Interim Results

MFI Furniture Group PLC 22 July 2004 22 July 2004 Interim results for the 24 weeks to 12 June 2004 Financial highlights - Sales down 0.7% to £703m - Howden Joinery up 25.6% to £227m - UK Retail down 11.4% to £416m - France Retail up 3.2% to £56m - Pre-tax profit of £32.1m (2003: £59.3m) - Pre-tax profit before exceptional items of £33.1m (2003: £54.5m) - Earnings per share of 3.8p (2003: 7.6p) - Earnings per share before exceptional items of 4.0p (2003: 6.8p) - Interim dividend per share up 11.1% to 2.0p Business highlights - Continued strong sales and profit growth at Howden Joinery - Some improvement in trading at UK Retail in recent weeks following management action - Traditional price / value proposition being aggressively marketed - New product introduction being accelerated - France Retail responding well to the refurbishment programme - Second phase of new systems now completed successfully John Hancock, Chief Executive, said: 'The first half has seen another strong performance from Howdens. We have seen disappointing results from UK Retail but have taken action to address the key issues and are seeing early signs of improvement in the second half of 2004. Looking forward we continue to remain positive about growth prospects in each of our routes to market.' - ends - Contacts: MFI Furniture Group Plc John Hancock, Chief Executive 020 8913 5319 Martin Clifford-King, Chief Financial Officer 020 8913 5350 Brunswick Group Limited Susan Gilchrist / Fiona Laffan / Anna Jones 020 7404 5959 COMPANY STATEMENT Results In the 24 weeks to 12 June 2004 Group turnover decreased by 0.7% to £703 million, compared to £708 million for the same period in the previous year. Profit before tax was £33.1 million before a loss on sale of properties totalling £1.0 million, which compares to £54.5 million before inclusion of an exceptional credit of £4.8 million relating to property disposals last year. Earnings per share, excluding exceptional items, decreased to 4.0 pence per share. The decline in profitability was primarily due to a weak performance from our UK Retail business and management has taken action to address these issues. Nevertheless the progress we have made over the past five years, to balance the business with multiple routes to market and new product ranges, ensures that we are no longer totally exposed to temporary difficulties in any one division. Operational review • UK Retail Orders taken during the period were 6.5% down on the same period last year. As identified in earlier trading statements the orders decline was a result of a disappointing promotional strategy and a slowdown in our new product introduction, particularly in bedrooms and beds. Increased orders of higher value product, where lead times are longer, and some initial disruption on the implementation of our new systems, has also impacted the level of fulfilled sales in the period. As a result UK retail sales have fallen 11.4%, with same store growth down 12.7%. Given the resultant increase in the size of the order book at the period end, we would expect the sales performance in the second half to be ahead of orders by between two and three percentage points. Operating profits were £1.9 million, down from £31.4 million last year, and include a £6 million impact from the disruption of the refits compared to a comparable figure of £10 million last year. Actions to address this performance have been focused in four areas. Firstly, although our pricing has always been competitive, our communication to customers did not adequately support this and we lost share of voice in a more competitive marketplace. We have now restored our traditional price / value offer with our promotions proposition 'more home for your money'. We have also increased our advertising spend for the second half. Secondly, we are accelerating new product introduction and are increasing our ranges, particularly in the sub £500 price band. Throughout 2004 we are launching 11 kitchen, 15 bedroom, seven bed, 15 upholstery and eight living and dining ranges. The programme will deliver innovation, keep pace with design trends and improve price competitiveness - we will be returning to a rate of new product introductions of 25% a year in each category. Thirdly, we have appointed