Final Results

MFI Furniture Group PLC 26 February 2004 26 February 2004 Preliminary results for the 52 weeks to 27 December 2003 Financial highlights - Turnover up 15.1% to £1,482m - Howden Joinery up 37.1% to £448m - UK Retail up 5.7% to £911m - France Retail up 21.2% to £114m - Pre-tax profit of £117.9m - Pre-tax profit before property profits up 28.6% to £103.8m* - EBITDA up 26.4% to £162.3m (see note 11) - Earnings per share of 15.4p - Earnings per share before property profits up 26.5% to 12.9p* - Dividends per share up 22.6% to 3.8p * reported before profit on disposal of fixed assets of £14.1m Business highlights - Continuing progress on all strategic priorities - Sixth year of exceptional growth at Howden Joinery - Continued growth from UK Retail - now entering final phase of store refurbishments - Excellent performance from new product categories - France Retail responding well to store refits based on UK High Street template - Decision taken to move to test phase of Howden Millwork John Hancock, Chief Executive, said: 'For the first time in the Group's history, operating profits have exceeded £100m. 'We are pleased to be reporting on such strong financial results in what is an increasingly competitive retail environment. The retail divisions are nearing the end of a significant transition period that has seen a number of changes over the past three years, including the refurbishment of the UK and French store portfolios, the introduction of new product categories and international pilots. The growth of Howden Joinery has added balance and stability to the Group as a whole. With a focus on costs, I feel confident that MFI is strongly positioned for future growth in profitability.' - ends - Contacts: MFI Furniture Group Plc John Hancock, Chief Executive 020 8913 5319 Martin Clifford-King, Finance Director 020 8913 5350 Brunswick Group Limited Susan Gilchrist / Fiona Laffan / Katya Reynier 020 7404 5959 Overview We have continued to make progress on our key strategic priorities - namely the rollout of the new format into our stores both in the UK and in France, the continued expansion of our highly successful Howden Joinery trade operation in the UK, together with the continued piloting of a trade operation in the US and the development of new supply chain initiatives. The Group has achieved a significantly improved financial performance for the fourth successive year in a period when we have invested heavily. We are growing our profitability despite an increasingly unpredictable environment. Financial results Group sales and profitability increased strongly, with the outstanding performance of Howden Joinery adding further balance and stability to the Group. Sales of £1,482m represented a 15.1% increase on the previous year, 8.9% on a same store basis. Profit before tax and exceptional credits rose by 28.6% to £103.8m. An exceptional credit of £14.1m, arising from the disposal of properties, resulted in reported profit before tax of £117.9m. Earnings per share before exceptional items rose by 26.5% to 12.9p. Sales growth versus last year within each route to market was as follows: Sales Total Same store Howden Joinery 37.1% 27.2% UK Retail 5.7% 1.8% France Retail 21.2% 7.3% Total Group 15.1% 8.9% Overall gross margin has increased from 50.2% to 50.9% reflecting more efficient global sourcing, together with an increased mix of higher margin product in the refurbished MFI stores and improved margins in the Howden Joinery depots. Total selling and distribution costs have increased by 14.6%. Within this figure is the impact of the acquisition of Sofa Workshop and the additional cost of the new and reformatted stores and depots; after deducting these, same store costs are up 8%. Within operating profit there is a £2.7m provision for employer national insurance arising from our various share incentive schemes and a further £0.7m (2002 - £0.1m) amortisation of goodwill arising on the acquisition of Sofa Workshop. Also we have received £4.1m for the surrender of leases which have been credited to operating profit. Routes to market - Howden Joinery Howden Joinery has continued to deliver outstanding results with operating profits of £72.0m, up 62.2% on last year's figure of £44.4m. Operating margins have grown from 13.6% to 16.1% over the period. The returns achieved today are a result of the investment decisions taken in 1999 when we increased our opening programme with the associated revenue costs and impact on profitability at the time. The continued organic growth from our existing depots, and the rollout of the opening programme, resulted in total