Final Results

Headlam Group PLC 20 March 2007 20 March 2007 Preliminary Results for the Year Ended 31 December 2006 Headlam Group plc ('Headlam'), Europe's leading floorcoverings distributor, announces its final results for the year ended 31 December 2006. Financial highlights 2006 2005 Change £000 £000 Revenue 509,899 486,635 +4.8% Operating profit 43,941 41,498 +5.9% Profit before tax 43,558 40,840 +6.7% Basic earnings per share 35.1p 33.1p +6.0% Dividend per share 20.15p 18.00p +11.9% Key points • UK turnover increased by 4.1% on a like for like basis • Profit before tax improved by 6.7% • Maintaining investment in facilities, product and sales and marketing • Cash flow from operating activities increased by 32.4% to £30.1 million • Final dividend increased by 12.5% from 13.6p to 15.3p Tony Brewer, Headlam's Group Chief Executive, said: 'We continue to actively invest in sales and marketing initiatives throughout our businesses in the UK and Continental Europe, supported by our comprehensive distribution network. The management teams of these individual businesses are clearly focused on delivering the objectives before them and we look forward to achieving another successful year.' Enquiries: Headlam Group plc Tony Brewer, Group Chief Executive Tel: 01675 433000 Stephen Wilson, Group Finance Director Chairman's Statement During 2006, market conditions in the UK, in both residential and particularly commercial floorcoverings, have been favourable. Increased contributions across each of our business sectors and all product categories have enabled the group to achieve another record year in revenue and profitability. Revenue from the group's activities amounted to £509.9 million, an increase of 4.8% on last year and profit before tax increased by 6.7% to £43.6 million. Earnings and dividend Basic earnings per share increased by 6.0% from 33.1p to 35.1p. Your board is recommending a final dividend of 15.30p per share, an increase of 12.5% on last year. This increases the total dividend for the year by 11.9% from 18.00p to 20.15p. If approved by shareholders at the forthcoming Annual General Meeting, the final dividend will be paid on 2 July 2007 to shareholders on the register at 8 June 2007. Strategy The group is committed to being the leading distributor of floorcoverings in the UK and Continental Europe. During the ongoing development of our businesses, it is not our intention to diversify away from our focus on floorcovering distribution. To retain our position as the leading distributor of floorcoverings in Europe, we will continue to invest in the infrastructure of the business. Over the last twelve years we have invested in eleven new facilities, giving our businesses increased capacity and the latest floorcovering material handling technology keeping us at the forefront of the floorcovering industry. Operations We continue to develop and maintain our close relationship with the leading worldwide floorcovering manufacturers. Our 47 businesses in the UK operate in five clearly defined business sectors, working closely with these suppliers and subsequently with our customers. We employ 320 external sales people who are positioning new product into the independent retailer and flooring contractor on a daily basis. This ensures that our customers have the latest product offering which is supported by a next day delivery service through our fleet of 420 commercial vehicles. Whilst encouraging the autonomy of individual business operations, they each operate to a specific strategy relevant to their own market position and also comply with consistent operational procedures and financial disciplines. The management teams of these individual businesses are working to clearly defined budgets and specific objectives. They are measured and incentivised on the performance of their individual business responsibility. We believe this autonomous business structure is a major strength that allows us to manage our market position and thereby removes a large element of risk within our business. The improvements we have made in our three Continental European businesses in France, Switzerland and the Netherlands have resulted in a further increase in revenue and profitability. Employees We wish to thank all management and employees for their contribution to the group's ongoing success. The autonomous structure of our business operations has developed a culture of individuality, whilst benefiting from opportunities throughout the group. We have had many instances over a number of years where employees have developed into senior sales and management roles. This policy of internal promotion wherever possible, gives all employees the opportunity for significant career development within the group. Outlook Through our clearly focused structure, which exists in each of our five business sectors, we are confident that our individual management teams and the autonomous businesses, for which they are responsible, will continue to exceed market conditions. The group has made a positive start to 2007 in