category managers for each of our four product areas - kitchens and appliances; beds and bedrooms; lounge, dining, sofas and home office; and bathrooms. These category managers report directly to Gordon MacDonald and will provide end-to-end management from raw material to customer delivery for each category. This will allow us to stay closer to the customer and will lead to faster, better decision-making and implementation. The new integrated systems will improve our visibility from sourcing to customer delivery, which in turn will enable us to enhance customer service and reduce working capital requirements and costs. And fourthly, we have created a new role - Retail Operations Director - that will have specific focus for our out-of-town stores. Steve Walker, who joined MFI in 2001 and has over 30 years retail operational experience, has been appointed to this position and reports directly to John Hancock. Mark Horgan will continue to focus on our commercial strategy, marketing and financial services. The initial response to these actions is already encouraging with total orders flat in the past five weeks compared to being down 6.5% in the first half, when compared to the previous year. During the period we have been managing a number of transitions in our business, including the move to category management, a number of important changes to field personnel, the introduction of new systems and the continuing refurbishment of our stores. So far this year 15 stores have been added to the new format, bringing the total number of new format stores today to 137 out of a total of 192. We will have a run rate of at least 90% of turnover being derived from our new format stores by the end of the year. Orders from the refurbished stores have continued to show increases of 20% - 25% in their first year. Although we recognise that we have lost some of these gains in the second year following refurbishment, we are taking action to address this. In addition to the actions outlined above we have replaced store managers in some of our under-performing stores and have increased our level of field management support. • Howden Joinery Operating profits were £34.2 million, up 30.5% against £26.2 million last year, on an increase in turnover of 25.6%. Same depot sales growth was robust at 20.1%. The operating margin of 15.1% reflects the benefit of improved selling prices introduced in the summer of 2003, offset by increased infrastructure and staff costs to support the increased sales levels and new product ranges in the seasonally stronger second half. We expect the margin to improve further in the second half as a result of higher volumes and new product going through the network. During the period we introduced new ranges of kitchens as well as higher-priced worktops and appliances and are laying down new space through depot openings and extensions. We have extended four depots and plan to extend a further 21 by the end of the year. We have opened eight depots in the first 24 weeks and are on target to open a further 12 in the second half, giving a total of 320 depots trading by the end of the year. We have increased our target number of depots from 380 to 480, with plans to open 40 new depots in 2005, as we are confident that this business has significant further growth potential. The early signs from our pilot in the SouthEast of the United States are encouraging. We are introducing new product sourced in the UK, but tailored for the US market, in the Autumn and we will report further on this at our preliminary results in February 2005. We have decided to test the Howden business model in France with two depots to be opened early in 2005. • France Retail Sales in France were up 3.2% on last year. Orders for the period were significantly higher than despatches at 14.5% up on last year, reflecting a higher order book at the half year. Profits at £1.4 million compare to £0.9 million profit for the same period last year. Today we have 72 of our 137 stores refitted. These are adapted from the UK high street format to meet local tastes and requirements and are showing order increases of over 16% on the previous year. We are focusing on the conversion rollout as it is the refits that are giving the greatest returns on our investment. Structural