Preliminary Results

RNS Number : 8732Q

Headlam Group PLC

03 March 2016

 

3 March 2016

Headlam Group plc

("Headlam" or "the group")

 

Preliminary Results for the year ended 31 December 2015

Headlam Group plc (LSE: HEAD), Europe's leading floorcoverings distributor, is pleased to announce its preliminary results for the year ended 31 December 2015.

Key financials

             ·      Revenue up 3.0% to £654.1 million (2014: £635.2 million)

    ·      Operating profit up 16.9% to £36.8 million (2014: £31.5 million)

             ·      Profit before tax of £35.6 million up 17.6% (2014: £30.3 million)

    ·      Earnings per share up 18.2% to 33.8 pence (2014: 28.6 pence)

    ·      Total ordinary dividends paid and proposed up 18.3% to 20.70 pence (2014: 17.50 pence)

    ·      Net funds increased by £19.3 million to £43.9 million as at 31 December 2015 (31 December 2014: £24.6 million)

Highlights

             ·      The board has declared a special dividend of 6.0 pence to be paid on 25 April 2016

   ·      Further gains achieved in UK market share, with like-for-like revenues increasing by 3.9% and total UK           revenues increasing by 4.9%, exceeding the 2015 forecast market growth of 3.4% (Source: AMA Research Limited)

    ·      Acquisition of Matty's Wholesale Carpets in January 2015 for £2.0 million, bringing the total number of UK businesses to           56

    ·      London showroom opened in Clerkenwell to support Headlam Corporate, a new business unit targeting specified            commercial flooring

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

"2015 was another year of revenue, profit and market share growth at Headlam and a year of significant cash generation. Given that the current cycle of large capital expenditure is more or less complete, with just the construction of the Ipswich distribution facility remaining, the board has elected to return cash to shareholders by way of a special dividend of 6.0 pence per share."  

"Trading in the current year has started well, with like for like growth in the UK of 6.3% during the first eight weeks of the year. We are confident that the group will continue to perform well during the year ahead."

Enquiries:

Headlam Group plc     
Tony Brewer, Group Chief Executive                                Tel: [phone]
Stephen Wilson, Group Finance Director                           

Investec Bank plc (Joint Corporate Broker)                 Tel: [phone]
Garry Levin / David Flin / Josh Levy           

Arden Partners plc (Joint Corporate Broker)                Tel: [phone]
Jonathan Keeling / Steve Douglas 

Buchanan                                                                    Tel: [phone]
Mark Court / Helen Chan

Notes for Editors

About Headlam

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

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

The approach provides Headlam's suppliers with an opportunity to achieve extensive market access backed by cost effective distribution.

In order to offer this level of service to its customers and suppliers, Headlam has developed a diverse and autonomous operating structure that includes 56 businesses across the UK and a further five in continental Europe all trading under their individual brands. 

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

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

For further detail please visit: www.headlam.com

Chairman's Statement 

I am pleased to report that 2015 was another year of good progress at Headlam. It was a year that delivered good growth in revenues and profitability, reflecting positive trends in the group's marketplace in the UK along with further progress in the delivery of the group's strategy.

A particular feature of these results is the significant increase in year-end cash balances, demonstrating the ability of our business to benefit from previous capital expenditure and generate significant cash flow. As the current capital expenditure programme is now largely complete, it has been decided to return some of the group's surplus cash to shareholders as a special dividend. 

Overview

Group revenues in the year were up 3.0% at £654.1 million. In the UK, which represented 88% of group sales in the year, revenues were up 4.9% at £575.3 million, reflecting organic and acquisitive growth.

On a like for like basis, UK revenues were up 3.9% at £570.0 million. The growth in the second half was less than the first half increase of 5.4%, reflecting in part strong second half comparatives in 2014. The group has again delivered organic growth in excess of the UK floorcoverings market, which for 2015 is forecast to be 3.4% (Source: AMA Research Limited). 

Revenues from the Continental European businesses were down 3.8% in constant currency at £83.6 million. The second half decrease of 2.7% was less than the first half decrease of 4.8%, indicating that trading had begun to stabilise and improve. On translation to sterling, Continental European revenues were down 9.3% at £78.7 million. Whilst European markets remain challenging for the group, they represent a decreasing proportion of group revenues, at just 12.0% during 2015 (2014: 13.7%).  Since the year end, the aggregate revenue performance from the three Continental territories, France, Switzerland and the Netherlands, in constant currency, has improved by 1.5%. 

One bolt-on acquisition was completed during the year, Matty's Wholesale Carpets, a Midlands-based distributor of residential floorcoverings to independent flooring retailers. The acquisition, completed on 30 January 2015, has been earnings enhancing. The group continues to evaluate potential bolt-on acquisitions in line with its growth strategy.  The group also continued to invest in the development of its operations, including the opening of a showroom in Clerkenwell, London, as a marketing base for Headlam Corporate, a new business unit targeting specifiers of commercial flooring. The group also added to its network of service centres, opening a new service centre in Cheltenham in July 2015. During March 2016, two additional service centres are expected to open in Croydon and Hull which would bring the total to 31.

