Final Results - Year Ended 31 December 1999

Headlam Group PLC 14 March 2000 Preliminary Results for the Year Ended 31 December 1999 Headlam Group plc ('Headlam'), the floorcoverings and furnishings distributor, announces its preliminary results for the year ended 31 December 1999 with profits before taxation up by 36% and earnings per share up by 19%. Financial highlights 1999 1998 Change Turnover £386.9m £327.6m + 18% Profit before taxation* £31.2m £22.9m + 36% Earnings per share* 27.5p 23.1p + 19% Diluted earnings per share* 27.2p 22.9p +19% Total dividend per share 10.0p 8.5p + 18% * before amortisation of goodwill Key points * Significant progress in challenging market conditions * Strong increase in profits, earnings and dividends * An excellent year for the Floorcoverings division * Margins continue to improve in the Furnishings division * Successful integration of recent acquisitions in UK and Europe * Implementation of business-to-business e-commerce strategy * Positive start to 2000 Ian Kirkham, Chief Executive of Headlam, said: 'Headlam has made strong progress during 1999 despite testing market conditions. Our European presence is growing strongly and Headlam is now the market leader. We continue to look at opportunities in this fragmented market. 'In the UK Headlam continues to gain market share and improve margins. We are pleased to report that the current year has started well, with early signs that consumer confidence in the UK floorcoverings market is increasing.' Enquiries: Headlam Group plc Ian Kirkham, Chief Executive Tel: 0207 457 2345 Stephen Wilson, Finance Director Thereafter: 01604 234121 Gavin Anderson & Company Richard Barton/Julian Wilson Tel: 0207 457 2345 CHAIRMAN'S STATEMENT I am delighted, in my first statement as Chairman, to report that Headlam has continued to build on the sound progress of recent years. We have successfully consolidated our position as the UK market leader in floorcoverings and have continued to deliver on our strategic development plan having made good progress in the presently fragmented European marketplace. Financial performance Total sales increased to £386.9 million (1998: £327.6 million) and profit before goodwill amortisation and taxation increased to £31.2 million (1998: £22.9 million). These figures reflect growth in profitability in both the floorcoverings and fabrics businesses and first time contributions from the acquisitions made during the year. Earnings and Dividend Earnings per share (excluding goodwill amortisation) increased by 19.0% to 27.5p (1998: 23.1p). The board is recommending a final dividend of 7.55p per ordinary share, making total dividends for the year of 10.0p per ordinary share, an increase of 17.6% over the previous year's dividends of 8.5p per ordinary share. If approved the final dividend will be paid on 3 July 2000 to shareholders on the register at 16 June 2000. Acquisitions During 1999 the group acquired Joseph, Hamilton and Seaton ('JHS') a UK contract carpet supplier, La Maison du Sol ('LMS'), a French floorcoverings distributor, Haldon Thompson, a UK floorcoverings distributor and Eclipse Blinds plc ('Eclipse') which, substantially extended the group's interests in window furnishings. As is referred to in the Chief Executive's report, during the year the group has absorbed certain one off costs in the process of integrating and repositioning these acquisitions, in particular Eclipse. Already this year the group has made two further acquisitions for cash. In the UK we acquired Clifford's Carpets, a regional floorcoverings distributor based in Kent. In Continental Europe the group acquired Belcolor AG Flooring. Belcolor is the second largest floorcoverings distributor in Switzerland and following upon the 1999 acquisition of LMS, it takes forward the group's European development strategy. Board change I was delighted to be invited by the board to take over the chairmanship of the company from Graham Waldron from 1 January. The results for 1999 are a further testament to his chairmanship of the company since 1991. Graham's contribution to the business over the past eight years has been fundamental and I am glad that, as he will be remaining on the board, we shall benefit from this continued counsel. Staff We are fortunate that our staff are committed to providing the best service to our customers. Our businesses can only be as good as the service our staff give to our customers. The board wishes to thank them for all their efforts on behalf of our customers and the group over the past year. It is particularly pleasing that a substantial number of our staff have taken up previous opportunities to become shareholders in the group through our share ownership plans. It is planned to make a further offering to staff during the current year around the time that the existing share save schemes expire and once the Government's new share incentive plans become clear. Outlook The group is continuing to develop along the broad lines of the strategic plan developed eighteen months ago. The plan envisages further growth both