sales of £448m - an increase of 37.1% on last year. Same depot sales growth was 27.2%. By the end of 2003 we had 300 depots trading in the UK, 31 being opened in the year. We aim to open a further 30 depots in 2004 and are ultimately targeting a total of at least 380 depots within the UK. - UK Retail Sales were £911m, representing an increase over the previous year of 5.7%, up 1.8% on a same store basis. The operating profit of the UK Retail division has increased from £37.7m to £41.7m, an increase of 10.6%. This has been achieved after incurring £19m of costs and lost revenues associated with the refurbishment programme (2002 - £20m). A further 46 stores were opened in the new format in 2003 bringing the total to 122 today, two-thirds of the chain. Of these stores 74 are in full refit, 23 have received a partial refit and 25 have received a new partial refit. And by the end of this year 156 will be in the new format, representing just under 90% of our orders. The remaining stores will not be converted. The first year uplift in orders in our full refit stores was 23%, compared to the 25% level that we saw in 2002. Full refit stores trading in the second year since refit have shown a 10% decline in orders against the first year, impacted by a weak fourth quarter and a reduction in new product development in the year. We are working to improve the performance in the second year using additional promotional support. At the time of the interims we said we were piloting a new partial refitted store and these stores have achieved a 17% improvement in their first year, compared to the 12% improvement we are seeing in the original partial refits. Critical mass will be achieved during 2004 which will give us a wider range of opportunities to promote our brands; including the ability to launch national brand advertising across all our products and to develop better long-term relationships with our customers. This, combined with an increased focus on service levels, should drive both customer footfall and frequency of visits. New product categories are performing in line with expectation with bathrooms accounting for 8% (2002 - 8%) of sales in those stores where the product is sold, reflecting a run-rate of £55m of sales per annum. Sofa sales are running at £75m per annum and represent 5% (2002 - 4%) of sales in those stores where the product is sold. The improvement in the sofa performance is encouraging as we said 12 months ago that it was a key focus for 2003. Our move towards solutions for every room in the house has valuable growth potential, as the furniture market becomes increasingly fashion-driven. As we anticipated the pace of product innovation during 2003 was slowed as we rolled out the store refits. As we complete the refurbishment programme in 2004 the product development will return to former levels of investment with a particular focus on lower-priced kitchens, bedrooms and beds. - France Retail Notwithstanding a weaker furniture market in France, sales were £114m, up 21.2% on last year (10% in local currency) and with same store growth up by 7.3% in local currency. We have focussed on the refurbishment programme of our stores during the year, and this will be virtually complete by the end of 2004. We have added 40 new format stores (36 refits and 4 new stores) to the 28 that were open at the beginning of the year - making a total of 68. And we are seeing first year uplifts of around 20% on the refits. We now have 135 stores and plan to open five during 2004. Operating profits are £0.3m (2002 - £2.3m) after incurring £5m costs of disruption arising from the conversion process (2002 - £4m) and further investment in the infrastructure of the company. - Howden Millwork We have extended our initial pilot of 12 depots in the US to 15 during the year. The pilot has given us confidence that US tradesmen like the Howdens service proposition and that we can attract and retain good staff. Losses of £8.4m in the year were in line with our expectations and in line with the Howden business model where losses are incurred in the early stages. We are now moving to the next phase where we will fully evaluate the customers' requirements by testing both pricing and demand for product made to a US specification. This will help validate that the business model can provide acceptable levels of return on any further investment. Plans have been approved to open a further five depots in the Southeast of the US in 2004, expanding the total depot portfolio for the purposes of the test to 20 depots, with an anticipated loss of £10m for the year. The test will continue to be