Earnings and ordinary dividend

Basic earnings per share for the year increased by 18.2% to 33.8 pence (2014: 28.6 pence), reflecting an increase of 17.6% in the group's profit before tax to £35.6 million.  

The board is proposing to increase the final ordinary dividend by 19.5% from 12.30 pence to 14.70 pence resulting in a total ordinary dividend for the year of 20.70p, which represents an increase on 2014 of 18.3%.  The final dividend, if approved by shareholders at the group's Annual General Meeting ("AGM"), will be paid on 1 July 2016 to shareholders on the register at close of business on 3 June 2016. 

Special dividend

Throughout the downturn in the UK floorcoverings market between 2008 and 2011, the group continued to invest in its infrastructure, particularly in its distribution centre network. This capital expenditure programme, which has positioned the group to benefit from operational gearing as markets improve, is now largely complete. The final significant investment, currently intended as previously announced, is a major distribution centre in Ipswich with an estimated project cost of £13.5 million. Construction of this project has been delayed as a result of the planning process but work is now expected to begin in the latter half of this year.

The revised timing for the construction of the Ipswich facility, and its effect on the amount of capital expenditure this year has created the opportunity to pay a special dividend, which the board believes is the best way to return surplus capital to shareholders. The board has therefore declared that a special dividend of 6.0 pence per ordinary share shall be paid on 25 April 2016 to shareholders on the register at 8 April 2016.  

Governance and board

We continue to promote a culture of openness and transparency and encourage participation and contribution from all our board members.  The board recognises the value derived from good governance and the setting of high standards, not least in the confidence it brings to our shareholders, management, employees, suppliers and customers. 

On 31 May 2015, after serving over nine years as a non-executive director Mike O'Leary resigned from the board.  On behalf of the board, I would like to thank Mike for his commitment and participation and we wish him well for the future.  Philip Lawrence was appointed to the board with effect from 1 June 2015, at which time he was appointed as a member of the remuneration and nomination committees and chairman of the audit committee.  Also, with effect from 1 June 2015, Andrew Eastgate stepped down as chairman of the audit committee and was appointed chairman of the remuneration and nomination committees and senior independent director.  

Following a competitive tender process and a recommendation from the audit committee, the board has invited PricewaterhouseCoopers LLP ("PwC") to accept appointment as auditor in respect of the group's accounts for the year ended 31 December 2016.  The appointment is in line with guidance in the 2014 Corporate Governance Code.  The board would like to thank KPMG for their services to the group since 1992 and look forward to working with PwC in the future. 

Employees and shareholders

Once again, our employees' commitment and determination has been pivotal to the continued success of the group. Thank you to all our employees across the group for their dedication and hard work and our shareholders for their continuing support.

Dick Peters
Chairman
3 March 2016

Chief Executive's Review

Our Strategy

The group continues to follow a strategy focused on developing its floorcovering distribution business in the UK and Continental Europe and improving the all-round service offering it provides to customers.

The group's size and structure provides a unique competitive advantage allowing it to deliver a range of benefits, including continuous product development, wide and diverse product portfolio, extensive marketing support and next day distribution services, all of which are aimed at supporting and enhancing its customers' market position. 

Development of the group's overall business is achieved by operating each of the group's 56 businesses on an autonomous basis and encouraging the managers of each individual business to develop their own unique trading style, albeit within a well-developed and consistently applied framework of operational and financial control. 

This diverse business structure, particularly in the UK, covering the retail and commercial sectors, gives the group substantial reach across floorcovering markets and provides suppliers with a flexible channel for the sales, marketing and distribution of their products. 

In addition, the structure has allowed the group to be active with a wide and diverse product portfolio across a significant proportion of the floorcovering market and will, to a degree, help insulate the business from the downside risk arising from static or contracting markets.

In the UK, the business operates with 56 businesses (2014: 55) served from four national distribution hubs     (2014: 4), 14 distribution centres (2014: 14) and 29 service centres (2014: 27). 

Each individual business is supported by the group's commitment to continued investment in people, product, marketing, distribution facilities, service centres and IT.  This structural investment, in conjunction with the development of the identity of each individual business, has enabled us to bring together the benefits of a market facing culture delivering the latest selling, marketing and product initiatives with a comprehensive and sophisticated logistics operation. 

Ultimately, the total investment has underpinned the growth and performance of each business thus enabling the group to establish itself as Europe's leading floorcovering distributor. 

