.com .
¹ The final results for the year ended 31 December 2019 have been prepared in accordance with International Financial Reporting Standards and, therefore, reflect the new IFRS 16 'Leases' accounting standard ('IFRS 16') effective for financial periods beginning on or after 1 January 2019. As the Company has adopted the modified retrospective approach, there has been no restatement of the comparatives for the 2018 reporting period. The impact on the Company's financial statements is summarised in the Chief Executive's Review and Financial Review and impacts the Income Statement, Cash Flow Statement and Statement of Financial Position. There is no overall impact on the Company's cash and cash equivalents.
² Like-for-like revenue is calculated based on constant currency from activities and businesses that made a full contribution in both the 2019 and 2018 periods and is adjusted for any variances in working days.
³ Underlying is before non-underlying items which includes amortisation of acquired intangible assets, impairment of goodwill, acquisition related fees and associated restructuring costs, movements in deferred and contingent consideration, finance costs on deferred and contingent consideration, non-recurring pension costs in relation to guaranteed minimum pension ('GMP') equalisation, and non-recurring costs relating to senior personnel changes.
Enquiries:
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Headlam Group plc |
Tel: 01675 433 000 |
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Steve Wilson, Chief Executive Chris Payne, Chief Financial Officer Catherine Miles, Director of Communications |
Email: headlamgroup@headlam.com |
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Investec Bank plc (Corporate Broker) |
Tel: 020 7597 5970 |
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David Flin / Alex Wright |
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Panmure Gordon (UK) Limited (Corporate Broker) |
Tel: 020 7886 2500 |
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Erik Anderson / Dominic Morley / Ailsa Macmaster |
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Buchanan (Financial PR and IR) |
Tel: 020 7466 5000 |
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Mark Court / Toto Berger |
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Notes for Editors:
Operating for 28 years and employing 2,575 people as at 31 December 2019, Headlam is Europe's leading floorcoverings distributor.
Headlam provides the distribution channel between suppliers and trade customers of floorcoverings. Working in partnership with suppliers across the globe manufacturing a diverse range of floorcovering products and ancillary accessories, Headlam provides an unparalleled route to market for their products across the UK and certain Continental European territories.
The utilisation of an outsourced distribution channel enables manufacturers to focus on their core activities, incur reduced costs associated with distribution, and benefit from localised sales, marketing and distribution expertise that provides a more effective and greater route to market for their products.
To maximize customer and market penetration, and reflecting the regionalised nature of the marketplace, Headlam comprises 67 individual businesses in the UK and Continental Europe (France, the Netherlands and Switzerland) each operating under their own unique trade brand and utilising individual sales teams.
Headlam's extensive customer base, operating within both the residential and commercial sectors and comprising principally independent retailers and flooring contractors, receives the broadest product offering supported by next day delivery as well as additional marketing and other support.
Headlam's offering is enabled through its unrivalled operating expertise, long-established supplier and customer relationships, and comprehensive distribution network. Following years of considerable investment, Headlam's distribution network currently comprises four national distribution hubs, 19 regional distribution centres and a supporting network of smaller warehouse premises, trade counters, showrooms and specification centres.
In 2019, Headlam worked with 190 suppliers from 19 countries and fulfilled 5.3 million customer orders.
Chairman's Statement
Against a backdrop of general softness in the market, it was encouraging to have recorded revenue growth on both an absolute and like-for-like² basis during the year and, despite the previously guided reduced profit performance compared with 2018, propose a final ordinary dividend in-line with the Board's previously stated intention to maintain the full year dividend with that of 2018.
Notwithstanding this performance, the market conditions that have been evident over the past two years combined with ongoing cost inflation have underscored the need for the business to become more effective and efficient in order to deliver higher levels of growth and improved performance.
Despite being a market-leader with unparalleled expertise and scale, there is still much we can do to improve, grow and broaden our position within the floorcoverings industry. In-line with this intent, we have introduced considerable additional expertise into the business and, over the past twelve months, have focused on reviewing and refining our strategy and the associated strategic objectives.
The strategic objectives support the delivery of revenue growth, a broadened position in the market, and an improvement to both customer service and margin. These objectives build upon our industry-leading position, and are intended to provide the basis for long-term sustainable growth.
The ongoing operational improvement programme is a key enabler of our strategy and strategic objectives, and the programme continues to be developed, enhanced in scope, implemented and rolled-out through a number of constituent and holistic projects. As well as leading to an increasingly positive impact on the Company's financial performance through revenue growth and margin improvement, it is designed to benefit all stakeholders, including our people through more efficient working processes, suppliers through increased and more productive collaboration, and customers through an enhanced service proposition including improved product availability and delivery.
We believe that a sustainable business is one which employs strong and well-defined Environmental, Social and Governance ('ESG') practices, and our strategic objectives and the supporting operational improvement programme will allow a more concerted focus and measurement of our ESG practices, particularly in the area of the safety and wellbeing of our people and the mitigation of our impact on the environment. 2019 saw the establishment of our Employee Forum strengthening engagement with our workforce and providing another mechanism from which to directly seek and act on employee feedback. The transport consolidation project, part of the operational improvement programme, provides a clear roadmap for a reduction in the commercial vehicles needed to service local areas and the attendant positive impact on the environment and communities due to lower carbon emissions and vehicle movements.
We are committed to continuing to invest in the business to support its sustainability and future success. Following on from 2019, and as previously announced, we have a substantial level of investment planned in 2020 to support our growth and improvement objectives. A highlight of 2020 will be the opening of our new regional distribution centre in Ipswich after a total capital investment of £26 million, with the centre supporting and improving customer service throughout the South East of England while enabling greater network and operational efficiency.
With a backdrop of clearly defined strategic objectives and the ever-increasing momentum and scope of our activities to support their delivery, we are increasingly optimistic in our ability to build upon and grow our leading position and deliver an associated improvement in financial performance.
I wish to thank all our colleagues for their ongoing hard work and commitment.
Philip Lawrence
Non-Executive Chairman
5 March 2020
Chief Executive's Review
2019 Financial Performance
As per the guidance we gave in January 2019, we have reported a profit performance below that of 2018, with this reduction attributable to a number of factors including market conditions, ongoing cost inflation and regulatory requirements associated with accounting standards, all of which are detailed below.
It was reassuring that we were able to deliver results in-line with our January 2019 guidance, including a maintained dividend, given the backdrop of economic and political uncertainty and associated weak market that prevailed in the UK throughout the year, with the business demonstrating a degree of underlying resilience. In a soft market, which could have impacted us more greatly, we were able to maintain our trading performance throughout the year and additionally achieve some revenue growth on both an absolute and like-for-like basis.
Total revenue grew 1.5% to £719.2 million (2018: £708.4 million) with growth in Continental Europe outperforming that of the UK, at 4.5% and 1.0% respectively, and leading to the UK accounting for a slightly reduced 84.8% of total revenue (2018: 85.3%). Following a like-for-like² increase of 3.2% in Continental Europe and 0.3% in the UK, total like-for-like² revenue growth was 0.7%.
Reflective of the weak UK residential sector and overall soft market conditions that have persisted since 2018, there was a continuation of the gradual shift in overall business mix towards the commercial sector which has proven to be the more resilient UK revenue stream. Conversely, in Continental Europe, the residential sector performed better than the commercial sector so, when combined with the marginal decline in UK residential performance, this resulted in total residential sector revenue being flat. In 2019, the residential sector accounted for a reduced 63.7% of total revenue (2018: 64.6%; 2017: 67.9%).
Despite the shift in business mix towards the lower-margin commercial sector, the gross margin was fairly resilient year-on-year at 31.9% (2018: 32.3%) and supported by ongoing pricing discipline across the group.
As described in detail within the Financial Review, the new IFRS 16 'Leases' accounting standard ('IFRS 16') became effective in the financial year, positively impacting reported operating profit while reducing reported profit before tax and, therefore, having a marginally adverse impact on earnings per share. The Company adopted the modified retrospective approach and, therefore, there is no restatement of the 2018 comparatives. Underlying operating profit and underlying profit before tax was £42.2 million (2018: £44.3 million) and £39.5 million (2018: £43.4 million) respectively. This performance was in-line with the Company's guidance at the beginning of 2019 that, due to the anticipated and aforementioned movement in revenue mix and associated margin, and early-stage contributions from the operational improvement programme not yet able to fully offset year-on-year inflationary cost pressures, underlying profit performance would be lower year-on-year.