through organic development of the existing businesses and further acquisitions taking advantage of a fragmented European market to build a substantial floorcoverings and furnishings group. The current year has started well and is in line with the current year plan. CHIEF EXECUTIVE REVIEW Floorcoverings The Floorcoverings division achieved record sales and profits helped by return in UK consumer confidence during the final quarter of 1999. After a satisfactory first half year the demand for floorcoverings improved during the traditionally busy autumn period. The change in consumer preference to resilient and wood flooring enabled us to take advantage of higher unit sales and improving margins. Business with the smaller independent retailers flourished and at the same time we increased the amount of business conducted with multiple retail and mail order customers as Headlam's high levels of service and cost effective distribution systems began to reach a wider customer base. We completed the roll-out of our enhanced computer operating system during the year to cover all UK operations, providing the management team with the means to improve margins further and to control the businesses even more tightly. The integration of Joseph, Hamilton and Seaton and Haldon Thompson in the UK and La Maison du Sol in France has proceeded well. JHS recorded a satisfactory performance whilst LMS, acquired in June 1999, returned to profitability ahead of plan after years of small losses prior to acquisition. Early indications are that the introduction of Headlam's business model specifically tailored for the French floorcoverings market is working well and has been received enthusiastically by customers and suppliers. Having established operations across Europe we now plan to integrate all our distribution businesses to take advantage of both the advanced computer technology currently available to us in the UK and to offer a cohesive approach to multinational customers and suppliers. Gradus Group, comprising of Gradus Floorcovering Accessories, Gradus Carpets and a rapidly developing contract fabric business, had another satisfactory year. The concept of offering a portfolio of contract finishes to end users and specifiers is gaining momentum and several substantial orders have been secured for delivery in 2000. Recent events We are pleased to report that our Stockport business relocated to a purpose built distribution facility which opened in February. This will provide the local management team with every opportunity to develop into a more formidable participant in the important but fragmented North West UK flooring market place. Similarly, in late March 2000 the current West Midlands based businesses of KJC and Headlam will move into a freehold 155,000 sq.ft. state-of-the-art warehouse and distribution centre based at Coleshill near Birmingham. As Europe's largest dedicated floorcoverings distribution site this will enable us to strengthen our presence in an area of England that traditionally yields excellent floorcoverings sales. The existing freehold site occupied by these businesses is to be disposed of to a neighbouring business for £2.9 million. Acquisitions Clifford Carpets, a leading independently owned, Kent based business, was acquired in January for £1.4 million. This business will be relocated to the nearby existing MCD site in April but will retain its existing brand name. Our third acquisition in the European floorcoverings market was completed in January with the £6.1 million acquisition of Belcolor AG Flooring, Switzerland's second largest floorcoverings distributor. This business, with sales of approximately £19.0 million, is now being integrated into the division and should make a useful contribution to this year's divisional results. Summary Good trading conditions and a firm start to the year by the UK distribution businesses, Gradus Group and our European businesses bodes well for 2000. Certain one-off relocation costs will be incurred during the year including the major move of the two West Midlands businesses during April. We are excited about the prospect of using the internet to improve communications with our customers and suppliers. There is every reason to believe that with 1.5m sq.ft. of UK warehousing and over 270 delivery vehicles the internet will play a big part in our future plans. It should enable us to improve our service to our customers whilst driving down costs as improved communications lead to more efficient order receipt and stock holding procedures. We will use this opportunity to re-evaluate the level of optimum profitability that can be achieved from our distribution business. As a first step we plan to launch fully interactive, 24 hour, 7 day week customer order web sites during late March 2000 for the benefit of our trade customers. This will be the first of a number of initiatives we plan to introduce to improve both our own and our customer competitiveness utilising internet technology. We anticipate another very satisfactory year from the Floorcoverings division. Furnishings