Performance

One of the group's key performance objectives is aimed at achieving growth in market share.  We drive this growth by setting each of our individual businesses, in conjunction with the management teams, an annual growth parameter, which is collectively set to outperform the anticipated underlying growth in the market. 

Once again, it is pleasing to record that the group's growth in UK revenue during 2015, as has consistently been the case for a number of years, outperformed growth in the UK floorcovering market with the like for like growth of 3.9% exceeding the estimated market growth in 2015 of 3.4%.  The increase in like for like revenue reflected slightly stronger growth in residential, up 4.1%, compared with commercial up 3.5%. The revenue mix between residential and commercial floorcoverings in the UK has remained broadly at the same level for a number of years, and 2015 maintained the balance at 69% and 31% respectively.  

The resilience of residential sales is in part because a typical purchase by a residential end-user is of one piece of carpet at an average size of 4m by 5m.  It is well-established that people in the UK tend to replace carpets one room at a time, helping with the affordability of the purchase. The trend towards grey coloured carpeting has continued and, of the new best-selling carpet products launched during the year, grey carpet accounted for about 40% of the content of each range in the middle to higher price points.   

All of the group's principal product groups showed growth on the corresponding period. Sales of the Lifestyle Floors brand increased by 28% as a result of further investment in sampling, an improving product profile and increased market penetration. 

On the Continent, economic headwinds continue to influence performance and the overall trading result has registered a further decline during the year.   It is encouraging that the rate of decline slowed in the second half with the markets showing signs of stabilisation.  We continue to believe that there are opportunities to develop each individual business irrespective of the market conditions in each individual territory.  Gross margins continue to be protected and costs managed diligently.  As ever, additional revenue volume would transform the operating performance of these businesses. 

During the year, we have maintained our investment in people, marketing, infrastructure and the promotion and development of each of our individual business identities.  We continue to provide extensive marketing support to our customers and, through our well trained and knowledgeable sales teams, seek to gain an increasing share of their business opportunities.  In addition, our teams are also focused on prospecting for new customers and business opportunities. 

Developments in the year included a new buyers app for use on an iPad to promote group-wide best practice and an iPhone based driver delivery app to further improve customer service. 

Investments

Over the six year period from 2010 to 2015, we have used the group's balance sheet strength, allied with its positive cash flow, to invest £39.1 million in property, plant and equipment with a further £19.7 million expenditure forecast for 2016 and 2017.  This level of capital expenditure has been running, on average, at a rate of 1.5 times depreciation. 

Expenditure on property, plant and equipment during 2015 was £2.9 million, with the investment being focused on maintenance covering items such as fork lift trucks and racking. Expenditure for 2016 was previously forecast to be £18.0m, a significant portion of which was earmarked for the new 160,000 square foot distribution facility in Ipswich for Faithfull's Floorcovering, one of the group's regional multi-product businesses. Owing to delays to the start of construction at Ipswich, which is now expected in the latter half of 2016, projected expenditure is expected to be £13.5 million over the course of 2016 and 2017. 

Once the Ipswich distribution facility is fully operational, the group will have a well invested portfolio of four national distribution hubs and 14 regional distribution centres in the UK as well as four distribution centres on the Continent.  These facilities should be able to satisfy the group's capacity requirements and growth expectations for a number of years and there should be no requirement for further investment in additional or replacement distribution facilities in this time frame.  

During recent years, we have supplemented our distribution network in the UK with a number of service centres with the aim of improving customer service by making product more readily available.  This type of investment is particularly helpful for customers who prefer to collect their product needs as opposed to relying on our delivery service. 

During the year, we continued to expand the number of service centres we operate across the UK and at the end of the year they numbered 29.  The provision of trade counters is also offered within our distribution centres thereby bringing the number of collection points in the UK to 44.  There are still some locations that would benefit from the opening of a service centre and we anticipate expanding our coverage in the future, subject to the availability of suitable sites. The opening of two new service centres in Croydon and Hull is imminent.  

Acquisitions

We intend to continue to utilise our capital resource to augment the group's growth with further acquisitions.  We have a history of quickly and successfully integrating small bolt-on acquisitions into our existing infrastructure, achieving overhead synergies and an earnings enhancing performance. 

During the year, we acquired Matty's Wholesale Carpets, and integrated its operations into our distribution facility in Coleshill.  The acquisition has been immediately earnings enhancing and the group has also benefited in 2015 from acquisitions completed in the prior year. 

Prospects

Trading in the current year has started well, with like for like growth in the UK of 6.3% during the first eight weeks of the year. We are confident that the group will continue to perform well during the year ahead. 

Tony Brewer
Group Chief Executive
3 March 2016

Financial Review 

Revenue

During the year, group revenue increased by £18.9 million from £635.2 million to £654.1 million.