However, we stated at the same time that despite the lower profit guidance, the Board intended to maintain the 2019 dividend in-line with that of 2018, being reflective of the Board's confidence in the Company's ability to improve future profitability.
The following paragraphs provide detail on the strategy and associated activities which will support the delivery of this improvement, as well as detail on the declared and proposed maintained dividend for 2019.
Strategy and Operational Improvement Programme
As referred to in the Chairman's Statement, while we hold a leading position in our industry, there is much we can do to improve, grow and broaden our business. We remain underweight in certain product categories, customer groups and market segments which present both revenue and margin growth opportunities. Additionally, further revenue opportunity lies in improving our service proposition to customers, particularly in the areas of product availability and differentiation and tailored propositions for different customer groups.
Improvement is achieved by making the business more effective and efficient, which in tandem with revenue growth drives margin enhancement with a greater percentage of revenue drop-through to profit on our fairly fixed cost base. Our improvement activity encompasses greater collaboration with suppliers to improve buying and production scheduling, which in turn supports the increased product availability initiative, transport and delivery consolidation projects which reduce distribution costs, greater network optimisation, and the introduction of more efficient operating processes which additionally benefits our people and the environment.
The above aims form the basis of our strategy and strategic objectives which are supported by ongoing investment in people and capability, processes and the distribution network.
During 2019, considerable resource was focused on evaluating, developing and implementing the ongoing operational improvement programme which is a key enabler of our strategic objectives and designed to improve the customer service proposition, operating performance and margin. Much has been achieved in establishing the various constituent projects, which have additionally grown in scope, with their ongoing implementation and roll-out leading to an increasingly positive impact on financial performance.
The contribution from the operational improvement programme's earlier stage projects, largely in the area of a group procurement approach to goods not for resale and the extension of commercial and motor vehicle leasing contracts, amounted to over £1.0 million in 2019. This enabled us to offset general non-employee related year-on-year inflationary pressures during the year. This benefit is now embedded in the business and it is anticipated that the continued introduction, implementation and roll-out of various other projects during 2020 will provide an additional year-on-year benefit to the Company of approximately £1.0 million in 2020. This cost benefit will cover the additional investment required in the year to deliver on the constituent projects. 2021 and beyond is then anticipated to deliver progressive net contributions from the projects and overall programme to benefit operating margin. It is our overarching aim to enable the Company to consistently outperform the cyclical nature of the market in which we operate, establishing a higher level of growth and sustainably improving operating margin.
Of the constituent projects within the operational improvement programme, the roll-out of the inventory management and automated stock-reordering system to all UK sites was completed as planned at the end of 2019 with the benefits of improved product availability, stock-turn, warehouse capacity and improved supplier production scheduling becoming increasingly evident across the group. The transport consolidation project, focused around more effective delivery fleet utilisation, continues to be progressed following the successfully completed trial in South Wales during 2019 which validated the project. We have now moved to the phased roll-out stage, with this enabling a fuller quantification and realisation of a decrease in the cost to serve through an increased number of order drops per commercial vehicle combined with a reduction in the number of vehicles needing to service a local area. This project is not just of significance operationally and financially, but will additionally reduce our impact on the environment and local communities in which we operate through reduced transport emissions, air pollution and vehicle movements. Other projects centred upon enhancing customer service, including better tailored support and fulfilment propositions for different customer groups, is being supported by work undertaken in the area of customer insight and the resource added in the areas of operational support and customer engagement.
Our new regional distribution centre in Ipswich, described in detail below and due to be operational next month, is another key component in improving our performance through enabling greater network optimisation, operational efficiency, and improved customer service throughout the South East of England. Following the build-up of operations after its opening in Easter 2020, it is expected to become earnings enhancing during 2021.
We are pleased with the enlarged scope and increasing momentum of the operational improvement programme and its constituent projects following the considerable focus and attention deployed on fully defining and developing them throughout 2019 and into 2020. The programme provides a broad foundation for the delivery of an improving operating margin.
Investments and Capital Expenditure
2019 incorporated a planned substantial level of investment to support future growth and improved operational and financial performance, and as previously announced this will be continued in 2020.
Capital investment of £15.5 million was incurred during 2019 in relation to our new 190,000 square feet regional distribution centre in Ipswich, which remains on-track in terms of both cost and timing. The state-of-the-art facility with 10.6 million cubic feet of capacity is expected to become operational next month at a total cost of approximately £26.0 million, with the final tranche of £10.0 million being incurred during 2020 and forming the majority of the capital investment planned for the year.
The opening of the Ipswich distribution centre is an important milestone for us, and it would be an understatement to say it has been some years in the planning. I would like to thank everyone who has helped deliver this significant project for the group.
Acquisitions
We made one acquisition during the year, completing the purchase of the trade and assets of Edel Telenzo Carpets Ltd. ('Telenzo') in October 2019. Telenzo is the nationwide UK distribution company for Edel Carpets, a modern carpet producer located in the Netherlands owned by Condor Group, and is renowned for its wool tufted carpets and high-quality man-made fibre carpets for residential and commercial use. The business's operations were consolidated into our Tamworth distribution hub during 2019 creating operational efficiencies and continues to be operated day-to-day by its existing sales management team under its own trade brand.
Post the period-end, in March 2020, we completed the acquisition of Supertex Furnishing Limited ('Supertex') for a total consideration of £1.3 million, subject to finalising the net assets position. This acquisition enlarges our residential sector activities in the North West of England, a competitive region of the UK, and Supertex's main operations will eventually move to our existing premises in Stockport creating operating efficiencies.
We continue to monitor a targeted pipeline of acquisitions in-line with our strategic objectives of achieving meaningful growing and a broadened presence in the wider industry, including through product categories and market segments, and remain receptive to further opportunities.
People
As referred to in the Chairman's Statement, a wealth of additional experience and new expertise has been introduced into the business to help delivery of our strategic objectives. In addition to a fully assembled Board and Executive Team, we have made several key project manager and customer focused appointments to support the constituent projects of the operational improvement programme, and I am delighted to welcome them all to Headlam.
An ongoing priority is the continued development of a positive workplace culture, and we introduced a number of new forms of workforce engagement in 2019 as well as formulating a clear set of values and behaviours that will be utilised and embedded across the business. One of our core values is 'we keep people safe' and as part of this we undertook both internal and external assessments of our health and safety practices throughout 2019. Following a series of external audits, we were delighted that in October 2019, all the Company's UK national distribution hubs and regional distribution centres were certified as meeting the requirements of ISO 45001:2018, the world's first international standard for occupational health and safety management.
Dividend
In-line with the Board's previously stated intention to maintain the 2019 full year dividend with that of 2018, the Board has proposed a final ordinary dividend of 17.45 pence per share (2018: 17.45 pence per share) bringing the total ordinary dividend declared and proposed in respect of 2019 to a maintained 25.0 pence per share (2018: 25.0 pence per share). If approved by shareholders at the forthcoming AGM in May 2020, the final ordinary dividend will be payable on 1 July 2020 to shareholders on the register as at 5 June 2020.
Current Trading and Outlook
The spread of Coronavirus (COVID-19) has currently had no direct impact on our people, inventory position or customers. We have extensive inventories, breadth of product and a large geographical spread of suppliers. We continue to monitor the situation, put in place mitigation plans, and are communicating with our stakeholders as necessary.
Trading to date in 2020 has been marginally below the Board's expectations. Nevertheless, subject to no deterioration in market conditions or disruption, we continue to anticipate that this year's financial performance will show a modest improvement compared with 2019 as advised in the January 2020 Pre-Close Trading Update announcement. In-line with the Company's commitment to a progressive dividend policy, it is the Board's intention to reflect any increase in statutory basic EPS for 2020 in the 2020 full year dividend.
Steve Wilson
Chief Executive
5 March 2020
Financial Review
IFRS 16 'Leases' Accounting Standard
These results have been prepared in accordance with International Financial Reporting Standards and, therefore, include the new IFRS 16 'Leases' accounting standard ('IFRS 16') effective for financial periods beginning on or after 1 January 2019. As the Company has adopted the modified retrospective approach, there has been no restatement of the comparatives for the 2018 reporting period. The impact on the Company's Income Statement and Statement of Financial Position is summarised below and further detailed in Note 6. There is no overall impact on the Company's cash and cash equivalents.