guarantee We continue to take extensive legal and taxation advice and have instigated legal action against HM Customs & Excise to recover the VAT paid on the structural guarantees. We are carrying the tax paid of £57 million on our balance sheet as a debtor without any provision and further disclosure is given in note 11 to the accompanying notes to the financial statements. In May we revised the insurance product and no longer give a discount on the furniture if the customer chooses to purchase the revised product. Financial review The Group gross margin is 50.1%, compared to 50.9% last year. This reduction reflects an improved gross margin (0.9 percentage points impact to the Group) at Howdens following price increases in the second half of 2003. This was more than offset by a reduction in the gross margin in UK Retail (1.8 percentage points impact to the Group). This was a result of increased promotional markdowns, lower sales of own manufactured products and some adverse exchange movements. Actions taken on the promotional strategy and cost base in manufacturing will address this shortfall in the second half. Selling and distribution costs have increased by 4.0%. This increase mainly arises from the increased infrastructure and staffing costs in Howden Joinery. In UK Retail we reduced costs in the first half despite higher rental and depreciation charges. Group costs in the second half of the year will increase with increased depreciation from investment in new systems and store refurbishments, together with additional advertising spend in UK Retail. The operating cash inflow in the period is £92.9 million, before deducting £10.7 million paid to HM Customs & Excise relating to the structural guarantee. After taking into account capital investment, dividends, tax and investment in own shares, net cash has increased by £18.5 million to £29.1 million. Our available cash, which excludes monies held in escrow for future insurance claims under the structural guarantee, has increased by £16.5 million to £15.3 million. In May the Group made a statement on the position of its pension plan following a comprehensive review. The Board continues to take advice from leading counsel as to the actions required and this is explained in more detail in note 12. In future we will provide timely trading updates separately from our Results Announcements. We intend to give updates in March following the conclusion of the Winter Sale, in May at the AGM covering the Easter period, in September covering the August bank holiday promotion and in mid-December before the year-end to include Howdens' important autumn trading period. Dividend As the Group comes to the end of the investment programme to refurbish retail stores in both the UK and France and introduce new systems across the Group, the business will become highly cash generative in the long-term. As a result the Board will keep the level of dividend cover under review. The Board has declared an interim dividend of 2.0 pence per share (2003: 1.8 pence), an increase of 11.1%. This will be paid on 22 October 2004 to shareholders on the register at the close of business on 1 October 2004. Shares will be quoted ex-dividend from 29 September 2004. As reported at the last Preliminary Results, the Board is also rebalancing the relative dividend payout between the first and second half as the seasonality of profits is now weighted towards the second half of the year. Current trading and outlook Total orders from Boxing Day to 17 July and for the first five weeks of the second half to 17 July are as follows: Total orders from Same store orders Total orders Same store orders Boxing Day to 17 from Boxing Day to for 5 weeks to for 5 weeks to 17 July 17 July 17 July July Howden 25% 19% 21% 16% Joinery UK (6)% (7)% 0% (1)% Retail France 13% *11% 0% *3% Retail Group 3% 1% 9% 6% * in local currency Whilst this represents only a short period of time, the performance in the last five weeks reflects the positive changes being made in the business. A year ago we stated that the UK Retail business could achieve an ambitious target of £1.4 billion of sales in 2006. We continue to believe that the business and the brand is capable of achieving these sales, but recent performance indicates that it will