As highlighted in the table below, the group's UK organic growth of 3.9% once more outperformed the annual market growth, which for 2015 was forecast to be 3.4% (Source: AMA Research Limited).  The contribution from the UK acquisitions completed during 2014 in addition to the acquisition of Matty's Wholesale Carpets, completed during 2015, amounted to £5.4 million bringing the total revenue increase in the UK to 4.9%, an improvement of £26.9 million on the previous year. 

The combined revenue performance from the Continental European businesses showed further contraction during the year, declining by 3.8% on a like for like basis which, once translated into sterling, showed a reduction of 9.3% for the year.

			£000	%	£000	%
Revenue for the year ended 31 December 2014:
	UK		548,393	86.3
	Continental Europe		86,849	13.7
					635,242	100.0
	Movement:
		UK organic growth	21,571	3.9
		UK acquisitions	5,376	-
					26,948	4.9
		Contraction in Continental Europe	(3,265)	-3.8
		Translation effect	(4,847)	-
					(8,112)	-9.3
	Total movement				18,836	3.0
Revenue for the year ended 31 December 2015:
	UK		575,341	88.0
	Continental Europe		78,737	12.0
					654,078	100.0

 

As a result of the increase in UK revenues and a contraction on the Continent during 2015, the proportion of group revenue from the UK increased from 86.3% to 88.0%. 

Gross margin

The group's gross margin increased during the year from 30.0% to 30.7%, with three factors contributing to the 0.7% improvement. Firstly a reduction in the cost of goods purchased provided a gain of 17 basis points, secondly, an improvement in volume related purchase rebates generated an improvement of 22 basis points and thirdly,  one-off benefits, which are unlikely to repeat during 2016 and beyond, amounting to 31 basis points and totalling £2.0 million, were secured during the year, principally in connection with the appreciation of sterling against the euro. 

Expenses

During the year, distribution and administrative expenses increased by £4.6 million, up 2.9% from £159.1 million to £163.7 million.  The mix of distribution to administration cost remained broadly unchanged finishing the year at 73.3%:26.7%.  People cost in isolation was the largest increase, amounting to 48.4% of the gross cost increase before currency translation.  Just over a third of the increase in people cost was offset by the gains arising from the reduction in fuel cost of £1.0 million.

	Total		Distribution		Administration
	£000	%	£000	%	£000	%
2014 expenses	159,078		117,458	73.8	41,620	26.2
Significant movements:
People cost	2,979	48.4	3,251	86.4	(272)	-11.3
Fuel	(1,011)	-16.4	(974)	-25.9	(37)	-1.5
Sampling investment	747	12.1	747	19.9	-	-
Bad debts	483	7.8	483	12.8	-	-
IT	1,289	20.9	-	-	1,289	53.8
Occupancy	673	10.9	-	-	673	28.1
Share costs	408	6.6	-	-	408	17.0
Intangibles	375	6.1	-	-	375	15.6
Other	218	3.5	256	6.8	(38)	-1.6
	6,161	100.0	3,763	100.0	2,398	100.0
Currency translation	(1,506)		(1,151)		(355)
2015 expenses	163,733		120,070	73.3	43,663	26.7

Elsewhere, the continued investment in sampling, IT and the expansion of the service centre infrastructure generated combined cost increases of £2.7 million.  The need to impair receivables, an increase in the cost of share based payments, and the intangible cost relating to the acquisition of Matty's Wholesale Carpets created an additional increase of £1.3 million.  The currency effect of translating the overseas businesses reduced the gross cost increase by £1.5 million.

Operating profit

		£000
Operating profit 2014		31,462
Gross margin improvement:
	Volume benefit	5,650
	Pricing benefit	4,320
		9,970
Expenses increase:
	Distribution	(2,612)
	Administration	(2,043)
	Total increase	(4,655)
Operating profit 2015		36,777
Drop through rate as a percentage of incremental revenue		28.2%
EBITDA 2014		36,362
EBITDA 2015		41,956
Increase		15.4%

Operating profit during 2015 increased by 16.9% compared with 2014 with the operating margin improving from 5.0% to 5.6%, reflecting the increase in gross margin and operational gearing generated on the higher revenue base.  The operating margin generated by the incremental year on year revenue improvement amounted to 28.2%.

Tax

The effective underlying rate of taxation reduced to 20.25% during the year, reflecting the decrease in UK headline corporation tax rate and also the further future reductions, already enacted, that impact upon deferred taxation. The anticipated effective underlying rate for 2016 is expected to reduce to 20% due to further UK rate reductions which have been enacted.

During the period, the board approved a tax strategy which is aligned to the group's overall strategic aims and values. The strategy sets out the group's approach to tax, including the tax governance framework, attitude to tax risk and its relationship with tax authorities. 

The group 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 group maintains an open and honest relationship with HM Revenue & Customs and currently operates with a level of tax compliance risk that is rated as "low". 