Summary tables of impact of IFRS 16 adoption
Impact on the Income Statement | Financial year ended 31 December 2019 | |
| Under new IFRS 16 standard £000 | Under previous standard £000 |
Costs charged to operating profit | 15,260 | 16,375 |
Interest expense | 1,688 | - |
Total costs charged to the income statement | 16,948 | 16,375 |
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Net impact and effect on statutory basic earnings per share | 573 | 0.6 pence |
Impact on the Statement of Financial Position | As at 1 January 2019 | |
| £000 | |
Operating lease commitments as disclosed at 31 December 2018 | 50,436 | |
Additional liabilities on adopting IFRS 16* | 4,065 | |
Discount effect | (4,673) | |
Lease liability recognised at 1 January 2019 | 49,828 | |
Of which current liabilities | 13,930 | |
*See Note 6
Revenue
During the year and against the backdrop of a soft market, total revenue improved marginally by 1.5% from £708.4 million to £719.2 million, an increase of £10.8 million. Like-for-like² revenue increased in both the UK and Continental Europe, by 0.3% and 3.2% respectively, producing a total like-for-like² revenue increase of 0.7% (2018: total like-for-like² revenue decline of 3.8%).
UK
The Company's UK revenue performance, which accounted for 84.8% of total revenue, was £6.0 million up on 2018 at £610.2 million (2018: £604.2 million), reflecting a continued weak market backdrop particularly in the residential sector that has been evident over the last two years. The five UK acquisitions made during 2018 and 2019 added £6.6 million of revenue in 2019 and, therefore, excluding the impact of the acquisitions, revenue was almost flat.
The residential sector represented 65.1% of UK revenue in 2019 (2018: 66.3%), representing a reduction of 0.8% and 1.4% on an absolute and like-for-like² basis respectively. As a consequence, there was a continued shift in the business mix towards the commercial sector which has been the more resilient business stream, representing 34.9% of UK revenue in 2019 (2018: 33.7%; 2017: 29.6%). The year-on-year commercial revenue increase on an absolute and like-for-like² basis was 4.6% and 3.8% respectively.
Continental Europe
The Continental European businesses growth outperformed the UK, delivering a 4.5% increase in revenue to £109.0 million, with a 3.2% increase on a like-for-like² basis. Continental Europe accounted for 15.2% of total revenue in 2019, up from 14.7% in 2018. In contrast to the UK, the weighting between the residential and commercial sector revenue showed a movement towards residential which performed more strongly with 5.9% like-for-like² growth and now accounting for 56.0% of revenue (2018: 54.7%; 2017: 52.6%). The commercial sector was essentially flat during the period on a like-for-like² basis.
| £000 | % | £000 | % |
Revenue for the year ended 31 December 2018 |
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UK | 604,150 | 85.3 |
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Continental Europe | 104,273 | 14.7 |
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| 708,423 | 100.0 |
Incremental items during the 12-month period to 31 December 2019 |
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UK: |
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Like-for-like² | 1,897 | 0.3 |
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One less working day | (2,396) | (0.4) |
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Acquisitions | 6,591 | 1.1 |
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| 6,092 | 1.0 |
Continental Europe: |
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Like-for-like² | 3,157 | 3.2 |
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Changes in working days | (642) | (0.6) |
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Acquisitions | 2,562 | 2.5 |
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Translation effect | (355) | (0.4) |
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| 4,722 | 4.5 |
Total movement |
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| 10,814 | 1.5 |
Revenue for the year ended 31 December 2019 |
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UK | 610,242 | 84.8 |
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Continental Europe | 108,995 | 15.2 |
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| 719,237 | 100.0 |
²Like-for-like revenue is calculated based on constant currency from activities and businesses that made a full contribution in both the 2019 and 2018 periods, and is adjusted for any variances in working days.
Gross Margin
Gross margin reduced by 40 basis points in the year from 32.3% to 31.9%. This was due, in part, to the shift in product mix towards the lower margin commercial sector as a result of the weakness in the UK residential sector, with the balance arising from general pricing movement and the one-off prior year benefit resulting from the trade creditor early settlement discount disclosed in the 2018 financial results.
Expenses
Combined distribution costs and administrative expenses were marginally up on both an underlying and statutory basis year-on-year, at £187.3 million and £191.1 million respectively, although this included a £1.1 million reduction benefit due to the reclassification of costs under IFRS 16 adoption (2018: £184.8 million and £187.7 million respectively, not restated). The increase was driven by one acquisition in the year, detailed below, and the full year impact of acquisitions made in 2018 offset by reductions in vehicle expenses. People costs were largely flat year-on-year (excluding the effects of acquisitions), however, this includes a reduction in pension costs largely related to the defined benefit schemes, a reduction in share-based payments, and a reduction in the number of employees of 40, offset by a 2% cost of living award and the restoration of performance target bonuses. The primary contributors to the early phases of the operational improvement plan were the group procurement initiatives on goods not for resale and the extension of commercial and motor vehicle leasing contracts delivering an accumulated cost saving of over £1.0 million in 2019 which compensated for inflationary pressures elsewhere.
Underlying distribution costs and administrative expenses expressed as a proportion of total revenue was essentially flat compared with 2018 at 26.0% (2018: 26.1%), and relative proportions of distribution costs and administrative expenses as a percentage of total underlying expenses for 2019 remained largely consistent at 72.5% and 27.5% respectively (2018: 72.7% and 27.3%, not restated).
Items totalling £4.3 million (net) have been treated as non-underlying in 2019 (2018: £2.9 million). These non-underlying items related to the amortisation of acquired intangible assets and impairment of goodwill (£3.5 million), acquisition related fees and associated restructuring costs (£0.7 million), the movements in deferred and contingent consideration (reducing by £0.3 million), and finance costs on deferred and contingent consideration (£0.4 million). These are discussed in detail in Note 1 and referred to below.
| Total expenses |
| Distribution |
| Administration | |||
| £000 | % | £000 | % | £000 | % | ||
Expenses for 2018 (not restated) | 187,743 |
| 134,316 | 71.5 | 53,427 | 28.5 | ||
Significant movements in 2019: |
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People cost | 136 | 3.9 | 1,185 | 78.4 | (1,049) | (52.2) | ||
Vehicle expenses | (1,564) | (44.4) | (1,651) | (109.2) | 87 | 4.3 | ||
Legal and professional | 1,191 | 33.8 | - | - | 1,191 | 59.2 | ||
Occupancy costs | 626 | 17.8 | - | - | 626 | 31.1 | ||
Effect of acquisitions | 1,888 | 53.6 | 1,247 | 82.4 | 641 | 31.9 | ||
Impact of IFRS 16 | (1,116) | (31.7) | - | - | (1,116) | (55.5) | ||
Other | 1,420 | 40.3 | 731 | 48.4 | 689 | 34.2 | ||
Underlying sub total | 2,581 | 73.2 | 1,512 | 100.0 | 1,069 | 53.1 | ||
Non-underlying | 943 | 26.8 | - | - | 943 | 46.9 | ||
Total before currency translation | 3,524 | 100.0 | 1,512 | 100.0 | 2,012 | 100.0 | ||
Currency translation | (124) |
| (90) |
| (34) |
| ||
Expenses for 2019 | 191,143 |
| 135,738 | 71.0 | 55,405 | 29.0 | ||
Operating Profit
As a consequence of the weak market backdrop contributing to relatively flat like-for-like² revenue growth and a slight reduction in gross margin, absolute gross profit was flat year-on-year at £229.4 million (2018: £229.1 million) despite a year-on-year £2.7 million gross profit benefit from acquisitions. Therefore, after factoring in the £2.5 million increase in underlying expenses largely arising from the acquisitions, underlying operating profit was down £2.1 million on 2018 at £42.2 million (2018: £44.3 million, not restated) with an underlying operating margin of 5.9% (2018: 6.2%, not restated). Statutory operating profit was £38.3 million (2018: £41.3 million, not restated).
| Underlying | Non-underlying | Total |
| £000 | £000 | £000 |
Operating profit 2018 (not restated) | 44,273 | (2,942) | 41,331 |
Gross margin improvement in 2019: |
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Volume benefit | 532 | - | 532 |
Mix change | (660) | - | (660) |
Pricing movement | (1,174) | - | (1,174) |
Anticipated trade creditor settlement discount | (1,049) | - | (1,049) |
Effect of acquisitions | 2,689 | - | 2,689 |
| 338 | - | 338 |
Expense changes |
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|
Distribution | (175) | - | (175) |
Administration | (394) | (943) | (1,337) |
Effect of acquisitions | (1,888) | - | (1,888) |
Total increase | (2,457) | (943) | (3,400) |
Operating profit 2019 | 42,154 | (3,885) | 38,269 |
Profit and EPS
The adoption of IFRS 16 impacted underlying profit before tax and statutory basic earnings per share through a reduction of £0.6 million and 0.6 pence respectively. Underlying profit before tax was £39.5 million (2018: £43.4 million, not restated), statutory profit before tax was £35.2 million (2018: £40.4 million, not restated) and statutory basic earnings per share 34.0 pence (2018: 40.0 pence, not restated). Statutory profit before tax and statutory basic earnings per share were further impacted by a goodwill impairment described below.