take us longer to achieve this than we initially expected. The Group is now a multi-faceted business and is not dependent on one business in one market. We remain confident in the prospects for the Group, based on the more compelling consumer proposition in UK Retail which we have put in place and further progress at Howden Joinery. Ian Peacock John Hancock 22 July 2004 FINANCIAL HIGHLIGHTS 24 weeks to 24 weeks to 52 weeks to 12 June 14 June 27 December 2004 2003 2003 Unaudited Unaudited Audited £m £m £m Turnover (including share of joint venture) 704.6 709.4 1,485.1 Turnover (excluding share of joint venture) 703.2 708.1 1,481.5 Gross margin 50.1% 50.9% 50.9% Operating profit margin 4.8% 7.8% 7.1% Profit before tax 32.1 59.3 117.9 Profit before tax and exceptional items 33.1 54.5 103.8 DIVIDEND PER SHARE Interim 2.0p 1.8p 1.8p Final n/a n/a 2.0p Full year dividend n/a n/a 3.8p Dividend cover - pre-exceptional n/a n/a 3.4x EARNINGS PER SHARE Earnings per share 3.8p 7.6p 15.4p Earnings per share before exceptional items 4.0p 6.8p 12.9p OTHER FINANCIAL INFORMATION Net assets (restated) 452.7 412.2 447.2 CONSOLIDATED PROFIT AND LOSS ACCOUNT 24 weeks to 24 weeks to 52 weeks to 12 June 14 June 27 December 2004 2003 2003 Notes Unaudited Unaudited Audited £m £m £m Turnover Group and share of joint venture 2 704.6 709.4 1,485.1 Less: share of joint venture (1.4) (1.3) (3.6) _____ _____ _______ Group turnover 703.2 708.1 1,481.5 Cost of sales (350.6) (347.7) (727.2) _____ _____ _______ Gross profit 352.6 360.4 754.3 Selling and distribution costs (285.9) (275.0) (581.4) Administration costs (32.5) (30.2) (66.6) Goodwill amortisation (0.3) (0.3) (0.7) _____ _____ _______ Operating profit 33.9 54.9 105.6 Share of operating loss of joint venture (0.9) (1.1) (2.1) _____ _____ _______ Total operating profit - Group and share of joint venture 33.0 53.8 103.5 Exceptional item - net (loss)/profit on disposal of fixed assets (1.0) 4.8 14.1 _____ _____ _______ Profit on ordinary activities before interest 32.0 58.6 117.6 Interest receivable and similar income 0.8 0.9 1.5 Interest payable and similar charges (0.7) (0.2) (1.2) _____ _____ _______ Profit on ordinary activities before taxation 2 32.1 59.3 117.9 Tax 3 (10.6) (16.3) (31.1) _____ _____ _______ Profit for the financial period 21.5 43.0 86.8 Dividends 4 (11.6) (10.3) (21.9) _____ _____ _______ Retained profit 5 9.9 32.7 64.9 ===== ===== ======= Earnings per share Basic earnings per 10p ordinary share 6 3.8p 7.6p 15.4p ===== ===== ======= Diluted earnings per 10p ordinary share 6 3.5p 7.2p 14.3p ===== ===== ======= Earnings per share (before exceptional items) Basic earnings per 10p ordinary share 6 4.0p 6.8p 12.9p ===== ===== ======= Diluted earnings per 10p ordinary share 6 3.7p 6.4p 12.0p ===== ===== ======= CONSOLIDATED BALANCE SHEET As at As at As at 12 June 14 June 27 December 2004 2003 2003 Notes Unaudited Unaudited Audited (restated) (restated) FIXED ASSETS £m £m £m Intangible assets 14.1 14.3 14.5 Tangible assets 389.8 362.0 387.0 Investments Other unlisted investments 8.0 8.0 8.0 Share of joint venture net assets 0.9 1.7 1.1 ________ ________ _________ Total investments 8.9 9.7 9.1 ________ ________ _________ Total fixed assets 412.8 386.0 410.6 CURRENT ASSETS Stocks 188.3 175.9 195.7 Debtors - due within one year 7 149.1 142.0 141.6 Debtors - due after one year 7 57.1 34.3 46.3 Investments Fixed term deposits in escrow 10 13.8 9.5 11.8 Other fixed term deposits 10 - 5.2 - Cash at bank and in hand 10 40.3 5.3 48.8 ________ ________ _________ 448.6 372.2 444.2 ________ ________ _________ CREDITORS FALLING DUE WITHIN ONE YEAR 362.7 323.3 334.9 Net current assets 85.9 48.9 109.3 Total assets less current liabilities 498.7 434.9 519.9 CREDITORS FALLING DUE AFTER MORE THAN ONE YEAR 25.7 1.5 51.5 PROVISIONS FOR LIABILITIES AND CHARGES 20.3 21.2 21.2 ________ ________ _________ Net assets 452.7 412.2 447.2 ======== ======== ========= CAPITAL AND RESERVES Called up share capital 5 62.2 61.4 62.0 Share premium account 5 66.9 62.6 65.8 Revaluation reserve 5 21.8 30.7 22.3 ESOP reserve 5 (45.5) (40.4) (42.2) Other reserves 5 28.1 25.5 26.7 Profit and loss account 5 319.2 272.4 312.6 ________ ________ _________ Equity shareholders' funds 452.7 412.2 447.2 ======== ======== ========= CONSOLIDATED