low risk and it is results, not a timetable, which will drive the future development of the business. - Supply chain The supply chain is a key area of focus for the Group as it is the backbone of our business and is instrumental to our continuing growth. We have invested £50m in total in integrated IT systems, which replace legacy systems that were inadequate for supporting our business growth. The first phase of our SAP project - the financial systems - went live in July on schedule, and the second phase - supply chain - will be completed in March. Future stages - covering manufacturing, warehouse management and the retail stores - will be evaluated on their benefit to the business. We have recently established a joint venture in Hong Kong to source Chinese product. China is the lowest cost country for sourcing many of our core products and components that are currently procured within Europe. The potential savings are considerable, and the joint venture should begin operation during 2004. Structural Guarantee As reported at the interims we continue to vigorously contest HM Customs & Excise's challenge to the Company's VAT treatment for structural guarantees. The maximum potential exposure is £50m at the year-end, but this would be expected to be offset by the recovery of approximately £13m of insurance premium tax paid on the sale of extended structural guarantees and by underwriting profit within our captive insurance company. In common with all of our product categories we revise our products from time to time and we will be changing the current insurance product in the first half. We are carrying the tax paid of £46m on our balance sheet as a debtor without any provision and further disclosure is given in note 12 of the accompanying notes. Cash flow The Group is highly cash generative with EBITDA rising to £162.3m, compared to £128.4m in the previous year. Working capital has increased as we built stock to ensure that we can meet our customers' requirements and expanded the Howden Joinery business - nevertheless we expect to obtain improvements in the use of working capital as a result of the introduction of our new systems. A higher level of gross capital expenditure has been incurred as the business has focussed on its extensive organic growth plans, but this has been partially funded by a sale and leaseback programme covering some of our tertiary sites. As a result the Group had net borrowings of £1.2m at the year-end (2002 - net free cash of £32.2m). This shows a reduction of net free cash of £33.4m during the year, but is struck after lodging £46m with HM Customs & Excise for the disputed VAT on the structural guarantee. In addition the Group held £11.8m (2002 - £6.7m) on short-term deposit, held in escrow for future insurance claims on the structural guarantee. Dividend The Board has proposed a raised final dividend of 2.0p per share to be paid on 11 June 2004 to shareholders on the register at 28 May 2004. The shares will be quoted ex-dividend from 26 May 2004. This brings a total dividend for the year to 3.8p per share, an increase of 22.6% over the previous year. The Board is reviewing the relative dividend payout ratio between the first and second half. This is primarily due to the second half accounting for a growing proportion of profits, driven by the increasing contribution of Howden Joinery to the Group's results. In future it is likely that the final dividend will increasingly account for a greater proportion of the full-year dividend. Current trading and outlook Total Group orders from Boxing Day to 24 February have increased by 4% (up 2% on a same store basis). Howden Joinery continues to perform well whilst UK Retail has suffered from a slowdown in new product development - particularly in lower-priced kitchens, bedrooms and beds - as we have rolled out the refurbishment programme. Orders Total Same store Howden Joinery 23% 18% UK Retail (2)% (3)% France Retail 24% 11% Total Group 4% 2% The UK Retail performance for the year to date is a little disappointing, but it is struck part way through the winter sale and is measured against strong comparatives (2002 - same store orders for the full winter sale were up 8% on 2001). In order to provide a comprehensive update on trading following the end of the winter sale, we will issue a further trading update on Tuesday 23 March 2004. We have every confidence that the business remains capable of further strong growth in a series of highly fragmented markets; markets in which we can outperform our competitors in terms of product, pricing and service standards. CONSOLIDATED PROFIT AND LOSS