Tax
The underlying effective tax rate for 2019 was 17.4% (2017: 17.9%) which is lower than the headline rate of corporation tax in the UK of 19.0%. This difference is largely due to an adjustment in recognising deferred tax assets relating to the Headlam BV business in the Netherlands and a reassessment of the need to provide for uncertain tax positions following the ongoing review of tax risks in the Company. The full effective rate of tax in 2019 was 18.8% (2018: 17.2%), up on 2018 due to the effect of the non-underlying items.
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'. HM Revenue & Customs advised in September 2019 that the Company's low risk rating had been renewed for another three years.
Ordinary Dividends
When declaring the interim and recommending the final ordinary dividend, the Board considers the Company's cash resource, adequacy of distributable reserves and future expectations of performance.
The total ordinary dividend payable in respect of 2019 equates to an earnings per share cover ratio of 1.4 (2018: 1.6, not restated), cash outflow of £20.9 million, and reflects a free cash flow (cash from operating activities less capital equipment spend) cover ratio of 1.2 (2018: 1.7) reflecting the expenditure on the Ipswich facility during the year, detailed below.
Dividend announcements, approvals and payments are typically expected to be as follows:
|
|
| Approximate |
Dividend | Status and date announced | Approval | payment date |
Ordinary interim | Declared August | The Board August | January in the year following announcement |
Ordinary final | Recommended | AGM by shareholders |
|
| March | May | July |
Acquisitions, Related Goodwill and Other Intangible Assets
The Company completed one acquisition during the year, purchasing the trade and assets of Edel Telenzo Carpets Ltd. ('Telenzo') for a total consideration of £2.1 million, with the business contributing revenue of £1.7 million and an operating profit of £0.3 million in the year. The acquired assets included intangible assets of £0.9m which were attributed to brand name, customer relationships and supply agreements with residual goodwill of £0.3m. During the year, £25,000 of intangibles were amortised in the Income Statement.
The Company acquired five businesses in 2018, and the fair values of the assets and liabilities acquired were reconsidered for 2019 as part of the hindsight period, with no adjustment considered necessary. One of the businesses, CECO (Flooring) Ltd ('CECO'), a leading specification business based in Carryduff, south of Belfast, outperformed management expectations and as a result the outstanding contingent consideration under the terms of the acquisition was paid in full during the year. This led to a reversal of part of the discounting applied on the original acquisition and a total consideration payment above that provided on acquisition due to the strength of the business performance. These amendments are included as non-underlying items in the income statement.
Domus Group of Companies Limited ('Domus') was acquired in December 2017, and during 2019 deferred consideration of £1.6 million became payable which was partly satisfied by the issue of 88,350 new ordinary shares of 5 pence each in the capital of the Company. The original contingent consideration relating to the acquisition has now been fully released to the income statement as a non-underlying credit since the likelihood of achieving the EBITDA criteria required to trigger any contingent consideration payments is considered to be very low. Additionally, based on the Board's assessment of the carrying value of the investment in the Domus business, a goodwill impairment of £2.1 million has been recognised within non-underlying items in the year. Due to its predominant focus on larger scale projects within the London area, the Domus business in particular has been adversely affected by the weak market backdrop and political and economic uncertainty that has prevailed over the last two years, and which has particularly impacted investment in the London market. Although the market is anticipated to recover, the Board felt it prudent to take a more cautious view on the revenue recovery in Domus and hence to take a write-down reflecting an impairment in the carrying value as at the 31 December 2019. This assessment is sensitive to assumptions used by the Board in reviewing the carrying value and they are disclosed in more detail in the Financial Statements.
Retirement Benefits
The Company operates two defined benefit pension schemes, in the UK and in Switzerland, the assets and liabilities of which are dominated by the UK scheme which is closed to new members.
The year-on-year decrease in the net liability amounts to £1.6 million. This was mainly caused by the changes in the UK scheme's financial assumptions, where 70% of retiring members are now assumed to commute their pensions by taking the maximum tax-free cash element allowed (2018: nil), salary and pension increases are assumed to rise in-line with RPI (3.1%, 2018: 3.4%), a 0.7% decrease in the discount rate to 2.0%, together with positive changes in the scheme's asset performance.
The Company reviewed its pension arrangements in 2019, and in particular the future build-up of final salary benefits in its UK Defined Benefit Pension Scheme ('UK DB Scheme'). As stated above, the Company closed the UK DB Scheme to new entrants many years ago. Since then, new employees have been eligible to join the Defined Contribution Pension Plan. The Company wishes to provide sustainable and competitive pension benefits for all its employees, and during 2019 consultation began on the closure of the UK DB Scheme to future accruals, with its closure from the end of March 2020 reducing an area of risk and volatility for the Company and providing fairer pension provision across the workforce. Various adjustments were made in response to feedback from affected members following the consultation, including adjustments to ongoing benefits and the date of closure of the scheme. Affected members will automatically be enrolled into the Company's Defined Contribution Pension Plan.
Capital Allocation, Investment Decisions and Return on Capital
The Board is committed to ensuring the efficient allocation of capital, with a clear strategy for sustainable growth, with controls in place to govern capital expenditure and working capital.
The Board routinely reviews organic growth opportunities and associated investment, value enhancing acquisitions, and shareholder returns to ensure the Company deploys an optimal capital structure. Such investment opportunities are subject to both internal rate of return and cash flow payback criteria, regularly reviewed by the Company to ensure consistency of assessment.
Return on Capital Employed, measured as earnings before interest and taxes ('EBIT') as % of capital employed, in 2019 was 20.3% (2018: 23.2%, not restated).
Capital Expenditure
The Company incurred a replacement level of capital expenditure on its land and buildings of £0.2 million during the year (2018: £0.4 million), and capital expenditure on plant and machinery of £2.6 million (2018: £3.5 million).
Total capital expenditure on the new Ipswich regional distribution centre continues to be estimated to be in the region of £26.0 million, with £0.5 million spend incurred in 2018, £15.5 million incurred in 2019 (including land acquisition cost of £4.0 million), and the balance of £10.0 million in 2020.
Cash Flows
Net Cash Flow from Operating Activities
During the year, net cash flow from operating activities was £44.3 million (2018: £40.0 million) with the key drivers behind this positive cash flow generation shown below.
|
2019 |
2018 |
| £000 | £000 |
Cash flows from operating activities |
|
|
Profit before tax for the year | 36,169 | 40,447 |
Net finance cost | 3,100 | 884 |
Depreciation of property, plant and equipment, amortisation and impairment | 8,898 | 7,038 |
Depreciation of right of use asset | 15,260 | - |
Profit on sale of property, plant and equipment | (60) | (50) |
EBITDA | 62,367 | 48,319 |
Share-based payments | 807 | 1,478 |
Working capital changes | (7,213) | 209 |
Cash generated from the operations | 55,961 | 50,006 |
Interest paid | (3,407) | (1,426) |
Tax paid | (8,289) | (7,789) |
Additional pension contributions | - | (747) |
Net cash from operating activities | 44,265 | 40,044 |
Cash generated from operations remained strong in the year despite the weaker trading backdrop, being 146% of statutory operating profit and 107% (2018: 121% not restated) after adjusting for the principal elements of lease payments resulting from IFRS16 adoption.