both the UK and Continental Europe and is well positioned to achieve its objectives for the year. Graham Waldron, Chairman Chief Executive's Review Conditions in the UK floorcovering market during 2006 in both residential and particularly commercial flooring were positive. This enabled us to grow our UK businesses by 4.1% on a like for like basis and total sales by 4.6%. Our businesses in Continental Europe prospered with solid performances from France and Switzerland and a particularly strong performance from the Netherlands. These businesses achieved a collective like for like sales increase of 5.6%. UK operations We have previously categorised our businesses into four specific sectors. However, due to the growing importance of our Regional multi-product commercial operations, we have now increased our business sectors to five: Regional multi-product: we have 20 businesses throughout the UK which provide a comprehensive product offering of both residential and commercial floorcovering. Through close liaison with our manufacturers and local relationships with customers, these businesses create a substantial market presence and endeavour to provide an excellent service. During 2006, the businesses increased their sales by 3.7%. National multi-product: Mercado has a comprehensive distribution network enabling it to supply residential and commercial flooring throughout England, Wales and Northern Ireland. Through its experienced sales team, substantial stock holding and delivery infrastructure, Mercado increased its business by 5.8%. Regional commercial: the newly formed sector, developed through the emergence of existing businesses and also recent acquisitions, now has nine locations throughout England and Northern Ireland. The businesses benefit from strong relationships in the commercial flooring market, with both manufacturers and particularly with flooring contractors. Whilst they were able to increase their business by 7.9% in 2006, there are significant opportunities to increase the geographical coverage both through acquisition and organic growth. Residential specialist: these 12 businesses supply medium to premium end carpet products. Through their product innovation and additional marketing initiatives they were able to increase their business by 6.0%. Through further investment in sales and marketing we can substantially increase the presence of these businesses in the premium sector. Commercial specialist: these three businesses are focused in specific areas of the commercial flooring market, principally healthcare, education and government installations. All three businesses performed to expectations in 2006 and were able to grow their business by 8.7%. Customers Customers, who are principally independent floorcovering retailers and contractors, continue to prosper. With the benefit of our distribution network, extensive product range and sales and marketing initiatives we have increased the number of active accounts to 36,225 (2005: 35,748). Products Carpet is still our largest product group, representing 49% of UK sales. During the year we launched 2,690 (2005: 2,486) new products supported by 665,000 (2005: 626,482) point of sale items positioned in independent retailers. This ongoing activity enabled us to increase sales by 1.1%. Sales of carpet in the UK are dominated by plain product consisting of twist pile in either polypropylene or wool and loop pile natural effects, again in polypropylene or wool. Residential vinyl business, which accounts for 13% of UK sales, increased by 4.2%. During the year we placed 132,000 (2005: 167,360) new point of sale items to support the launch of 622 (2005: 693) new products. The residential vinyl market in the UK has moved significantly towards slip resistant products. This gives the benefit of both safety and an enhanced reproduction of various types of natural flooring. We believe this improved product has increased our sales of residential vinyl, particularly through the independent retail sector. Wood and laminate, which contribute 5% to the UK sales, have seen a recovery during the year, increasing by 10.2%. We believe there are still extensive opportunities to increase our market presence not only in laminate flooring, but also in engineered and solid wood. Commercial Flooring represents 27% of UK sales. Through the various activities of our regional and national multi-product businesses and also the regional commercial and commercial specialist businesses, we were able to increase sales of commercial products by 10.2% during 2006. Market information would suggest that this particular sector has been fairly buoyant, but we believe our increase will have outperformed the market and consequently increased our market share. Information Technology and Material Handling We continue to enhance our software and invest in the latest hardware to position our businesses at the forefront of technology, both operationally and financially. As previously reported, with the introduction of our IT platform into the French business in 