CASH FLOW STATEMENT 24 weeks to 24 weeks to 52 weeks to 12 June 14 June 27 December 2004 2003 2003 (restated - see (restated - see note 9) note 9) Notes Unaudited Unaudited Audited £m £m £m Net cash inflow from operating activities 8 82.2 36.6 93.6 Returns on investments and servicing of finance 9 0.1 0.7 0.3 Taxation (17.5) (8.1) (22.2) Capital expenditure and financial investment (net) 9 (27.8) (28.8) (70.2) Equity dividends paid (11.6) (9.2) (19.7) ____ ____ ____ Cash inflow / (outflow) before use of liquid resources and financing 25.4 (8.8) (18.2) Management of liquid resources (2.0) (7.8) (4.9) Financing 9 (31.3) (11.4) 38.0 ____ ____ ____ (Decrease) / increase in cash in the period (7.9) (28.0) 14.9 ==== ==== ==== RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS (Decrease) / increase in cash in the period (7.9) (28.0) 14.9 Cash movement on: - debt and lease financing 10 25.0 1.3 (48.7) - cash flow from increase in liquid resources 10 2.0 7.8 4.9 ____ ____ ____ Change in net funds resulting from cash flows 19.1 (18.9) (28.9) Effect of foreign exchange rate changes 10 (0.6) - 0.6 ____ ____ ____ Movement in net funds in the period 18.5 (18.9) (28.3) Net funds at the beginning of the period 10 10.6 38.9 38.9 ____ ____ ____ Net funds at the end of the period 10 29.1 20.0 10.6 ==== ==== ==== STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES 24 weeks to 24 weeks to 52 weeks to 12 June 14 June 27 December 2004 2003 2003 Unaudited Unaudited Audited £m £m £m Profit for the financial period 21.5 43.0 86.8 Translation differences on foreign currency denominated net investments (2.4) 1.4 2.2 -------- -------- --------- Total recognised gains and losses relating to the period 19.1 44.4 89.0 ======== ======== ========= RECONCILIATION OF MOVEMENTS IN EQUITY SHAREHOLDERS' FUNDS 24 weeks to 24 weeks to 52 weeks to 12 June 14 June 27 December 2004 2003 2003 (restated) (restated) Unaudited Unaudited Audited £m £m £m Total recognised gains and losses for the period 19.1 44.4 89.0 Dividends (11.6) (10.3) (21.9) Net additions to ESOP trust (3.3) - - Shares issued 1.3 0.4 4.2 -------- -------- -------- Net addition to equity shareholders' funds 5.5 34.5 71.3 -------- -------- -------- Opening equity shareholders' funds 447.2 418.1 418.1 Reclassification of ESOP shares (note 1) - (40.4) (42.2) -------- -------- -------- Adjusted equity shareholders' funds at beginning of period 447.2 377.7 375.9 -------- -------- -------- Equity shareholders' funds at end of the period 452.7 412.2 447.2 ======== ======== ======== The figures for the 24 weeks to 14 June 2003 and the 52 weeks to 27 December 2003 have been restated following the adoption of UITF Abstract 38 'Accounting for ESOP Trusts'. Further details are given in note 1. NOTES TO THE FINANCIAL STATEMENTS 1 BASIS OF PREPARATION The financial information for the 24 weeks to 12 June 2004 and 14 June 2003 is unaudited. The accounting policies are consistent with those applied to the audited financial statements for the 52 weeks to 27 December 2003, with the exception of the adoption of UITF Abstract 38, 'Accounting for ESOP trusts'. UITF Abstract 38 is effective for periods ending on or after 22 June 2004, and we have accordingly adopted it in these interim financial statements. The Abstract requires own shares held through an ESOP trust to be accounted for as a reduction in shareholders' funds rather than as fixed asset investments. The Abstract requires this change to be made retrospectively and therefore we have restated our comparatives. The effect of this has been to reduce net assets as at 14 June 2003 by £40.4m, and to reduce net assets as at 27 December 2003 by £42.2m. There is no effect on retained profits. These statements do not constitute statutory financial statements within the meaning of Section 240 of the Companies Act 1985. The Group's full financial statements for the 52 week period to 27 December 2003, on which the auditors made an unqualified report, have been delivered to the Registrar of Companies. 