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

Earnings and dividend

Ordinary dividends

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

When declaring the interim and recommending the final dividend, the board considers the group's cash resource and adequacy of distributable reserves. 

Over the last five years, the group's total dividends and basic earnings per ordinary share have grown at a compound average growth rate of 9.4% and 10.5% respectively.

Year ending 31 December	Basic EPS Pence	Dividend Pence	Cover ratio
2011	24.60	14.15	1.74
2012	25.80	14.85	1.74
2013	24.50	15.30	1.60
2014	28.60	17.50	1.63
2015	33.80	20.70	1.63

Basic earnings per share for the year amounted to 33.8p, an improvement of 18.2% on the basic earnings of 28.6p for 2014.  Total ordinary dividends paid and proposed for 2015 have increased by 18.3% from 17.5p to 20.70p.

The relationship between ordinary dividends and basic earnings can also be expressed as a cover ratio which over the last five years has averaged 1.67 but, in the last two years has been lowered to a ratio of 1.63. 

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

In implementing the policy, the board ensures the parent company has sufficient distributable reserves available from which to make the distribution.  The table below illustrates the reserves position for the last five years and the ability of the parent to fund the dividend payment as measured by the number of years cover.  On average, over the last five years, the parent has maintained reserves sufficient to cover 4.8 years of dividend.  Details of current year distributable reserves are shown in the retained earnings column in the Statement of Changes in Equity on page 19.

	Distributable reserves		Proposed
Year ending 31	parent	group	dividends	Years
December	£000	£000	£000	Cover
2011	59,679	115,778	11,663	5.1
2012	58,435	121,361	12,300	4.8
2013	71,220	124,465	12,689	5.6
2014	57,241	126,018	14,655	3.9
2015	81,082	140,924	17,416	4.7

Special dividends

For a number of years, the group has undertaken an expansionary investment programme to improve and increase the capacity and reach of its infrastructure in the UK.  The final significant element in the current programme will be the construction of a new distribution facility in Ipswich. 

Once this project is completed, the group's commitment to expansionary capital expenditure will largely cease and, subject to ongoing levels of cash generation being maintained, should lead to a position whereby the group will carry a level of funding in excess of that which would be required to maintain its asset base. 

This development, therefore, paves the way for a return of surplus funds to shareholders and the board is of the opinion that this can be best achieved through the payment of special dividends. 

Whilst the timing of the Ipswich construction has been delayed over the last few years, the prospect of initiating the project during the latter half of 2016 now appears likely.  This timetable is still behind the schedule previously advised to shareholders and therefore, given that capital expenditure will not be at the levels previously advised, the board is declaring the payment of a special dividend during April 2016.

Once the cash effect of the capital outlay on the Ipswich development has been fully assessed following its completion, the board will give further consideration to the distribution of surplus capital by the use of special dividend payments. 

The conditions that will apply to any special dividend payments are firstly, the groups forecast average net debt in the year in which the special dividend is paid should be approximately equal to or less than 0.5 of EBITDA, secondly, the cover ratio of the aggregated ordinary and special dividends when expressed in terms of dividend cover will not be less than one and thirdly, the payment must be made from available distributable reserves. 

The board believes this approach provides a flexible mechanism for managing the maintenance and expansion of the group's asset base.

	Cash from	Net capital	Dividends
	operations	expenditure	proposed
Year ending 31 December	£000	£000	£000
2011	20,856	1,925	11,663
2012	37,195	6,469	12,300
2013	34,849	12,788	12,689
2014	38,023	5,576	14,655
2015	41,557	2,760	17,416

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

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

 

Employee benefits

The liability attaching to employee benefits is as follows:

	2015 £000	2014 £000
Current liabilities	2,171	2,933
Non-current liabilities	16,843	18,803
Total	19,014	21,736

The year on year decrease in the deficit amounts to £2.7 million.  Whilst the liability relates to both the UK and Swiss defined benefit pension plans its composition is dominated by the UK plan.  Relative to the equivalent period last year, average bond yields in the UK have increased, and therefore, the discount rate assumption has increased by 0.3% per annum from 3.4% to 3.7% (causing a reduction in the value placed on the Scheme's liabilities).  However, the market implied level of price inflation has edged up slightly, increasing from 3.2% to 3.3% (which, other things being equal, would lead to an increase in the Scheme's liabilities).  The net effect of these two factors is positive in the sense of reducing the Scheme's deficit compared to the prior year.  With regard to life expectancy assumptions, mortality has been based on the CMI 2013 tables and not the more recent CMI 2015 tables, which predict an improvement in mortality.  The later tables have not been adopted in order to avoid potential movements in the liability as a result of a volatility arising from potential short term trends. 

Cash flow

Net cash flow from operating activities

During the year, net cash flow from operating activities increased by £9.3 million from £27.2 million to £36.5 million.  The components of the movement are shown in the table below.