division - Fabrics The fabric operations of the Furnishing division produced a creditable performance, improving their margins on a planned reduction in sales. Fabric also contributed to a healthy cashflow as working capital was reduced to reflect the lower sales level. Wm. O'Hanlon, the window blind and fabric business, had another record year and subsequently its management team was given responsibility for three small Eclipse businesses, all of which are involved in window blind manufacturing. All four businesses share common practices, skills and core competencies, most of which can now be interchanged. In a relatively short period of time real progress has been made in improving the results from the three former Eclipse businesses. Edinburgh Weavers also had a record year and continues to progress well. The design and sourcing skills of its management team are making a useful contribution to the divisional results as a whole. Claremont and Gordon John both experienced difficult trading conditions which restricted their ability to progress. Given this background the management team took a fairly defensive position, concentrating on working capital reductions and improving operating efficiencies. Summary The whole of the division has now accommodated the move by consumers away from print to coloured wovens and plain fabrics. To complement the group's growing interest in e-commerce liningsxpress.com, an internet based next day curtain lining service, will be launched to the furnishing trade at the beginning of April. It aims to facilitate a faster, more energetic approach to a market which is an important and integral part of the division's activities. Clearly Fabrics is currently the most challenging of the group's markets, however we are making steady headway in producing a satisfactory return despite these conditions. Acquisition of Eclipse Blinds plc The acquisition of Eclipse Blinds plc was completed in May 1999 and subsequently a thorough review of each business unit was completed in September 1999. The major conclusions drawn from this review were that certain of the original Eclipse businesses lacked the required critical mass, whilst others had not been fully integrated into the former Eclipse Group. Overall the Eclipse Group required some restructuring to take advantage of the markets it operates in and to realise the substantial growth potential. Following acquisition the senior management has been strengthened by the appointment of a new Finance Director and an announcement regarding the appointment of a new Managing Director is expected shortly. The management of subsidiaries now attend regular Eclipse board meetings and are encouraged to review both individual businesses and collectively the Eclipse Group performance. Product development is now undertaken with both local and international markets in mind with the ultimate objective of bringing group synergies and additional profit opportunities. Eclipse operating subsidiaries The core UK business recorded good results and grew both its profits and market share. Recent product launches and a strengthened sales team are propelling the business into a stronger market position. Further improvements are anticipated as the flow of new products and marketing initiatives gathers pace. The previous management's decision to acquire three loss making companies and merge them on one site in Northampton proved to be unsuccessful. To resolve this issue one business has been sold and one transferred to Headlam's Fabric division where there are common core competencies. The remaining business has been relocated to Vertika, an original Eclipse business, in order to assist Vertika in reaching a satisfactory level of critical mass. The window blind manufacturing business in Germany has been merged with another Eclipse business situated in the Czech Republic which in turn has relocated to a nearby enlarged facility, drastically reducing labour costs and eliminating a loss making performance. Both of these businesses have now been incorporated into the existing Headlam window blind subsidiary, Wm. O'Hanlon. In the United States the core business, Eclipse Blinds Inc., recorded a very profitable performance but did not reach its own ambitious growth targets. A number of initiatives, including tighter control of costs, improved service levels and the imminent launch of two major new products have been actioned to provide further stimulus to an exciting company which is surrounded by a number of strategic options for future expansion. Summary The integration process is almost complete. Improved management techniques and control procedures are now in place. Prior to its acquisition by Headlam, Eclipse had made a number of small, but loss making acquisitions. These individual businesses have now been dealt with, leaving the two main businesses in the US and UK as the future engine room for growth. A substantial amount of work has been undertaken to reposition Eclipse and to enable it to take full advantage of good market conditions as consumers increasingly express