2 SEGMENTAL ANALYSIS 24 weeks to 12 24 weeks to14 52 weeks to 27 June 2004 June 2003 December 2003 (restated) (restated) TURNOVER £m £m £m Howden Joinery 227.0 180.8 448.1 UK Retail 415.6 468.9 910.9 France Retail 56.3 54.6 114.1 Howden Millwork 3.0 2.2 5.1 Other operations 1.3 1.6 3.2 ---------- ---------- ---------- 703.2 708.1 1,481.5 Joint venture operations 1.4 1.3 3.6 ---------- ---------- ---------- Total 704.6 709.4 1,485.1 ========== ========== ========== PROFIT BEFORE TAXATION £m £m £m Howden Joinery 34.2 26.2 72.0 UK Retail 1.9 31.4 41.7 France Retail 1.4 0.9 0.3 Howden Millwork (3.3) (3.5) (8.4) Other operations (0.3) (0.1) - ---------- ---------- ---------- Total operating profit 33.9 54.9 105.6 Joint venture operations (0.9) (1.1) (2.1) ---------- ---------- ---------- Total operating profit 33.0 53.8 103.5 (Loss)/profit on disposal of fixed assets (1.0) 4.8 14.1 Net interest receivable 0.1 0.7 0.3 ---------- ---------- ---------- Profit before taxation 32.1 59.3 117.9 ========== ========== ========== NET ASSETS £m £m £m Howden Joinery 121.2 115.1 132.8 UK Retail 275.0 244.7 270.8 France Retail 33.8 35.6 39.1 Howden Millwork 3.7 4.9 4.6 Other operations 1.3 1.3 1.3 Joint venture operations 0.9 1.7 1.1 --------- ---------- ---------- 435.9 403.3 449.7 Unallocated net assets (restated) 16.8 8.9 (2.5) --------- ---------- ---------- Total 452.7 412.2 447.2 ========= ========== ========== All results are from continuing operations. Unallocated net assets comprise balances in respect of dividends and net funds. Prior periods have been restated to reflect the fact that, in the accounts of those periods, unallocated net assets also used to comprise investment in own shares. There has been a change in treatment of investment in own shares in the current period (see note 1). The analysis of turnover by destination is not materially different to the analysis of turnover by origin. NOTES TO THE FINANCIAL STATEMENTS 3 TAXATION The taxation charge is calculated at 31.9% of profit before exceptional items (24 weeks to 14 June 2003 - 30%, 52 weeks to 27 December 2003 - 30%, both on profits before exceptional items), being the estimated effective rate of taxation for the 2004 financial year. 4 DIVIDEND The interim dividend will be paid on 22 October 2004 to shareholders on the register of members at the close of business on 1 October 2004. The shares will be quoted ex-dividend from 29 September 2004. 5 SHARE CAPITAL AND RESERVES Share Share premium Revaluation ESOP Other Profit and capital account reserve reserve reserves loss account £m £m £m £m £m £m As at 27 December 2003 62.0 65.8 22.3 - 26.7 312.6 Reclassification of ESOP shares (note 1) - - - (42.2) - - ------- -------- ------- ------- ------- ------- As at 27 December 2003 62.0 65.8 22.3 (42.2) 26.7 312.6 Retained profit for the period - - - - - 9.9 Shares 0.2 1.1 - - - - issued Net addition to ESOPs - - - (3.3) - - Realised revaluation profit - - (0.5) - - 0.5 Foreign exchange - - - - - (2.4) Amortisation of goodwill - - - - 1.4 (1.4) ------- -------- ------- ------- ------- ------- As at 12 June 2004 62.2 66.9 21.8 (45.5) 28.1 319.2 ======= ======== ======= ======= ======= ======= The ESOP reserve was created during the period as a result of adopting UITF 38 'Accounting for ESOP Trusts'. See note 1 for more details. NOTES TO THE FINANCIAL STATEMENTS 6 EARNINGS PER SHARE 24 weeks to 12 June 2004 24 weeks to 14 June 2003 52 weeks to 27 December 2003 Earnings Weighted Weighted Weighted average average average number Earnings number Earnings number of per of per of Earnings shares share Earnings shares share Earnings shares per share £m m £m m P £m m p Earnings per share (eps) Basic earnings per share 21.5 571.4 3.8 43.0 565.4 7.6 86.8 565.4 15.4 Effect of dilutive share options - 37.2 (0.3) - 31.3 (0.4) - 41.3 (1.1) _________________________ ____________________________ _____________________________ Diluted earnings per share 21.5 608.6 3.5 43.0 596.7 7.2 86.8 606.7 14.3 _________________________ ____________________________ _____________________________ Eps before loss/ (profit) on sale of fixed assets Basic earnings per share 21.5 571.4 3.8 43.0 565.4 7.6 86.8 565.4 15.4 Loss / (profit) on sale of fixed assets 1.0 - 0.2 (4.8) - (0.8) (14.1) - (2.5) _________________________ ____________________________ _____________________________ Basic eps before loss/ (profit) on sale of fixed assets 22.5 571.4 4.0 38.2 565.4 6.8 72.7 565.4 12.9 _________________________ ____________________________ _____________________________ Diluted earnings per share 21.5 608.6 3.5 43.0 596.7 7.2 86.8 606.7 14.3 Loss / (profit) on sale of fixed assets 1.0 - 0.2 (4.8) - (0.8) (14.1) - (2.3) _________________________ ____________________________ _____________________________ Diluted eps before loss/ (profit) on sale of fixed assets 22.5 608.6 3.7 38.2 596.7 6.4 72.7 606.7 12.0 _________________________ ____________________________ _____________________________ 7 DEBTORS 24 weeks to 24 weeks to 52 weeks to 12 June 14 June 27 December 2004 2003 2003 £m £m £m Debtors and prepayments - due within one year 149.1 142.0 141.6 ========= ========= ========= VAT paid re structural guarantee - due after one year (note 11) 57.1 34.3 46.3 ========= ========= ========= NOTES TO THE FINANCIAL STATEMENTS 8 CASH FLOW STATEMENT Reconciliation of operating profit to operating cash flows: 24 weeks to 24 weeks to 52 weeks to 12 June 14 June 27 December 2004 2003 2003 £m £m £m Operating profit before exceptional items 33.9 54.9 105.6 Depreciation and amortisation charge 24.0 21.9 48.2 Amortisation of fixed asset investments 4.2 6.1 8.5 Decrease / (increase) in stocks 7.4 1.2 (18.6) (Increase) in debtors (7.1) (18.0) (18.0) Increase in creditors and provisions 30.5 4.8 13.9 _________ _________ _________ 92.9 70.9 139.6 Net cash outflow - VAT paid re structural guarantee (10.7) (34.3) (46.0) _________ _________ _________ Net cash inflow from operating activities 82.2 36.6 93.6 ========= ========= ========= 9 ANALYSIS OF CASH FLOWS FOR HEADINGS NETTED IN THE CASH FLOW STATEMENT Following the adoption of UITF 38 (see note 1 for more details), the cash flow notes for the 24 weeks to 14 June 2003 and the 52 weeks to 27 December 2003 have been restated to reflect the fact that the item 'Payments to acquire own shares', which used to form part of the cash flow heading 'Capital expenditure and financial investment', is now included under the cashflow heading 'Financing'. 24 weeks to 24 weeks to 52 weeks to 12 June 14 June 27 December 2004 2003 2003 (restated) (restated) £m £m £m Returns on investments and servicing of finance Interest received 0.8 0.9 1.5 Interest paid (0.7) (0.2) (1.2) _________ _________ _________ Net inflow on investments and servicing of finance 0.1 0.7 0.3 ========= ========= ========= Capital expenditure and financial investment Payments to acquire tangible fixed assets (32.4) (49.7) (127.2) Receipts from sales of tangible fixed assets 5.3 21.6 58.2 Investment in joint ventures (0.7) (0.7) (1.2) _________ _________ _________ Net outflow from capital expenditure and financial investment (27.8) (28.8) (70.2) ========= ========= ========= Financing Shares issued 1.3 0.4 4.2 Payments to acquire own shares (7.6) (10.5) (14.9) Loan acquired with subsidiary undertaking - - (1.3) (Decrease) / increase in bank finance (25.0) (1.3) 50.0 Capital element of finance lease - - - rental payments _________ _________ _________ Net (outflow) / inflow for financing (31.3) (11.4) 38.0 fffff ========= ========= ========= NOTES TO THE FINANCIAL STATEMENTS 10 ANALYSIS OF NET FUNDS Cash at Current bank Bank asset Total net and in hand loans Net funds investments funds £m £m £m £m £m As at 28 December 2002 33.3 (1.3) 32.0 6.9 38.9 Cash flow (28.0) 1.3 (26.7) 7.8 (18.9) _______ _______ _______ _______ _______ As at 14 June 2003 5.3 - 5.3 14.7 20.0 Cash flow 42.9 (50.0) (7.1) (2.9) (10.0) Exchange movement 0.6 - 0.6 - 0.6 _______ _______ _______ _______ _______ As at 27 December 2003 48.8 (50.0) (1.2) 11.8 10.6 Cash flow (7.9) 25.0 17.1 2.0 19.1 Exchange movement (0.6) - (0.6) - (0.6) _______ _______ _______ _______ _______ As at 12 June 2004 40.3 (25.0) 15.3 13.8 29.1 ======= ======= ======= ======= ======= 11 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 24 weeks to 12 52 weeks to 27 52 weeks to 28 52 weeks to 29 June 2004 December 2003 December 2002 December 2001 £ m £m £m £m £m Reduction in VAT 59.4 9.4 20.7 22.0 7.3 IPT paid (15.3) (2.3) (5.3) (5.6) (2.1) External insurance premium/ expenses (7.6) (1.1) (2.5) (2.8) (1.2) Reinsurance premium to Group company (12.3) (1.9) (4.2) (4.5) (1.7) Underwriting profit recognised by Group company 1.8 0.8 1.0 - - _____ ____ ____ ____ ___ Profit taken to profit and 26.0 4.9 9.7 9.1 2.3 loss ===== ===== ==== ==== ==== 