	£000
2014 net cash flow from operating activities	27,193
Operating profit	5,324
Depreciation and amortisation	279
Profit on asset disposals	(1)
Share based payments	408
Working capital	2,920
Interest paid	200
Taxation	112
Additional pension contributions	71
2015 net cash flow from operating activities	36,506

As with previous years, the two key contributors to the year on year movement were the operating profit increase of £5.3 million and the net working capital release of £2.9 million driven by a substantial increase in payables of £7.3 million.  

The additional contributions funding the UK defined benefit pension plan deficit amounted to £3.0 million but, following the triennial actuarial valuation of the UK plan at 31 March 2014, the additional contributions for 2016 will fall to £2.1 million.  The next triennial valuation will take place on 31 March 2017.  Subject to the outcome, contributions for 2017 are expected to be £2.2 million.

Cash flows from investing and financing activities

The table below summarises the cash flow movements during the year arising from investing and financing activities.  The overall cash outflow from the two activities was down by £6.6 million with the four main factors being a reduction in net capital expenditure of £3.0 million, the incremental investment as a result of the Matty's Wholesale Carpets acquisition, a substantial reduction in cash outflows directed at reducing borrowings and an increase in the dividend payment.

	£000
2014 cash flows from investing activity	(5,061)
2014 cash flows from financing activity	(21,871)
	(26,932)
Movement in investing activity:
Net reduction in capital expenditure	2,997
Interest received	(120)
Acquisitions	(1,646)
	1,231
Movement in financing activity:
Treasury share issues	(23)
Repayment of borrowings	7,393
Dividends paid	(1,966)
	5,404
Net movement	6,635
2015 cash flows from investing activity	(3,830)
2015 cash flows from financing activity	(16,467)
	(20,297)

Net debt

As detailed in the table below, group net funds at the end of the year increased by £19.4 million from £24.6 million to £43.9 million.

Group	At 1 January 2015	Cash flows	Translation differences	At 31 December 2015
	£000	£000	£000	£000
Cash at bank and in hand	47,589	16,209	134	63,932
Debt due within one year	(204)	190	14	-
Debt due after one year	(22,818)	2,627	191	(20,000)
	24,567	19,026	339	43,932

  

Funding and going concern

The group maintains sufficient banking facilities to fund its operations and investments and, as at 31 December 2015, the group's total facilities were 75.5% undrawn as shown below.

	Drawn £000	Undrawn £000	Total facility £000
Less than one year	-	41,706	41,706
Over one year and less than five years	20,000	20,000	40,000
	20,000	61,706	81,706

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

 

Steve Wilson

Group Finance Director

3 March 2016

Consolidated Income Statement

for the year ended 31 December 2015

		2015	2014
		£000	£000
Revenue	1	654,078	635,242
Cost of sales		(453,568)	(444,702)
Gross profit		200,510	190,540
Distribution expenses		(120,070)	(117,458)
Administrative expenses		(43,663)	(41,620)
Operating profit	1	36,777	31,462
Finance income		738	819
Finance expenses		(1,891)	(1,981)
Net finance costs		(1,153)	(1,162)
Profit before tax		35,624	30,300
Taxation		(7,213)	(6,515)
Profit for the year attributable to the equity shareholders		28,411	23,785
Dividend paid per share	3	17.50p	15.30p
Earnings per share
Basic	2	33.8p	28.6p
Diluted	2	33.7p	28.5p

All group operations during the financial years were continuing operations.

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2015

		2015 £000	2014 £000
Profit for the year attributable to the equity shareholders		28,411	23,785
Other comprehensive income:
Items that will never be reclassified to profit or loss
Remeasurement of defined benefit plans		1,292	(8,900)
Related tax		(554)	1,789
		738	(7,111)
Items that are or may be reclassified to profit or loss
Foreign exchange translation differences arising on translation of overseas operations		6	(742)
Effective portion of changes in fair value of cash flow hedges		(556)	(177)
Transfers to profit or loss on cash flow hedges		172	132
Related tax		58	18
		(320)	(769)
Other comprehensive income/(expense) for the year		418	(7,880)
Total comprehensive income attributable to the equity shareholders for the year		28,829	15,905

Statements of Financial Position

at 31 December 2015

			Note	2015 £000	2014 £000
	Assets
	Non-current assets
	Property, plant and equipment			101,263	103,461
	Intangible assets			10,388	10,013
	Deferred tax assets			2,238	2,726
				113,889	116,200
	Current assets
	Inventories			119,143	116,569
	Trade and other receivables			120,154	118,816
	Cash and cash equivalents			63,932	47,589
				303,229	282,974
	Total assets		1	417,118	399,174
	Liabilities
	Current liabilities
	Other interest-bearing loans and borrowings			-	(204)
	Trade and other payables			(172,701)	(166,266)
	Employee benefits			(2,171)	(2,933)
	Income tax payable			(6,974)	(6,073)
				(181,846)	(175,476)
	Non-current liabilities
	Other interest-bearing loans and borrowings			(20,000)	(22,818)
	Employee benefits			(16,843)	(18,803)
				(36,843)	(41,621)
	Total liabilities		1	(218,689)	(217,097)
	Net assets			198,429	182,077
Equity attributable to equity holders
of the parent
Share capital				4,268		4,268
Share premium				53,512		53,512
Other reserves				(275)		(1,721)
Retained earnings				140,924		126,018
Total equity				198,429		182,077