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 £54.5 million, with the main factors being the dividends paid (£20.9m), investment in capital equipment (£15.8m), and the inclusion of lease payments for the right of use assets introduced following the adoption of IFRS 16.
| 2019 | 2018 |
| £000 | £000 |
Cash flows from investing activities |
|
|
Acquisition of subsidiaries, net of cash and debt acquired and repaid | (4,448) | (9,576) |
Acquisition of property, plant and equipment | (15,777) | (4,384) |
Proceeds from sale of property, plant and equipment | 130 | 403 |
Interest received | 857 | 601 |
|
|
|
|
|
|
Net cash from investing activities | (19,238) | (12,956) |
Cash flows from financing activities |
|
|
Shares acquired and issued | 825 | (4,764) |
Net movement on borrowings | (229) | 211 |
Principal elements of lease payments | (14,880) | - |
Dividends paid | (20,941) | (20,969) |
Net cash from financing activities | (35,225) | (25,522) |
Net Funds
Net funds at the year-end decreased to £27.0 million from £36.7 million in 2018 as a result of the net cash outflows arising from operating, investing and financing activities outlined above. During the year, this included net cash outflows totalling £15.3 million on the Ipswich distribution centre and Telenzo acquisition.
In both 2018 and 2019, the Company drew-down on its banking facilities during the year in-line with the normal swings in working capital. Average net debt in 2019 was £3.3 million (2018: £16.9 million net debt).
| At 1 January 2019 | Cash flows including acquisitions | Foreign exch/other movement | At 31 December 2019 |
| £'000 | £'000 | £'000 | £'000 |
Cash at bank and in hand | 44,005 | (10,403) | (217) | 33,385 |
Bank overdraft | (221) | 205 | 6 | (10) |
Debt due within one year | (236) | 229 | (215) | (222) |
Debt due after one year | (6,805) | - | 604 | (6,201) |
| 36,743 | 9,969 | 178 | 26,952 |
Funding and Going Concern
On 5 August 2019, the Company completed a refinancing of its existing banking facilities to extend their term from 14 December 2021 to 30 April 2023. The Company has maintained its two agreements with Barclays Bank PLC and HSBC Bank Plc, but decreased the level of Sterling committed facilities from £72.5 million to £68.5 million and increased its Euro committed facilities from €8.6 million to €9.6 million. The Company also has short-term uncommitted facilities which continue at £25.0 million, and are renewable on an annual basis. The total banking facilities available at 31 December 2019 were £109.7 million (2018: £112.8 million).
The Company maintains sufficient banking facilities to fund its operations and investments, and as at 31 December 2019, 94.1% of the total facilities were undrawn as shown below.
| Drawn | Undrawn | Total facility |
| £'000 | £'000 | £'000 |
Less than one year | 232 | 32,817 | 33,049 |
Over one year and less than five years | 6,201 | 70,421 | 76,622 |
| 6,433 | 103,238 | 109,671 |
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 12 months from the date of this Financial Review and it is appropriate to adopt the going concern basis in preparing the Company's Financial Statements.
Chris Payne
Chief Financial Officer
5 March 2020
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2019
|
|
| Non-underlying |
|
| Non-underlying |
|
|
| Underlying | (Note 1) | Total | Underlying | (Note 1) | Total |
|
| 2019 | 2019 | 2019 | 2018 | 2018 | 2018 |
| Note | £000 | £000 | £000 | £000 | £000 | £000 |
Revenue | 2 | 719,237 | - | 719,237 | 708,423 | - | 708,423 |
Cost of sales |
| (489,825) | - | (489,825) | (479,349) | - | (479,349) |
Gross profit |
| 229,412 | - | 229,412 | 229,074 | - | 229,074 |
Distribution costs |
| (135,738) | - | (135,738) | (134,316) | - | (134,316) |
Administrative expenses |
| (51,520) | (3,885) | (55,405) | (50,485) | (2,942) | (53,427) |
Operating profit | 2 | 42,154 | (3,885) | 38,269 | 44,273 | (2,942) | 41,331 |
Finance income |
| 821 | - | 821 | 709 | - | 709 |
Finance expenses |
| (3,515) | (406) | (3,921) | (1,593) | - | (1,593) |
Net finance costs |
| (2,694) | (406) | (3,100) | (884) | - | (884) |
Profit before tax |
| 39,460 | (4,291) | 35,169 | 43,389 | (2,942) | 40,447 |
Taxation | 3 | (6,877) | 277 | (6,600) | (7,750) | 807 | (6,943) |
Profit for the year attributable to the equity shareholders |
| 32,583 | (4,014) | 28,569 | 35,639 | (2,135) | 33,504 |
Earnings per share |
|
|
|
|
|
|
|
Basic | 4 | 38.8p |
| 34.0p | 42.5p |
| 40.0p |
Diluted | 4 | 38.6p |
| 33.8p | 42.2p |
| 39.6p |
Ordinary dividend per share |
|
|
|
|
|
|
|
Interim dividend for the financial year | 5 |
|
| 7.55p |
|
| 7.55p |
Final dividend proposed for the financial year | 5 |
|
| 17.45p |
|
| 17.45p |
All Group operations during the financial years were continuing operations.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2019
|
| 2019 | 2018 |
|
| £000 | £000 |
Profit for the year attributable to the equity shareholders |
| 28,569 | 33,504 |
Other comprehensive income/(expense) |
|
|
|
Items that will never be reclassified to profit or loss |
|
|
|
Remeasurement of defined benefit plans |
| 917 | 8,562 |
Related tax |
| (159) | (1,628) |
|
| 758 | 6,934 |
Items that are or may be reclassified to profit or loss |
|
|
|
Foreign exchange translation differences arising on translation of overseas operations |
| (549) | 540 |
|
| (549) | 540 |
Other comprehensive income for the year |
| 209 | 7,474 |
Total comprehensive income attributable to the equity shareholders for the year |
| 28,778 | 40,978 |
STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 2019
|
|
|
| |
|
| 2019 | 2018 |
|
| Note | £000 | £000 |
|
Assets |
|
|
|
|
Non-current assets |
|
|
|
|
Property, plant and equipment |
| 114,573 | 102,048 |
|
Right of use assets |
| 43,865 | - |
|
Intangible assets |
| 48,514 | 50,924 |
|
Investments in subsidiary undertakings |
| - | - |
|
Deferred tax assets |
| 692 | 516 |
|
|
| 207,644 | 153,488 |
|
Current assets |
|
|
|
|
Inventories |
| 132,474 | 132,704 |
|
Trade and other receivables |
| 123,705 | 119,007 |
|
Cash and cash equivalents |
| 33,385 | 44,005 |
|
|
| 289,564 | 295,716 |
|
Total assets | 2 | 497,208 | 449,204 |
|
Liabilities |
|
|
|
|
Current liabilities |
|
|
|
|
Bank overdraft |
| (10) | (221) |
|
Other interest-bearing loans and borrowings |
| (222) | (236) |
|
Lease liabilities |
| (13,921) | - |
|
Trade and other payables |
| (181,845) | (181,300) |
|
Income tax payable |
| (5,037) | (6,730) |
|
|
| (201,035) | (188,487) |
|
Non-current liabilities |
|
|
|
|
Other interest-bearing loans and borrowings |
| (6,201) | (6,805) |
|
Lease liabilities |
| (30,734) | - |
|
Trade and other payables |
| - | (2,592) |
|
Provisions |
| (2,299) | (2,249) |
|
Deferred tax liabilities |
| (7,608) | (8,063) |
|
Employee benefits |
| (4,263) | (5,888) |
|
|
| (51,105) | (25,597) |
|
Total liabilities | 2 | (252,140) | (214,084) |
|
Net assets |
| 245,068 | 235,120 |
|
Equity attributable to equity holders of the parent |
|
|
|
|
Share capital |
| 4,273 | 4,268 |
|
Share premium |
| 53,512 | 53,512 |
|
Other reserves |
| 1,334 | 185 |
|
Retained earnings |
| 185,949 | 177,155 |
|
Total equity |
| 245,068 | 235,120 |
|