ACCOUNT _________________________________________________________________________________ For the 52 weeks to 27 December 2003 52 weeks to 52 weeks to 27 December 2003 28 December 2002 Notes £m £m Turnover: Group and share of joint ventures 2 1,485.1 1,288.8 Less: Share of joint ventures (3.6) (1.4) ------ ------ Group turnover 1,481.5 1,287.4 Cost of sales (727.2) (641.2) ------ ------ Gross profit 754.3 646.2 Selling and distribution costs (581.4) (507.4) Administrative expenses (66.6) (58.9) Goodwill amortisation (0.7) (0.1) ------ ------ Operating profit 2 105.6 79.8 Share of operating loss of joint ventures (2.1) (2.0) ------ ------ Total operating profit - Group and share of joint ventures 103.5 77.8 Net profit on disposal of fixed assets 3 14.1 0.1 ------ ------ Profit on ordinary activities before interest 117.6 77.9 Interest receivable and similar income 1.5 3.2 Interest payable and similar charges (1.2) (0.3) ------ ------ Profit on ordinary activities before taxation 117.9 80.8 Tax on profit on ordinary activities 4 (31.1) (23.4) ------ ------ Profit for the financial period 86.8 57.4 Dividends paid and proposed 5 (21.9) (17.4) ------ ------ Amount transferred to reserves 7 64.9 40.0 ====== ====== Earnings per share Basic earnings per 10p ordinary share 6 15.4p 10.2p ====== ====== Diluted earnings per 10p ordinary share 6 14.3p 9.5p ====== ====== Earnings per share before profit on sale of fixed assets Basic earnings per 10p ordinary share 6 12.9p 10.2p ====== ====== Diluted earnings per 10p ordinary share 6 12.0p 9.5p ====== ====== All results are derived from continuing operations CONSOLIDATED BALANCE SHEET ________________________________________________________________________________ 27 Dec 2003 28 Dec 2002 Notes £m £m FIXED ASSETS Intangible assets 14.5 14.6 Tangible assets 387.0 356.8 Investments 51.3 46.1 ------ ------ Total fixed assets 452.8 417.5 ------ ------ CURRENT ASSETS Stocks 195.7 177.1 Debtors 187.9 124.0 Investments 11.8 6.9 Cash at bank and in hand 48.8 33.3 ------ ------ 444.2 341.3 CREDITORS Amounts falling due within one year 8 334.9 316.0 ------ ------ Net current assets 109.3 25.3 ------ ------ Total assets less current liabilities 562.1 442.8 CREDITORS Amounts falling due after more than one year 9 51.5 2.8 PROVISIONS FOR LIABILITIES AND CHARGES 10 21.2 21.9 ------ ------ Net assets 489.4 418.1 ====== ====== CAPITAL AND RESERVES Called up share capital 62.0 61.3 Share premium account 7 65.8 62.1 Revaluation reserve 7 22.3 40.0 Other reserves 7 26.7 24.3 Profit and loss 7 312.6 230.4 ------ ------ Equity shareholders' funds 489.4 418.1 ====== ====== CONSOLIDATED CASH FLOW STATEMENT ________________________________________________________________________________ For the 52 weeks to 27 December 2003 52 weeks to 52 weeks to 27 Dec 2003 28 Dec 2002 Notes £m £m Net cash inflow from operating activities 11 93.6 138.0 Returns on investments and servicing of finance 11 0.3 2.9 Taxation (22.2) (16.2) Capital expenditure and financial investment 11 (85.1) (117.5) Acquisitions 11 - (8.5) Equity dividends paid (19.7) (16.0) ------ ------ Cash outflow before use of liquid resources and financing (33.1) (17.3) Management of liquid resources (4.9) (6.7) Financing 11 52.9 5.5 ------ ------ Increase/(decrease) in cash in the period 11 14.9 (18.5) ====== ====== RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS ________________________________________________________________________________ 52 weeks to 52 weeks to 27 Dec 2003 28 Dec 2002 Notes £m £m Increase/(decrease) in cash in the period 11 14.9 (18.5) Cash movement on : 11 bank loans (48.7) - debt and lease financing - (0.1) liquid resources 4.9 6.7 ------ ------ Change in net funds resulting from cash flows (28.9) (11.9) Foreign currency translation differences 11 0.6 (0.3) ------ ------ Movement in net funds in the (28.3) (12.2) period Net funds at the beginning of the period 11 38.9 51.1 ------ ------ Net funds at the end of the period 11 10.6 38.9 ====== ====== 1. BASIS OF PREPARATION The financial information set out does not constitute statutory financial statements for the periods ended 52 weeks to 27 December 2003 and 52 weeks to 28 December 2002, but is derived from those accounts. Statutory accounts for the 52 weeks to 28 December 2002 have been delivered to the Registrar of Companies and those for the 52 weeks to 27 December 2003 will be sent to shareholders and filed with the Registrar of Companies on 16 April 2004. The auditors have reported on the accounts, their reports were unqualified and did not contain statements under Section 237(2) or (3) of the Companies Act 1985. 