These financial statements were approved by the board of directors on 3 March 2016 and were signed on its behalf by:

Tony Brewer                                        Steve Wilson

Director                                                 Director

Company Number: 460129

Statement of Changes in Equity

for the year ended 31 December 2015

	Share capital £000	Share premium £000	Capital redemption reserve £000	Translation reserve £000	Cash flow hedging reserve £000	Treasury reserve £000	Retained earnings £000	Total equity £000
Balance at 1 January 2014	4,268	53,512	88	6,165	(87)	(10,908)	124,465	177,503
Profit for the year attributable to the equity shareholders	-	-	-	-	-	-	23,785	23,785
Other comprehensive income	-	-	-	(742)	(45)	-	(7,093)	(7,880)
Total comprehensive income for the year	-	-	-	(742)	(45)	-	16,692	15,905
Transactions with equity shareholders, recorded directly in equity
Share-based payments	-	-	-	-	-	-	692	692
Share options exercised by employees	-	-	-	-	-	3,808	(2,780)	1,028
Current tax on share options	-	-	-	-	-	-	183	183
Deferred tax on share options	-	-	-	-	-	-	(545)	(545)
Dividends to equity holders	-	-	-	-	-	-	(12,689)	(12,689)
Total contributions by and distributions to equity shareholders	-	-	-	-	-	3,808	(15,139)	(11,331)
Balance at 31 December 2014	4,268	53,512	88	5,423	(132)	(7,100)	126,018	182,077
Balance at 1 January 2015	4,268	53,512	88	5,423	(132)	(7,100)	126,018	182,077
Profit for the year attributable to the equity shareholders	-	-	-	-	-	-	28,411	28,411
Other comprehensive income	-	-	-	6	(384)	-	796	418
Total comprehensive income for the year	-	-	-	6	(384)	-	29,207	28,829
Transactions with equity shareholders, recorded directly in equity
Share-based payments	-	-	-	-	-	-	1,100	1,100
Share options exercised by employees	-	-	-	-	-	1,824	(819)	1,005
Current tax on share options	-	-	-	-	-	-	95	95
Deferred tax on share options	-	-	-	-	-	-	(22)	(22)
Dividends to equity holders	-	-	-	-	-	-	(14,655)	(14,655)
Total contributions by and distributions to equity shareholders	-	-	-	-	-	1,824	(14,301)	(12,477)
Balance at 31 December 2015	4,268	53,512	88	5,429	(516)	(5,276)	140,924	198,429

Cash Flow Statements

for the year ended 31 December 2015

			2015 £000	2014 £000
Cash flows from operating activities
Profit before tax for the year			35,624	30,300
Adjustments for:
Depreciation, amortisation and impairment			5,179	4,900
Finance income			(738)	(819)
Finance expense			1,891	1,981
Profit on sale of property, plant and equipment			(31)	(30)
Share-based payments			1,100	692
Operating cash flows before changes in working
capital and other payables			43,025	37,024
Change in inventories			(1,827)	(1,514)
Change in trade and other receivables			(1,524)	(143)
Change in trade and other payables			7,270	2,656
Cash generated from the operations			46,944	38,023
Interest paid			(1,268)	(1,477)
Tax paid			(6,245)	(6,357)
Additional contributions to defined benefit plan			(2,925)	(2,996)
Net cash flow from operating activities			36,506	27,193
Cash flows from investing activities
Proceeds from sale of property, plant and equipment			277	92
Interest received			726	846
Acquisition of subsidiaries, net of cash acquired			(1,977)	(331)
Acquisition of property, plant and equipment			(2,856)	(5,668)
Net cash flow from investing activities			(3,830)	(5,061)
Cash flows from financing activities
Proceeds from the issue of treasury shares			1,005	1,028
Repayment of borrowings			(2,817)	(10,210)
Dividends paid			(14,655)	(12,689)
Net cash flow from financing activities			(16,467)	(21,871)
Net increase in cash and cash equivalents			16,209	261
Cash and cash equivalents at 1 January			47,589	47,477
Effect of exchange rate fluctuations on cash held			134	(149)
Cash and cash equivalents at 31 December			63,932	47,589

Notes

1 Segment reporting

The group has 56 operating segments in the UK and five 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 consider all segments have similar economic characteristics except for the regulatory environment in which they operate, which is determined by the country in which the operating segment resides.