their current preference for window treatments in the form of products manufactured or distributed by the Eclipse Group. Group Summary Floorcoverings - remains our core business and the main profit driver of the group. Consequently, the future allocation of resources for acquisitional growth will be centred around the Floorcoverings division. We have identified a number of further opportunities which when realised are likely to be financed from the group's strong cash flow. Furnishing - having created a meaningful and profitable division with critical mass, we shall now primarily concentrate on growing this organically and extracting a higher return for our endeavours. e-commerce - this is a wonderful opportunity to utilise the group's core competencies of warehouse logistics and distribution to the full. Inevitably some of the traditional methods our customers and their customers use to select and purchase the products we distribute will change. Headlam is well placed to take advantage of these opportunities, several of which we are about to implement. FINANCIAL REVIEW Accounting policies The financial statements have been prepared on a basis which is consistent with previous years except to the extent that they have been modified to incorporate the relevant accounting standards issued during the period by the Accounting Standards Board and applicable to accounting periods ending on 31 December 1999. Profit and loss account Turnover The group's turnover increased by 18.1% from £327.6 million to £386.9 million. Turnover from continuing operations reduced by 2.2% from £327.6 million to £320.4 million and acquisitions during the year contributed £66.5 million. Turnover from continuing operations in the Floorcoverings division increased by 1.3% from £268.4 million to £272.0 million and JHS, LMS and Haldon Thompson, the three businesses acquired during the year and included respectively from 1 March, 1 June and 1 July contributed a further £28.7 million. Turnover from continuing operations in the Furnishings division reduced by 18.3% from £59.1 million to £48.3 million mainly as a consequence of the deliberate decision to reduce activity in low margin retail business during the second half of 1998. Turnover from Eclipse Blinds, included in this division from 1 May 1999, amounted to £37.8 million. Profit on ordinary activities before interest and goodwill amortisation During the period, the group's profit on ordinary activities before interest and goodwill amortisation increased by 36.2% from £25.2 million to £34.3 million. The contribution from continuing operations during the year amounted to £28.0 million, an increase of 11.3% on the previous year. Acquisitions added a further £6.3 million. The group's gross profit margin increased during the year from 28.6% to 29.9% whilst net operating expenses expressed as a percentage of turnover increased from 20.9% to 21.1%. Net operating margins increased from 7.7% to 8.9%. Profit from continuing operations in the Floorcoverings division, increased by 12.3% from £22.5 million to £25.3 million and net operating margins increased from 8.4% to 9.3%. JHS, LMS and Haldon Thompson contributed £1.6 million. Profit from continuing operations in the Furnishings division remained unchanged compared with last year at £3.6 million. However, net operating margins increased from 6.1% to 7.5%. Eclipse Blinds contributed £4.7 million during the period. Goodwill amortisation The goodwill arising on acquisition of JHS, Eclipse Blinds, LMS and Haldon Thompson has been capitalised and assigned a useful economic life of 20 years. Goodwill has been amortised during the year on a timing basis in order to match with post acquisition income. Goodwill amortisation during the year amounted to £2.4 million of which, £0.4 million relates to the Floorcoverings division and £2.0 million relates to the Furnishings division. The potential economic lives of businesses and goodwill will be reviewed annually and revised if appropriate. Goodwill amounting to £69.5 million, arising on acquisitions which occurred prior to the start of the year has been written off directly against the profit and loss account. Net interest payable The group's net interest cost increased from £2.3 million to £3.1 million but interest cover remained virtually unchanged at 11.1 compared with 11.0 for the previous year. Taxation on profit on ordinary activities The underlying rate of tax during the year was 34.2% giving rise to a charge of £10.7 million. However, a prior year adjustment of £1.2 million arising from an overestimate of previous years' tax reduced the tax charge for the year to £9.5 million giving rise to an effective rate of 30.5 %. The underlying rate of tax increased on last year's rate of 31.0% due to an overall increase in the level of profits earned outside the UK and the inability of some overseas businesses to fully utilise the available tax relief. Earnings per share Basic earnings per share, excluding goodwill amortisation, increased by 19.0% from 23.1p to 27.5.p. Diluted earnings per share, excluding