2006, we now operate all businesses in the UK and Continental Europe from the same platform which gives both operational consistency and standardised financial disciplines. We made a major step forward in material handling during 2005 with the introduction of the despatch sortation system at Tamworth. This system was incorporated into the construction of the new facility for Wilkies in Leeds which became operational in October 2006. We also retrospectively installed a sortation system into the Coleshill distribution centre in the first quarter of 2007. We envisage that our new facilities will incorporate this system which significantly enhances material handling capability and improves cost effectiveness. Investments During 2006 we completed the construction of the 105,000 square foot purpose built freehold distribution facility for Wilkies, our regional multi-product business based in Leeds. This facility became operational in October 2006 and we anticipate that Wilkies will be able to significantly develop their residential and commercial business in the north of England over the coming years. Following the appropriate planning permission, we have now purchased land in Bridgend, South Wales to enable us to re-house MCD Wales. This will be constructed during the course of this year and will be operational towards the end of 2007. The strong cash generation by our operations allows continued investment to strengthen further the group's position. We have other projects at various stages of the planning and development process, to ensure that the group remains the leader in European floorcovering distribution. Europe It is particularly pleasing that we recorded a continued improvement in all three of our Continental European businesses in France, Switzerland and the Netherlands. This combined performance showed a sales increase of 5.6% and an increase in operating profit of 12.6%. Each of our businesses has seen improving market conditions progressively during 2006. This, in conjunction with sales, marketing and operational improvements that we have made over previous years, has contributed to this result. With this improving trend, we have continued to assess other opportunities to enlarge our presence in Continental Europe. Acquisitions In September 2006 we acquired the business of Concept (Midlands) Limited, based in West Bromwich. The acquisition of this business, along with the development of other regional commercial operations, has enabled us to increase the structure of our business sectors from four to five. We continue to evaluate potential acquisitions in both the commercial and residential markets in the UK, in addition to opportunities in Continental Europe. We envisage further additions to the group over the coming months. Outlook We continue to actively invest in sales and marketing initiatives throughout our businesses in the UK and Continental Europe, supported by our comprehensive distribution network. The management teams of these individual businesses are clearly focused on delivering the objectives before them and we look forward to achieving another successful year. Tony Brewer, Group Chief Executive Financial review Trading performance Group revenue increased during the year by 4.8% from £486.6 million to £509.9 million. As already highlighted, like for like improvement from the UK businesses amounted to 4.1% whilst the Continental European businesses achieved a collective like for like increase of 5.6%. In addition to the like for like increases in the UK, group revenue also includes the first full year revenues amounting to £5.6 million from Clarendon and Gaskell Wool Rich, the two businesses acquired during 2005, and a contribution of £0.6 million from Concept (Midlands), which was acquired during October 2006. The group's operating profit increased by 5.9% from £41.5 million to £43.9 million with the UK and Continental European businesses achieving increases before unallocated corporate expenses of 4.2% and 12.6% respectively. Financial income and expense Net financial expenses decreased from £658,000 to £383,000. This was attributable to a reduction in the net cost of pension plans falling from £510,000 to £363,000 and a decrease in net interest payable from £148,000 to £20,000. Taxation The effective rate of taxation reduced marginally from 30.2% to 30.0%. The rate reflects the group's current mix of business and it is anticipated that the effective tax rate should remain at these levels for the foreseeable future. Earnings and dividends per share During the year, basic earnings per share increased by 6.0% from 33.1 pence per share to 35.1 pence per share. Dividends per share increased by 11.9% from 18.00 pence to 20.15 pence which represents a payout ratio of 57.4% of basic earnings per share compared with 54.4% for the previous year. The board anticipates maintaining a progressive dividend increase over the next three years with the intention of achieving a payout ratio of approximately 67.0% of earnings by the end of 2009. Shareholder returns The board