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2019
|
|
| Capital |
|
|
| Restated * |
|
| Share | Share | redemption | Special | Translation | Treasury | Retained | Total |
| capital | premium | reserve | reserve | reserve | reserve | earnings | equity |
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 |
Balance at 1 January 2018 | 4,268 | 53,512 | 88 | - | 6,859 | (4,056) | 157,903 | 218,574 |
Profit for the year attributable to the equity shareholders | - | - | - | - | - | - | 33,504 | 33,504 |
Other comprehensive income | - | - | - | - | 540 | - | 6,934 | 7,474 |
Total comprehensive income for the year | - | - | - | - | 540 | - | 40,438 | 40,978 |
Transactions with equity shareholders, recorded directly in equity |
|
|
|
|
|
|
|
|
Share-based payments | - | - | - | - | - | - | 1,478 | 1,478 |
Share options exercised by employees | - | - | - | - | - | 2,579 | (1,518) | 1,061 |
Consideration for purchase of own shares | - | - | - | - | - | (5,825) | - | (5,825) |
Current tax on share options | - | - | - | - | - | - | 38 | 38 |
Deferred tax on share options | - | - | - | - | - | - | (169) | (169) |
Deferred tax on income and expenses recognised directly in equity | - | - | - | - | - | - | (46) | (46) |
Dividends to equity holders | - | - | - | - | - | - | (20,969) | (20,969) |
Total contributions by and distributions to equity shareholders | - | - | - | - | - | (3,246) | (21,186) | (24,432) |
Balance at 31 December 2018 | 4,268 | 53,512 | 88 | - | 7,399 | (7,302) | 177,155 | 235,120 |
Balance at 1 January 2019 | 4,268 | 53,512 | 88 | - | 7,399 | (7,302) | 177,155 | 235,120 |
Change in accounting policy (note 6) | - | - | - | - | - | - | (216) | (216) |
Restated total equity at 1 January 2019 | 4,268 | 53,512 | 88 |
- | 7,399 | (7,302) | 176,939 | 234,904 |
Profit for the year attributable to the equity shareholders | - | - | - |
- | - | - | 28,569 | 28,569 |
Other comprehensive (expense)/income | - | - | - | - | (549) | - | 758 | 209 |
Total comprehensive income for the year | - | - | - |
- | (549) | - | 29,327 | 28,778 |
Transactions with equity shareholders, recorded directly in equity |
|
|
|
|
|
|
|
|
Share-based payments | - | - | - | - | - | - | 807 | 807 |
Share options exercised by employees | - | - | - | - | - | 1,273 | (448) | 825 |
Ordinary shares issued | 5 | - | - | 469 | - | - | - | 474 |
Effect of movement on foreign exchange on current taxation | - | - | - | - | (44) | - | - | (44) |
Current tax on share options | - | - | - | - | - | - | 20 | 20 |
Deferred tax on share options | - | - | - | - | - | - | 245 | 245 |
Dividends to equity holders | - | - | - | - | - | - | (20,941) | (20,941) |
Total contributions by and distributions to equity shareholders | 5 | - | - | 469 | (44) | 1,273 | (20,317) | (18,614) |
Balance at 31 December 2019 | 4,273 | 53,512 | 88 | 469 | 6,806 | (6,029) | 185,949 | 245,068 |
* Retained earnings for the group were restated by a change in accounting policy arising from the adoption of IFRS 16 at 1 January 2019, see note 6.
CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2019
|
|
|
| |
|
| 2019 | 2018 |
|
|
| £000 | £000 |
|
Cash flows from operating activities |
|
|
|
|
Profit before tax for the year |
| 35,169 | 40,447 |
|
Adjustments for: |
|
|
|
|
Depreciation of property, plant and equipment, amortisation and impairment |
| 8,898 | 7,038 |
|
Depreciation of right-of-use asset |
| 15,260 | - |
|
Finance income |
| (821) | (709) |
|
Finance expense |
| 3,921 | 1,593 |
|
Profit on sale of property, plant and equipment |
| (60) | (50) |
|
Share-based payments |
| 807 | 1,478 |
|
Operating cash flows before changes in working capital and other payables |
| 63,174 | 49,797 |
|
Change in inventories |
| (572) | 1,563 |
|
Change in trade and other receivables |
| (4,725) | 12,524 |
|
Change in trade and other payables |
| (1,916) | (13,878) |
|
Cash generated from the operations |
| 55,961 | 50,006 |
|
Interest paid |
| (3,407) | (1,426) |
|
Tax paid |
| (8,289) | (7,789) |
|
Additional contributions to defined benefit plan |
| - | (747) |
|
Net cash flow from operating activities |
| 44,265 | 40,044 |
|
Cash flows from investing activities |
|
|
|
|
Proceeds from sale of property, plant and equipment |
| 130 | 403 |
|
Interest received |
| 857 | 601 |
|
Acquisition of subsidiaries, net of cash acquired |
| (4,448) | (9,141) |
|
Repayment of acquired borrowings on acquisition |
| - | (435) |
|
Acquisition of property, plant and equipment |
| (15,777) | (4,384) |
|
Net cash flow from investing activities |
| (19,238) | (12,956) |
|
Cash flows from financing activities |
|
|
|
|
Proceeds from the issue of treasury shares |
| 825 | 1,061 |
|
Payment to acquire own shares |
| - | (5,825) |
|
Drawdown of borrowings |
| 45,000 | 45,443 |
|
Repayment of borrowings |
| (45,229) | (45,232) |
|
Principal elements of lease payments |
| (14,880) | - |
|
Dividends paid |
| (20,941) | (20,969) |
|
Net cash flow from financing activities |
| (35,225) | (25,522) |
|
Net (decrease)/increase in cash and cash equivalents |
| (10,198) | 1,566 |
|
Cash and cash equivalents at 1 January |
| 43,784 | 42,030 |
|
Effect of exchange rate fluctuations on cash held |
| (211) | 188 |
|
Cash and cash equivalents at 31 December |
| 33,375 | 43,784 |
|
NOTES
1 Non-underlying items
In order to illustrate the underlying trading performance of the Group, presentation has been made of performance measures excluding those items which it is considered would distort the comparability of the Group's results. These non-underlying items are defined as those items that, by virtue of their nature, size or expected frequency, warrant separate additional disclosure in the financial statements in order to fully understand the underlying performance of the Group.
Non-underlying items of £4,291,000 relate to the following:
| 2019 | 2018 |
| £000 | £000 |
Impairment of goodwill | 2,100 | - |
Amortisation of acquired intangibles | 1,424 | 1,763 |
Acquisitions related fees and associated restructuring costs | 686 | 513 |
Movements in deferred and contingent consideration | (325) | (1,384) |
Finance costs on deferred and contingent consideration | 406 | - |
Non-recurring people costs | - | 836 |
GMP equalisation | - | 1,214 |
| 4,291 | 2,942 |
The related tax on these costs, of £277,000.
2 Segment reporting
As at 31 December 2019, the Group had 62 operating segments in the UK and four 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. 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 considers 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 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 | |||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||
| £000 | £000 | £000 | £000 | £000 | £000 | ||
Revenue |
|
|
|
|
|
| ||
External revenues | 610,242 | 604,150 | 108,995 | 104,273 | 719,237 | 708,423 | ||
Reportable segment underlying operating profit | 41,253 | 45,163 | 3,524 | 488 | 44,777 | 45,651 | ||
Reportable segment assets | 329,002 | 304,645 | 47,229 | 42,591 | 376,231 | 347,236 | ||
Reportable segment liabilities | (205,530) | (168,184) | (29,057) | (25,219) | (234,587) | (193,403) | ||
During the year there were no inter-segment revenues for the reportable segments (2018: £nil).