2. SEGMENTAL ANALYSIS 52 weeks to 52 weeks to 27 Dec 2003 28 Dec 2002 £m £m TURNOVER (1) Howden Joinery 448.1 326.9 UK Retail 910.9 861.4 France Retail 114.2 94.2 Howden Millwork 5.1 2.0 Other operations 3.2 2.9 ------ ------ Turnover 1,481.5 1,287.4 Joint venture operations 3.6 1.4 ------ ------ Total turnover 1,485.1 1,288.8 ====== ====== PROFIT BEFORE TAXATION(2) Howden Joinery 72.0 44.4 UK Retail 41.7 37.7 France Retail 0.3 2.3 Howden Millwork (8.4) (4.5) Other operations - (0.1) ------ ------ Operating profit 105.6 79.8 Joint venture operations (2.1) (2.0) ------ ------ Total operating profit 103.5 77.8 Profit on disposal of fixed assets 14.1 0.1 Net interest receivable 0.3 2.9 ------ ------ Profit before taxation 117.9 80.8 ====== ====== NET ASSETS Howden Joinery 132.8 85.6 UK Retail 270.8 229.4 France Retail 39.1 29.3 Howden Millwork 4.6 4.6 Other operations 1.3 1.5 Joint venture operations 1.1 2.1 ------ ------ 449.7 352.5 Unallocated net assets(3) 39.7 65.6 ------ ------ Total net assets 489.4 418.1 ====== ====== 1 The analysis of turnover by destination is not materially different from the analysis of turnover by origin. 2 All results are from continuing operations. 3 Unallocated net assets comprise balances in respect of dividends, cash, borrowing and investment in own shares. 3. PROFIT ON DISPOSAL OF FIXED ASSETS The profit on disposal of fixed assets of £14.1m (2002: £0.1m) represents net profits on disposal of land and buildings. The associated tax charge is £nil (2002: £nil) as the profit is offset by available tax losses. 4. TAX ON PROFIT ON ORDINARY ACTIVITIES 52 weeks to 52 weeks to 27 Dec 2003 28 Dec 2002 £m £m Taxation on profit for the period comprises: UK corporation tax 32.8 19.0 Adjustment relating to prior periods (5.3) (4.0) Deferred tax 3.6 8.4 ------ ------ 31.1 23.4 ====== ====== The taxation charge is calculated at 30.0% (2002 - 29.0%) on profits before profits on disposal of fixed assets. 5. EQUITY DIVIDENDS 52 weeks to 52 weeks to 28 Dec 2003 28 Dec 2002 £m £m Interim paid - 1.8 pence per share (2002 - 1.5 pence per share) 10.3 8.0 Final proposed - 2.0 pence per share (2002 - 1.6 pence per share) 11.6 9.4 ====== ====== Total dividend - 3.8 pence per share (2002 - 3.1 pence per share) 21.9 17.4 ====== ====== 6. EARNINGS PER SHARE Earnings per share for the 52 weeks to 28 December 2002 have been restated to exclude shares held by the Group's employee share trusts in accordance with FRS14: 'Earnings per share'. 52 weeks to 27 December 2003 52 weeks to 28 December 2002 ------------------ ----------------- Earnings Weighted Earnings Earnings Weighted Earnings average per share average per share number of number shares of shares £m m p £m m p Basic earnings per share Earnings attributable to ordinary shares 86.8 565.4 15.4 57.4 564.3 10.2 Effect of dilutive share options - 41.3 (1.1) - 39.5 (0.7) ------ ------- ------- ------ ------ ------ Diluted earnings per share 86.8 606.7 14.3 57.4 603.8 9.5 ====== ======= ======= ====== ====== ====== Reconciliation of earnings per share to exclude profit on sale of fixed assets Basic earnings per share 86.8 565.4 15.4 57.4 564.3 10.2 Profit on sale of fixed assets (14.1) - (2.5) (0.1) - - ------ ------- ------- ------ ------ ------ Basic earnings per share before profit on sale of fixed assets 72.7 565.4 12.9 57.3 564.3 10.2 ====== ======= ======= ====== ====== ====== Diluted earnings per share 86.8 606.7 14.3 57.4 603.8 9.5 Profit on sale of fixed assets (14.1) - (2.3) (0.1) - - ------ ------- ------- ------ ------ ------ Diluted earnings per share before profit on sale of fixed assets 72.7 606.7 12.0 57.3 603.8 9.5 ====== ======= ======= ====== ====== ====== 7. RESERVES Share Profit and premium Other Revaluation loss account reserves reserve account £m £m £m £m At 28 December 2002 62.1 24.3 40.0 230.4 Retained profit for the period - - - 64.9 Shares issued 3.7 - - (0.2) Amortisation of goodwill - 2.4 - (2.4) Realised revaluation surplus - - (17.7) 17.7 Foreign exchange - - - 2.2 ------- ------ -------- -------- At 27 December 2003 65.8 26.7 22.3 312.6 ======= ====== ======== ======== 8. CREDITORS AMOUNTS FALLING DUE WITHIN ONE YEAR 27 Dec 2003 28 Dec 2002 £m £m Trade creditors 140.7 128.7 Corporation tax 19.8 14.5 Other taxation and social security 21.8 21.3 Proposed dividends 11.6 9.4 Other creditors 22.8 17.8 Accruals and deferred income 118.2 124.3 -------- -------- 334.9 316.0 ======== ======== 9. CREDITORS AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR 27 Dec 2003 28 Dec 2002 £m £m Bank loans 50.0 1.3 Other creditors 1.5 1.5 ------- -------- 51.5 2.8 ======= ======== 