recognises that it has a responsibility to shareholders to ensure that the group generates a sustainable return on shareholders funds and maintains investment in the business to support future growth. Total shareholder return, being the increase in the share price plus reinvested dividends, has been 182.8% over the last five years compared to the FTSE Mid 250 average of 122.8%. Over the last three years, it has been 106.0% compared with the FTSE Mid 250 average of 111.9% and during the last year, 47.6% compared with the FTSE Mid 250 average of 32.1%. Return on average shareholders funds during 2006 amounted to 30.2% compared with 31.6% for the previous year. The modest dilution during the year is a result of the significant investment in new and extended facilities undertaken during the last few years. As highlighted in the Chairman's Statement, this commitment to investing in modern, efficient facilities has maintained our position as the leading European floorcoverings distributor. However, whilst this activity brings medium to long term benefits, the immediate consequence is an increase in the cost base since the new facilities are generally larger than the ones they replace. Depending on the level of investment undertaken, this increase in the cost base can give rise to short term dilution in the return on average shareholders funds. Cash flows and net funds Cash generated from operating activities Net cash generated from operating activities during the year was £30.1 million, a net increase of £7.4 million compared with last year. The two significant movement's year on year were; the reduced investment in working capital amounting to £9.0 million and the increase in additional pension fund contributions of £3.2 million. During 2006 net working capital investment, £1.8 million, reduced to more normal levels compared with the exceptional amount, £10.7 million, invested during the previous year. Expenditure in 2005 reached this level because of the increased inventory requirement created by the significant additional capacity from the new and extended facilities. Generally, when one new facility becomes operational during the year, the additional working capital requirements can be managed without any material increase. Additional contributions to the defined benefit pension plan during the year amounted to £3.9 million compared with £0.7 million during the previous year. Cash flows from investing activities Net cash outflows from investing activities totalled £10.4 million compared with £9.5 million during 2005. Investment in property, plant and equipment amounted to £12.9 million compared with £11.0 million for 2005. The largest item of expenditure was £8.9 million incurred on the completion of the Wilkies property bringing the total cost of this facility to £10.9 million. In addition, £1.5 million was expended on acquiring the freehold interest in the property occupied by our business in the Netherlands and £2.5 million on routine maintenance projects. Subject to planning approval, we anticipate the level of expenditure during 2007 to be no greater than £12.9 million. Changes in net funds Group net funds increased from £35.5 million to £40.6 million during the year as detailed in the table below. Acquisitions At excluding At 1 January Cash cash and Translation 31 December 2006 flows overdrafts differences 2006 £000 £000 £000 £000 £000 Cash at bank and in hand 36,193 5,725 - (57) 41,861 Bank overdraft - (1,022) - 12 (1,010) ------- ------- ------- ------- ------- 36,193 4,703 - (45) 40,851 ------- ------- ------- ------- ------- Finance leases and similar hire purchase contracts (738) 497 (26) - (267) ------- ------- ------- ------- ------- 35,455 5,200 (26) (45) 40,584 ------- ------- ------- ------- ------- However, over the course of the year, the group's net funds, as was the case for 2005, remained in a position that was very close to neutral. Employee benefits During the year, the net deficit relating to the defined benefit pension plans, as measured under IAS 19, decreased by £3.3 million from £20.5 million to £17.2 million. The two key drivers contributing to the reduction were the continued revival in equity values and the additional contribution of £3.9 million referred to above. Additional contributions during 2007 are expected to be £1.1 million. Stephen Wilson, Group Finance Director Consolidated income statement for the year ended 31 December 2006 Note 2006 2005 £000 £000 Revenue 1 509,899 486,635 Cost of sales (350,506) (336,570) -------- -------- Gross profit 159,393 150,065 Distribution expenses (81,623) (77,507) Administrative expenses (33,829) (31,060) -------- -------- Operating profit 1 43,941 41,498 Financial income 4,926 3,893 Financial expenses (5,309) (4,551) -------- -------- Net financing costs (383) (658) -------- -------- Profit before tax 43,558 40,840 Taxation (13,067) (12,352) -------- -------- Profit for the year attributable to the equity shareholders 30,491 28,488 -------- -------- Dividend paid per share 3 18.00p 16.25p Earnings per share