Reconciliations of reportable segment profit, assets and liabilities and other material items:
| 2019 | 2018 |
| £000 | £000 |
Profit for the year |
|
|
Total underlying operating profit for reportable segments | 44,777 | 45,651 |
Non-underlying items | (3,885) | (2,942) |
Unallocated expense | (2,623) | (1,378) |
Operating profit | 38,269 | 41,331 |
Finance income | 821 | 709 |
Finance expense | (3,921) | (1,593) |
Profit before taxation | 35,169 | 40,447 |
Taxation | (6,600) | (6,943) |
Profit for the year | 28,569 | 33,504 |
| 2019 | 2018 |
| £000 | £000 |
Assets |
|
|
Total assets for reportable segments | 376,231 | 347,236 |
Unallocated assets: |
|
|
Properties, plant and equipment | 102,081 | 88,879 |
Right of use assets | 656 | - |
Deferred tax assets | 692 | 516 |
Cash and cash equivalents | 17,548 | 12,573 |
Total assets | 497,208 | 449,204 |
Liabilities |
|
|
Total liabilities for reportable segments | (234,587) | (193,403) |
Unallocated liabilities: |
|
|
Lease liabilities | (645) | - |
Employee benefits | (4,263) | (5,888) |
Income tax payable | (5,037) | (6,730) |
Deferred tax liabilities | (7,608) | (8,063) |
Total liabilities | (252,140) | (214,084) |
|
| Continental | Reportable |
| Consolidated |
| UK | Europe | segment total | Unallocated | total |
| £000 | £000 | £000 | £000 | £000 |
Other material items 2019 |
|
|
|
|
|
Capital expenditure | 1,969 | 841 | 2,810 | 15,473 | 18,294 |
Depreciation | 2,225 | 693 | 2,918 | 2,456 | 5,374 |
Depreciation of right of use assets | 13,226 | 2,013 | 15,239 | 21 | 15,260 |
Non-underlying items (excluding finance expense) | 1,687 | 98 | 1,785 | 2,100 | 3,885 |
Other material items 2018 |
|
|
|
|
|
Capital expenditure | 2,579 | 1,139 | 3,718 | 666 | 4,384 |
Depreciation | 2,058 | 751 | 2,809 | 2,466 | 5,275 |
Non-underlying items | 1,262 | 466 | 1,728 | 1,214 | 2,942 |
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:
Revenue by principal product group and geographic origin is summarised below:
| UK |
| Continental Europe |
| Total | |||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||
| £000 | £000 | £000 | £000 | £000 | £000 | ||
Revenue |
|
|
|
|
|
| ||
Residential | 397,008 | 400,710 | 60,981 | 57,046 | 457,989 | 457,756 | ||
Commercial | 213,234 | 203,440 | 48,014 | 47,227 | 261,248 | 250,667 | ||
| 610,242 | 604,150 | 108,995 | 104,273 | 719,237 | 708,423 | ||
3 Taxation
Recognised in the income statement
| 2019 | 2018 |
| £000 | £000 |
Current tax expense: |
|
|
Current year | 7,909 | 8,775 |
Adjustments for prior years | (642) | (810) |
| 7,267 | 7,965 |
Deferred tax expense: |
|
|
Origination and reversal of temporary differences | (748) | (938) |
Adjustments for prior years | 78 | (84) |
| (667) | (1,022) |
Total tax in income statement | 6,600 | 6,943 |
| 2019 | 2018 |
| £000 | £000 |
Tax relating to items credited/(charged) to equity |
|
|
Current tax on: |
|
|
Income and expenses recognised directly in equity | (20) | (38) |
Translation reserve | 44 | - |
| 24 | (38) |
Deferred tax on: |
|
|
Share options | (245) | 169 |
Income and expenses recognised directly in equity | - | 46 |
Deferred tax on other comprehensive income: |
|
|
Defined benefit plans | 159 | 1,628 |
| (86) | 1,843 |
Total tax reported directly in reserves | (62) | 1,805 |
Factors that may affect future current and total tax charges
The UK headline corporation tax rate for the period was 19% (2018: 19%). The UK tax rate is expected to be reduced to 17% with effect from 1 April 2020 which was enacted during 2016. The majority of the deferred tax balance in respect of UK entities has therefore been calculated at 17% (2018: 17%) on the basis that most of the balances will materially reverse after 1 April 2020.
In addition, a reduction in the French corporation tax rate to 25% by 2022 was enacted in December 2017 which has also been taken into account in the calculation of the related deferred tax balance.
Reconciliation of effective tax rate
| 2019 |
| 2018 | ||
| % | £000 | % | £000 | |
Profit before tax |
| 35,169 |
|
| 40,447 |
Tax using the UK corporation tax rate | 19.0 | 6,682 | 19.0 | 7,685 | |
Effect of change in UK tax rate | 0.1 | 30 | 0.0 | 20 | |
Effect of change in overseas tax rate | - | - | (0.9) | (382) | |
Recognition of tax losses | (1.6) | (555) | - | - | |
Non-deductible expenses | 1.9 | 682 | 1.3 | 516 | |
Goodwill impairment | 1.1 | 401 | - | - | |
Effect of tax rates in foreign jurisdictions | (0.2) | (76) | 0.0 | (2) | |
Adjustments in respect of prior years | (1.5) | (564) | (2.2) | (894) | |
Total tax in income statement | 18.8 | 6,600 | 17.2 | 6,943 | |
Add back tax on non-underlying items |
| 277 |
|
| 807 |
Total tax charge excluding non-underlying items |
| 6,877 |
|
| 7,750 |
Profit before non-underlying items |
| 39,460 |
|
| 43,389 |
Adjusted expected tax rate excluding non-underlying items |
| 17.43% |
|
| 17.86% |
4 Earnings per share
| 2019 | 2018 |
| £000 | £000 |
Earnings |
|
|
Earnings for underlying basic and underlying diluted earnings per share | 32,583 | 35,639 |
Earnings for basic and diluted earnings per share | 28,569 | 33,504 |
| 2019 | 2018 |
Number of shares |
|
|
Weighted average number of ordinary shares for the purposes of basic earnings per share | 83,994,077 | 83,862,658 |
|
|
|
Effect of diluted potential ordinary shares: |
|
|
Weighted average number of ordinary shares at 31 December | 83,994,077 | 83,862,658 |
Dilutive effect of share options | 536,952 | 674,621 |
Weighted average number of ordinary shares for the purposes of diluted earnings per share | 84,531,029 | 84,537,279 |
Earnings per share |
|
|
Basic | 34.0p | 40.0p |
Diluted | 33.8p | 39.6p |
Underlying basic | 38.8p | 42.5p |
Underlying diluted | 38.6p | 42.2p |
5 Dividends
| 2019 | 2018 |
| £000 | £000 |
Interim dividend for 2018 of 7.55p paid 2 January 2019 | 6,322 | - |
Final dividend for 2018 of 17.45p paid 1 July 2019 | 14,619 | - |
Interim dividend for 2017 of 7.55p paid 2 January 2018 | - | 6,372 |
Final dividend for 2017 of 17.25p paid 6 July 2018 | - | 14,597 |
| 20,941 | 20,969 |
Interim dividends for 2019 of 7.55p per share (2018: 7.55p per share) are not provided for at 31 December 2019, but are recognised in the financial statements when the dividend is paid. The dividend was paid on 2 January 2020 and totalled £6,331,000.
The final proposed dividend of 17.45p per share (2018: 17.45p per share) will not be provided for until authorised by shareholders at the forthcoming AGM. There are no income tax consequences. The cost of the final proposed dividend will be £14,633,000.
The total value of dividends proposed but not recognised at 31 December 2019 is £20,964,000 (2018: £20,941,000).
6 Leases
In adopting IFRS 16, the Company has used the modified retrospective approach, and as such there has been no restatement of the comparatives for the 2018 reporting period as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 January 2019.
Adjustments recognised on adoption of IFRS 16
On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate as of 1 January 2019. The weighted average lessee's incremental borrowing rate applied to the lease liabilities on 1 January 2019 ranged from 2.70% to 3.77% depending on the leased asset.
|
|
| 2019 £000 |
|
|
Operating lease commitments as disclosed as at 31 December 2018 | 50,436 |
Additional operating lease liabilities on implementation of IFRS 16* | 4,065 |
| 54,501 |
Discounting effect using the lessee's incremental borrowing rates of between 2.7% and 3.77% | (4,673) |
Lease liability recognised as at 1 January 2019 | 49,828 |
|
|
Of which are: |
|
Current lease liabilities | 13,930 |
Non-current lease liabilities | 35,898 |
Lease liability recognised as at 1 January 2019 | 49,828 |
*Operating lease commitments as at 31 December 2018 were restated by £4,065,000 to correct for omissions identified during the transition to IFRS16. The restatement relates to the disclosure note only and there is no impact on the Consolidated Income Statement or Consolidated Statement of Financial Position.
Right of use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 31 December 2018. The adjustment for accrued lease payments relating to the leases recognised on this date was a decrease of £216,000.