10. PROVISIONS FOR LIABILITIES AND CHARGES Pension Property Deferred provision provision taxation Total £m £m £m £m At 28 December 2002 9.2 3.0 9.7 21.9 Created in the period - - 3.6 3.6 Utilised/released in the period (2.3) (2.0) - (4.3) ------ ------- ------ ------- At 27 December 2003 6.9 1.0 13.3 21.2 ====== ======= ====== ======= 11. CONSOLIDATED CASH FLOW STATEMENT (a) Reconciliation of operating profit to net cash inflow from operating activities 52 weeks to 52 weeks to 27 Dec 2003 28 Dec 2002 £m £m Operating profit before exceptional items 105.6 79.8 Depreciation of tangible fixed assets 47.5 40.2 Amortisation of goodwill 0.7 0.1 Amortisation of fixed asset investment 8.5 8.3 ------- ------- EBITDA 162.3 128.4 Increase in stocks (18.6) (45.9) Increase in debtors (18.0) (10.4) Increase in creditors and provisions 13.9 67.5 ------- ------- Net cash inflow - pre exceptional operating activities 139.6 139.6 VAT paid re Structural Guarantee (46.0) - Net cash outflow - operating exceptionals - (1.6) ------- ------- Net cash inflow from operating activities 93.6 138.0 ======= ======= (b) Analysis of cash flows for headings netted in the cash flow statement 52 weeks to 52 weeks to 27 Dec 2003 28 Dec 2002 £m £m Returns on investments and servicing of finance Interest received 1.5 3.2 Interest paid (1.2) (0.3) ------- ------- Net inflow on investments and servicing of finance 0.3 2.9 ======= ======= Capital expenditure and financial investment Payments to acquire tangible fixed assets (127.2) (98.3) Receipts from sales of tangible fixed assets 58.2 9.5 Payment to acquire own shares (14.9) (25.5) Investment in joint ventures (1.2) (3.2) ------- ------- Net outflow for capital expenditure and financial investment (85.1) (117.5) ======= ======= Acquisitions Acquisition of subsidiary undertaking - (10.9) Cash acquired with subsidiary undertaking - 2.4 ------- ------- Net outflow from acquisitions - (8.5) ======= ======= Financing Shares issued 4.2 5.4 Loan acquired with subsidiary undertaking (1.3) 1.3 Increase/(decrease) in bank finance 50.0 (0.8) Capital element of finance lease rental payments - (0.4) ------- ------- Net inflow from financing 52.9 5.5 ======= ======= (c) Analysis of net funds Current Total Cash at Bank Net asset Finance net bank loans funds Investments* leases funds £m £m £m £m £m £m As at 29 December 2001 52.1 (0.8) 51.3 0.2 (0.4) 51.1 Cash flow (20.9) 0.8 (20.1) 6.7 0.4 (13.0) Acquisition of subsidiary 2.4 (1.3) 1.1 - - 1.1 Exchange difference (0.3) - (0.3) - - (0.3) ------ ----- ----- ------- ------ ----- As at 28 December 2002 33.3 (1.3) 32.0 6.9 - 38.9 Cash flow 14.9 (48.7) (33.8) 4.9 - (28.9) Acquisition of subsidiary - - - - - - Exchange difference 0.6 - 0.6 - - 0.6 ------ ----- ----- ------- ------ ----- As at 27 December 2003 48.8 (50.0) (1.2) 11.8 - 10.6 ====== ===== ===== ======= ====== ===== *£11.8m (2002 - £6.7m) is held in escrow account to cover potential insurance liabilities 12. HM CUSTOMS & EXCISE CLAIM In August 2001 the Group introduced an optional insurance-backed structural guarantee on certain items of furniture sold in its UK retail stores. Value Added Tax (VAT) on the furniture element of the transaction and Insurance Premium Tax (IPT) is paid on the sale of these warranties. An assessment has been raised on the VAT and the relevant tax has been paid to HM Customs & Excise. The directors have taken extensive legal and taxation advice and this action is being contested vigorously. The relevant tax, which has been paid, is carried on the balance sheet as a debtor without any provision. To date, the following amounts have been recorded: Cumulative 2003 2002 2001 £m £m £m £m Reduction in VAT 50.0 20.7 22.0 7.3 IPT paid (13.0) (5.3) (5.6) (2.1) External insurance premium/expenses (6.5) (2.5) (2.8) (1.2) Reinsurance premium to Group company (10.4) (4.2) (4.5) (1.7) Underwriting profit recognised by Group company 1.0 1.0 - - ------ ------ ------ ------ Profit taken to profit and loss account 21.1 9.7 9.1 2.3 ====== ====== ====== ====== 80% of the insurance has been reinsured by the external insurer through the Group's captive insurance company, Southon Insurance Limited. The maximum potential exposure is £50m at the year end, but this would be expected to be offset by the recovery of approximately £13m of insurance tax premium paid on the sale of extended structural guarantees and by any future underwriting profit with Southon Insurance Limited. Due to the timing of our quarterly VAT payments, £46m of the £50m has been paid to HM Customs & Excise at the year end. 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