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 £59.4m at the period end, but this would be expected to be offset by the recovery of approximately £15.3m 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, £57.1m of the £59.4m has been paid to HM Customs & Excise at the period end. NOTES TO THE FINANCIAL STATEMENTS 12 PENSIONS On 6 May 2004 the Group announced that it had received actuarial and legal advice following a thorough review of an issue arising within its UK pension plans. This issue is liable to result in the Group recognising higher pension obligations than previously identified. The issue has its origins in a failure, back in 1994, effectively to properly equalise the pension age for men and women at age 65 for an employee's service from 17 November 1994. Although announcements to this effect were made at the time to plan members, the relevant trust documentation was not properly amended. This is liable to result in the part of the benefits earned by employee members over a period from 1994 to 2004 having to be calculated using a normal retirement date of age 60 rather than at age 65. Plan rules have now been amended to cap liability in relation to future service. The Board has sought legal advice on the scope for correction and an independent actuarial assessment of the additional liabilities, which might arise, and of the contributions required to fund them. It appears far from certain that the situation can be corrected, in which case some £40 million of additional liabilities (before tax) will arise. This figure is assessed on the same actuarial assumptions as currently used for funding the UK pension plans and accounting for them under SSAP24 (see note 23 to the Group's 2003 financial statements). Under FRS 17, which the Group has not yet adopted, this figure would be approximately £50 million (before tax). Under the pensions accounting standard SSAP24, the impact on future profits of the Group will depend on the period over which additional liabilities are recognised. At this stage the funding position has not yet been resolved and is uncertain. Given the current degree of uncertainty in the outcome of the discussions with the Trustees there is no recognition of any additional charge in these interim financial statements. The Board and the Trustees will be reviewing the funding position in the light of further advice to be received and will then discuss how best to proceed. The Trustees will need to be satisfied both as to the period over which contributions are paid and the date from which contributions commence. The Board expects that the funding position will become clearer in the second half of the financial year and that this would be reflected in the year end accounts. The Board continues to take advice from leading counsel as to the actions required to obtain recovery from the third parties on whose advice the Group and the Trustees of the plan relied in relation to this issue Independent review report by Deloitte & Touche LLP to MFI Furniture Group Plc Introduction We have been instructed by the company to review the consolidated financial information for the twenty-four weeks ended 12 June 2004 which comprises the profit and loss account, the balance sheet, the cash flow statement, statement of total recognised gains and losses, reconciliation of movement in equity shareholders' funds and related notes 1 to 12. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. This report is made solely to the company in accordance with Bulletin 1999/4 issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the company those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim report in accordance with the Listing Rules of the Financial Services Authority which require that the accounting polices and presentation applied to the interim figures are consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with the guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with United Kingdom auditing standards and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the twenty-four week period ended 12 June 2004. Deloitte & Touche LLP Chartered Accountants London 22 July 2004 This information is provided by RNS The company news service from the London Stock Exchange

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