(i) Amounts recognised in the statement of financial position
The balance sheet shows the following amounts relating to leases:
|
| ||
| 31 December 2019 £000 | 1 January 2019 £000 | |
Right-of-use assets |
|
| |
Properties | 15,883 | 18,692 | |
Non-property | 27,982 | 30,920 | |
| 43,865 | 49,612 | |
The right-of-use assets are shown as non-current assets in the balance sheet. The non-property right-of-use assets relate mainly to commercial and motor vehicles.
|
|
| ||
| 31 December 2019 £000 | 1 January 2019 £000 | ||
Lease liabilities |
|
| ||
Current | 13,921 | 13,930 | ||
Non-current | 30,734 | 35,898 | ||
| 44,655 | 49,828 | ||
The lease liabilities are split on the balance sheet between current and non-current. In the previous year, the Group only recognised lease liabilities in relation to leases that were classified as 'finance leases' under IAS 17. At 31 December 2018 the Group had operating leases amounting to £50.4 million and no finance leases.
Additions to the right-of-use assets in the group during the 2019 financial year were £8,980,000.
(ii) Amounts recognised in the income statement
The statement of profit or loss shows the following amounts relating to leases:
|
| |
| 31 December 2019 £000 | |
Depreciation charge of right-of-use assets |
| |
Properties | 4,509 | |
Non-property | 10,751 | |
| 15,260 | |
|
| |
Interest expense |
| |
Expense relating to IFRS 16 cost | 1,688 | |
Expense relating to IAS 17 cost previously included in administrative expenses | (16,375) | |
Net impact on the income statement | 573 | |
(iii) Impact on segment disclosures and earnings per share
The segment assets and liabilities for 31 December 2019 all increased as a result of the change in accounting policy. Lease liabilities are now included in segment liabilities. The impact on the following segments was as follows:
|
UK £000 | Continental Europe £000 |
Total £000 |
|
|
|
|
Reportable segment assets | 38,095 | 5,770 | 43,865 |
Reportable segment liabilities | (38,717) | (5,938) | (44,655) |
Earnings per share decreased by 0.6p per share, from 34.6p to 34.0p, for the twelve months to 31 December 2019 as a result of the adoption of IFRS 16.
(iv) The group's leasing activities and how these are accounted for
The group leases various properties and commercial vehicles and cars. Rental contracts are typically made for fixed periods of 5 to 10 years and 3 to 7 years respectively, but might have extension options. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets cannot be used as security for borrowing purposes.
Leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the group. The right-of-use asset is depreciated over the lease term on a straight-line basis. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period, this being the amortised cost method.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:
• fixed payments (including in-substance fixed payments), less any lease incentives receivable;
• variable lease payment that are based on an index or a rate;
• amounts expected to be payable by the lessee under residual value guarantees;
• the exercise price of a purchase option if the lessee is reasonably certain to exercise that option;
and
• payments of penalties for terminating the lease, if the lease term reflects the lessee exercising
that option.
The lease payments are discounted using the Group's incremental borrowing rate as it has been difficult to determine the interest rate implicit in the lease for existing leases.
Right-of-use assets are measured at cost comprising the following:
• the amount of the initial measurement of lease liability;
• any lease payments made at or before the commencement date less any lease incentives received;
• any initial direct costs; and
• restoration costs.
Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT equipment and small items of office furniture.
(v) Extension and termination options
Extension and termination options are included in a number of property and equipment leases across the group. These terms are used to maximise operational flexibility in terms of managing contracts. The majority of extension and termination options held, are exercisable only by the group and not by the respective lessor.
7 Acquisitions
On 18 October 2019, a subsidiary company of Headlam Group plc completed the acquisition of all the trade and assets of Edel Telenzo Carpets Ltd. ('Telenzo'). Telenzo is the UK distribution company for Edel Carpets, a modern carpet producer from Genemuiden, in the Netherlands. Telenzo is renowned for its 100% wool and wool blend tufted carpets and high quality man-made fibre carpets for residential and commercial use, and distributes its products nationwide.
The acquired business contributed revenue of £1.7 million and an operating profit of £0.3 million to the group for the year ended 31 December 2019. If the acquisitions had occurred on 1 January 2019, pro-forma revenue and operating profit for the year ended 31 December 2019 would have increased to £725.7 million and £39.8 million respectively.
Details of the acquisition are provisional and are shown below:
| Acquiree's | Fair value | Acquisition |
| book value | adjustments | amounts |
| £000 | £000 | £000 |
Acquiree's provisional net assets at the acquisition date: |
|
|
|
Intangible assets | - | 856 | 856 |
Property, plant and equipment | 11 | (11) | - |
Trade and other receivables | 1,400 | - | 1,400 |
Trade and other payables | (272) | - | (272) |
Deferred tax | - | (145) | (145) |
Net identifiable assets and liabilities | 1,139 | 700 | 1,839 |
Goodwill on acquisition |
|
| 258 |
Consideration |
|
| 2,097 |
|
|
|
|
Satisfied by: |
|
|
|
Cash |
|
| 2,097 |
|
|
|
|
Analysis of cash flows: |
|
|
|
On completion |
|
| 2,097 |
|
|
|
|
Professional fees of £72,000 were incurred in relation to acquisition activity and have been expensed to the income statement within non-underlying administration expenses.
The book value of receivables given in the table above represents both the gross contracted and fair value of amounts receivable. At the acquisition date, the entire book value of receivables was expected to be collected.
Goodwill of £258,000 arose on the acquisition, there were also intangible assets on acquisition of £856,000 which were attributed to brand names, customer relationships and supply agreements. During the year £25,000 of intangibles have been amortised to the income statement.
The residual goodwill reflects the significant benefit the acquisitions will have on the Group by bringing further geographic coverage, offering an expanded product range, developing a more sophisticated customer route to market, providing an additional avenue for growth and a different order profile.
Furthermore, acquired businesses gain access to the Group's extensive product ranges and benefit from enhanced sales and marketing investment. These changes typically enable acquired businesses to enhance the service provided to their customers and ultimately, develop and grow.
Prior year acquisitions
In the prior year the Group acquired Dersimo BV ('Dersimo'), BETU Holdings Limited (a non-trading holding company) the parent company of CECO (Flooring) Limited ('CECO'), Ashmount Flooring Supplies Limited ('Ashmount'), Rackhams Limited ('Rackhams'), and the business and certain assets of Garrod Bros Ltd ('Garrod Bros').
The fair values of the assets and liabilities acquired have been reconsidered as part of the hindsight period, but no adjustment was considered necessary. In relation to CECO, the contingent consideration has been paid in full earlier than planned as a result of profitability exceeding management expectations. This has led to a reversal of part of the discounting applied on the original acquisition.
The acquired businesses contributed revenues of £13.7 million and an operating profit of £0.6 million to the Group for the year ended 31 December 2018. If the acquisitions had occurred on 1 January 2018, pro-forma revenue and operating profit for the year ended 31 December 2018 would have increased to £717.7 million and £42.0 million respectively.
Deferred and contingent consideration
The acquisition of Domus Group of Companies Limited was financed by initial cash consideration of £24.2 million paid on completion and satisfied from the Group's existing cash and debt facilities; a deferred consideration of £3.3 million, payable in cash and Ordinary shares of 5 pence each in the capital of the Company ('Ordinary Shares'), of which £1.6 million was payable on 7 December 2019 and £1.7 million is payable on 7 December 2020; and a further maximum contingent consideration of £2.7 million, payable in cash based on Domus achieving certain EBITDA targets over the three-year period ending 31 December 2020.
The deferred and contingent consideration were discounted back and reported at present value at the date of the acquisition. Management have written down the contingent consideration each year based on their assessment of the probability of it being paid. At 31 December 2019 the contingent consideration amount was fully written down with no payments expected on this, however the Group has a current liability for discounted deferred consideration of £1,654,000 which is due on 7 December 2020.
8 Subsequent events
Management has 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 has 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 Supertex Furnishing Ltd. On 1 March 2020, HFD Ltd, a group subsidiary company acquired 100% of the issued share capital of Supertex Furnishing Ltd, a floorcovering distribution business based in Leyland, Lancashire, for consideration of £1.3 million, subject to finalising the net assets position.
9 Additional information
The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2019 or 2018 but is derived from those accounts. Statutory accounts for 2018 have been delivered to the registrar of companies, and those for 2019 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.
The Company anticipates that the Company's statutory accounts will be posted to shareholders during March 2020 and will be displayed on the Company's website at www.headlam.com during March. 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 2019 was approved by the Board on 5 March 2020.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
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