Basic 2 35.1p 33.1p -------- -------- Diluted 2 34.8p 32.8p -------- -------- All group operations during the financial years were continuing operations. Consolidated statement of recognised income and expense for the year ended 31 December 2006 2006 2005 £000 £000 Foreign exchange translation differences arising on translation of overseas operations (419) (321) Recycling of cash flow hedging reserve balance - 13 Actuarial gains and losses on defined benefit pension plans (173) (2,571) -------- -------- Tax recognised on income and expenses recognised directly in equity 1,057 910 -------- -------- Net income recognised directly in equity 465 (1,969) Profit for the year 30,491 28,488 -------- -------- Total recognised income and expense attributable to the equity shareholders 30,956 26,519 -------- -------- Consolidated balance sheet at 31 December 2006 Note 2006 2005 £000 £000 Non-current assets Property, plant and equipment 85,032 74,640 Intangible assets 13,210 13,210 Deferred tax assets 9,182 8,199 --------- --------- 107,424 96,049 --------- --------- Current Assets Inventories 94,217 91,160 Trade and other receivables 91,284 84,275 Cash and cash equivalents 41,861 36,193 --------- --------- 227,362 211,628 Non-current assets classified as held for sale - 3,471 --------- --------- Total assets 1 334,786 311,148 --------- --------- Current liabilities Bank overdraft (1,010) - Other interest-bearing loans and borrowings (267) (471) Trade and other payables (149,422) (141,529) Employee benefits (1,102) (1,080) Income tax payable (10,184) (11,139) --------- --------- (161,985) (154,219) --------- --------- Non-current liabilities Other interest-bearing loans and borrowings - (267) Employee benefits (16,124) (19,432) Deferred tax liabilities (3,665) (1,403) --------- --------- (19,789) (21,102) --------- --------- Total liabilities 1 (181,774) (175,321) --------- --------- Net assets 153,012 135,827 --------- --------- Consolidated balance sheet (continued) at 31 December 2006 Note 2006 2005 £000 £000 Equity attributable to equity holders of the parent Share capital 4 4,354 4,326 Share premium 4 53,428 52,280 Translation reserves 4 (616) (577) Retained earnings 4 95,846 79,798 --------- --------- Total equity 153,012 135,827 --------- --------- Consolidated cash flow statement for the year ended 31 December 2006 2006 2005 £000 £000 Cash flows from operating activities Profit before tax for the year 43,558 40,840 Adjustments for: Depreciation, amortisation and impairment 4,974 5,133 Financial income (4,926) (3,893) Financial expense 5,309 4,551 Loss/(profit) on sale of property, plant and equipment 10 (228) Equity settled share-based payment expenses 472 196 --------- --------- Operating profit before changes in working capital and provisions 49,397 46,599 (Increase)/decrease in trade and other receivables (6,810) 1,699 Increase in inventories (2,930) (11,335) Increase/(decrease) in trade and other payables 7,987 (1,085) --------- --------- Cash generated from the operations 47,644 35,878 Interest paid (2,023) (1,456) Tax paid (11,622) (10,994) Additional contributions to defined benefit pension plans (3,927) (722) --------- --------- Net cash from operating activities 30,072 22,706 --------- --------- Cash flows from investing activities Proceeds from sale of property, plant and equipment 1,816 598 Interest received 2,001 1,335 Acquisition of subsidiary, net of cash acquired (1,369) (426) Acquisition of property, plant and equipment (12,884) (10,965) --------- --------- Net cash from investing activities (10,436) (9,458) --------- --------- Cash flows from financing activities Proceeds from the issue of share capital 1,176 570 Repayment of borrowings - (662) Payment of finance lease liabilities (497) (438) Dividends paid (15,612) (13,976) --------- --------- Net cash from financing activities (14,933) (14,506) --------- --------- Net increase/(decrease) in cash and cash equivalents 4,703 (1,258) Cash and cash equivalents at 1 January 36,193 37,468 Effect of exchange rate fluctuations of cash held (45) (17) --------- --------- Cash and cash equivalents at 31 December 40,851 36,193 --------- --------- Notes 1. Segment reporting The group's activities are wholly aligned to the sales, marketing, supply and distribution of floorcovering products. These activities are carried out from business centres located in both the UK and Continental Europe. The group's internal management structure and financial reporting systems treat the UK and Continental Europe as two separate segments because of the difference in reward arising from these two markets and this forms the basis for the geographical presentation of the primary segment information given below. UK Continental Europe Total 2006 2005 2006 2005 2006 2005 £000 £000 £000 £000 £000 £000 Revenue External sales 434,321 415,038 75,578 71,597 509,899 486,635 ------- ------- ------- ------- ------- ------- Result Segment result 43,670 41,905 2,044 1,815 45,714 43,720 ------- ------- ------- ------- ------- ------- Unallocated corporate expenses (1,773) (2,222) ------- ------- Operating profit 43,941 41,498 Financial income 4,926 3,893 Financial expense (5,309) (4,551) Taxation (13,067) (12,352) ------- ------- Profit for the year 30,491 28,488 ------- ------- Other information Segment assets 293,280 271,074 32,324 28,404 325,604 299,478 Unallocated assets 9,182 11,670 ------- ------- Consolidated total assets 334,786 311,148 ------- ------- Segment liabilities (133,493) (127,258) (17,206) (15,009) (150,699) (142,267) Unallocated liabilities (31,075) (33,054) -------- -------- Consolidated total liabilities (181,774) (175,321) --------- --------- Capital expenditure 10,882 10,461 2,002 503 12,884 10,964 Depreciation 3,610 3,451 674 631 4,284 4,082 Amortisation 690 836 - - 690 836 Asset impairment - 215 - - - 215 Each segment is a continuing operation. Unallocated assets comprise deferred tax assets and assets held for resale. Unallocated liabilities comprise income tax, deferred tax liabilities and employee benefits. Management has access to information that provides details on sales and gross margin by principal product group and across the five principal business sectors which comprise Regional multi-product, National multi-product, Regional commercial, Residential specialist and Commercial specialist. However, this information is not provided as a secondary segment since the group's operations are not managed by reference to these sub classifications and the presentation would require an arbitrary allocation of overheads, assets and liabilities undermining the presentations validity and usefulness. Notes (continued) 2. Earnings per share The calculation of the basic and diluted earnings per share is based on the following data: 2006 2005 £000 £000 Earnings Earnings for the purposes of basic and diluted earnings per share being profit attributable to equity holders of the parent 30,491 28,488 ------- ------- 2006 2005 Number of shares Issued ordinary shares at 1 January 86,512,854 86,111,437 Effect of shares issued during the period 416,237 86,272 ----------- ----------- Weighted average number of ordinary shares for the purposes of basic earnings per share 86,929,091 86,197,709 ----------- ----------- Effect of diluted potential ordinary shares: Weighted average number of ordinary shares at 31 December 86,929,091 86,197,709 Share options 2,046,461 2,407,331 Number of shares that would have been issued at fair value (1,422,270) (1,813,602) ----------- ----------- Weighted average number of ordinary shares for the purposes of diluted earnings per share 87,553,282 86,791,438 ----------- ----------- 3. Dividends 2006 2005 £000 £000 Interim dividend for 2005 of 4.40p paid 3 January 2006 3,789 - Final dividend for 2005 of 13.60p paid 3 July 2006 11,823 - Interim dividend for 2004 of 4.00p paid 3 January 2005 - 3,421 Final dividend for 2004 of 12.25p paid 4 July 2005 - 10,555 --------- ---------- 15,612 13,976 --------- ---------- The final proposed dividend of 15.30p per share (2005: 13.60p per share) will not be provided for until authorised by shareholders at the forthcoming Annual General Meeting. Interim dividends of 4.85p per share (2005: 4.40p per share) are provided for when the dividend is paid. The total value of dividends proposed but not recognised at 31 December 2006 is £17,526,000(2005: £15,612,000). Notes (continued) 4. Capital and reserves Share Share Translation Cash flow Retained Total capital premium reserve hedging earnings equity reserve £000 £000 £000 £000 £000 £000 Balance at 1 January 2005 4,306 51,731 (256) (13) 66,579 122,347 Total recognised income and expense - - (321) 13 26,827 26,519 Equity-settled share based payment transactions - - - - 196 196 Share options exercised by employees 20 549 - - - 569 Deferred tax on Schedule 23 share options (pre Nov 2002) - - - - 172 172 Dividends - - - - (13,976) (13,976) ------- ------- ------- ------- ------- ------- Balance at 31 December 2005 4,326 52,280 (577) - 79,798 135,827 ------- ------- ------- ------- ------- ------- Balance at 1 January 2006 4,326 52,280 (577) - 79,798 135,827 Transfer between reserves - - 380 - (380) - Total recognised income and expense - - (419) - 31,375 30,956 Equity-settled share based payment transactions - - - - 472 472 Share options exercised by employees 28 1,148 - - - 1,176 Deferred tax on Schedule 23 share options (pre Nov 2002) - - - - 193 193 Dividends - - - - (15,612) (15,612) ------- ------- ------- ------- ------- ------- Balance at 31 December 2006 4,354 53,428 (616) - 95,846 153,012 ------- ------- ------- ------- ------- ------- Notes (continued) The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2006 or 2005. Statutory accounts for 2005 have been delivered to the registrar of companies, and those for 2006 will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports, and (iii) did not contain statements under section 237 (2) or (3) of the Companies Act 1985. This information is provided by RNS The company news service from the London Stock Exchange

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