The 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
	2015 £000	2014 £000	2015 £000	2014 £000	2015 £000	2014 £000
Revenue
External revenues	575,341	548,393	78,737	86,849	654,078	635,242
Reportable segment operating profit	37,363	30,695	575	1,183	37,938	31,878
Reportable segment assets	257,984	256,274	34,067	34,444	292,051	290,718
Reportable segment liabilities	(158,859)	(151,566)	(13,326)	(14,568)	(172,185)	(166,134)

During the year there are no inter-segment revenues for the reportable segments (2014: £nil).

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

							2015 £000		2014 £000
Profit for the year
Total profit for reportable segments								37,938	31,878
Unallocated expense								(1,161)	(416)
Operating profit								36,777	31,462
Finance income								738	819
Finance expense								(1,891)	(1,981)
Profit before taxation								35,624	30,300
Taxation								(7,213)	(6,515)
Profit for the year								28,411	23,785

Notes continued

1 Segment reporting - continued

								2015 £000	2014 £000
Assets
Total assets for reportable segments								292,051	290,718
Unallocated assets:
Properties, plant and equipment								89,828	91,493
Deferred tax assets								2,238	2,726
Cash and cash equivalents								33,001	14,237
Total assets								417,118	399,174
Liabilities
Total liabilities for reportable segments								(172,185)	(166,134)
Unallocated liabilities:
Employee benefits								(19,014)	(21,736)
Other interest-bearing loans and borrowings								(20,000)	(23,022)
Income tax payable								(6,974)	(6,073)
Derivative liabilities								(516)	(132)
Total liabilities								(218,689)	(217,097)
			UK £000	Continental Europe £000		Reportable segment total £000		Unallocated £000	Consolidated total £000
Other material items 2015
Capital expenditure			2,064	543		2,607		287	2,894
Depreciation			2,246	538		2,784		2,020	4,804
Amortisation			-	-		-		375	375
Other material items 2014
Capital expenditure			2,586	421		3,007		2,661	5,668
Depreciation			2,260	567		2,827		1,998	4,825
Amortisation			-	-		-		75	75

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

Each segment is a continuing operation.

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

Notes continued

1 Segment reporting - continued

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

	UK		Continental Europe		Total
	2015 £000	2014 £000	2015 £000	2014 £000	2015 £000	2014 £000
Revenue
Residential	399,453	378,910	40,281	43,415	439,734	422,325
Commercial	175,888	169,483	38,456	43,434	214,344	212,917
	575,341	548,393	78,737	86,849	654,078	635,242

2 Earnings per share

	2015 £000	2014 £000
Earnings
Earnings for basic and diluted earnings per share	28,411	23,785
	2015	2014
Number of shares
Issued ordinary shares at 31 December	85,363,743	85,363,743
Effect of shares held in treasury	(1,331,576)	(2,053,036)
Weighted average number of ordinary shares for the purposes of basic earnings per share	84,032,167	83,310,707
Effect of diluted potential ordinary shares:
Weighted average number of ordinary shares at 31 December	84,032,167	83,310,707
Dilutive effect of share options	282,078	264,178
Weighted average number of ordinary shares for the purposes of diluted earnings per share	84,314,245	83,574,885

Notes continued

3 Dividends

	2015 £000	2014 £000
Interim dividend for 2014 of 5.20p paid 2 January 2015	4,355	-
Final dividend for 2014 of 12.30p paid 1 July 2015	10,300	-
Interim dividend for 2013 of 4.65p paid 2 January 2014	-	3,856
Final dividend for 2013 of 10.65p paid 1 July 2014	-	8,833
	14,655	12,689

The final proposed dividend of 14.70p per share (2014: 12.30p per share) will not be provided for until authorised by shareholders at the forthcoming AGM.  There are no income tax consequences.

The interim dividends of 6.00p per share (2014: 5.20p per share) was provided for when the dividend was paid.  The dividend was paid on 2 January 2016 and totalled £5,048,000.

The total value of dividends proposed but not recognised at 31 December 2015 is £17,416,000 (2014: £14,655,000).

A special dividend has been declared of 6.00p per share that will be paid on 25 April 2016.

4. Additional information

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2015 or 2014 but is derived from those accounts. Statutory accounts for 2014 have been delivered to the registrar of companies, and those for 2015 will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

We anticipate that the company's statutory accounts will be posted to shareholders during April 2016 and will be displayed on the company's website at www.headlam.com at the same time.  Copies of the statutory accounts will also be available from the company's registered office at Headlam Group plc, PO Box 1, Gorsey Lane, Coleshill, Birmingham, B46 1LW.

This preliminary announcement of results for the year ended 31 December 2015 was approved by the board on

3 March 2016.

 

END

 

 

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