goodwill amortisation, increased by 18.8% from 22.9p to 27.2p. Basic and diluted earnings per share, after goodwill amortisation, were 24.4p and 24.1p respectively. Balance sheet Current liquidity The group's cash position during the year reduced by £12.1 million from £23.0 million to £10.9 million. At 31 December 1999, £9.0 million was held in sterling and the equivalent of £1.6 million in US dollars and £0.3 million in euros. Total group borrowings at 31 December 1999 compared with the position as at 31 December 1998 were as follows 1999 1998 £m £m Bank loans and overdraft 40.5 18.7 Loan notes - 2.7 Obligations under finance leases and similar hire purchase contracts 4.0 4.0 44.5 25.4 At 31 December 1999, £32.1 million was held in sterling and the equivalent of £4.4 million in US dollars, £7.9 million in euros and £0.1 million in other European currencies. On 30 June 1999 and 1 July 1999, the group redeemed the preference shares in Eclipse Blinds plc for £12.1 million. The nominal value of the shares redeemed amounted to £0.6 million and included a redemption premium of £11.5 million. The group funded the redemption with a sterling term loan facility of £15.5 million which was drawn down on 1 July 1999. As a consequence of the group electing to utilise its own resources to fund some of the acquisitions completed during the year and the decision to switch the Eclipse Blinds preference shares into more cost effective debt, the group's net indebtedness increased from £2.4 million to £33.6 million. Balance sheet gearing, based on shareholders' funds before the capitalisation of goodwill, increased from 4.2% at 31 December 1998 to 67.6%. Balance sheet gearing calculated on shareholders' funds after the capitalisation of goodwill was 28.2%. Cash flows Cash inflow from operating activities during the year amounted to £32.0 million compared with £26.2 million for the previous year. The group's capital expenditure during the year amounted to £10.5 million (1998: £1.4 million). The significant increase was principally due to the cost of funding the development of the warehouse and distribution centre at Coleshill. At 31 December 1999, development costs totalled £6.7 million. A further £3.3 million will be spent during the first quarter of 2000 in order to complete the project. Other expenditure incurred during the year included investments in plant and machinery for the Eclipse businesses, which totalled £1.3 million. Sales of assets during the year related to surplus properties no longer occupied. The disposals generated cash of £1.0 million. A further £2.9 million will be received during the first quarter of 2000 when KJC move to Coleshill and their existing property is sold. The outflow of funds relating to acquisitions during the year, amounting to £22.6 million includes cash consideration of £13.2 million, acquisition costs of £1.7 million and assumed net indebtedness in the acquired companies amounting to £7.7 million. Financing cash inflows amounted to £3.0 million net. £12.1 million related to the redemption of the Eclipse Blinds preference shares, £0.7 million to the repayment of debt and £15.5 million to the draw down under the term loan. Net proceeds from the issue of shares amounted to £0.3 million. Total cash outflows for the period amounted to £12.7 million compared with a £1.3 million inflow for previous year. Share capital During the period, the number of ordinary shares in issue increased by 14.9 million from 68.5 million to 83.4 million. 14.6 million shares were issued in connection with the acquisition of Eclipse at a price of 345.0p per share and a further 0.3 million were allotted under share option schemes at prices ranging between 129.6p and 366.5p. Consolidated profit and loss account for the year ended 31 December 1999 1999 1998 £000 £000 Turnover Continuing operations 320,366 327,593 Acquisitions 66,512 - 386,878 327,593 Cost of sales (271,030) (233,980) Gross profit 115,848 93,613 Net operating expenses (84,028) (68,461) Operating profit Continuing operations 27,992 25,152 Acquisitions 3,828 - Operating profit before goodwill amortisation 34,259 25,152 Goodwill amortisation (2,439) - 31,820 25,152 Net interest payable and other similar items (3,096) (2,295) Profit on ordinary activities before taxation 28,724 22,857 Taxation on profit on ordinary activities (9,494) (7,087) Profit for the financial year 19,230 15,770 Dividends paid and proposed on equity and non equity shares (8,461) (5,820) Profit retained for the financial year 10,769 9,950 Earnings per share Basic Before goodwill amortisation 27.5p 23.1p After goodwill amortisation 24.4p 23.1p Diluted Before goodwill amortisation 27.2p 22.9p After goodwill amortisation 24.1p 22.9p Consolidated balance sheet at 31 December 1999 1999 1998 £000 £000 Fixed assets Intangible assets 69,787 - Tangible assets 49,822 41,181 Investments 466 - 120,075 41,181 Current assets Stocks 81,784 61,184 Debtors 86,230 54,772 Investments 28 57 Cash at bank and in hand 10,871 22,981 178,913 138,994 Creditors: amounts falling due within one year (148,095) (98,504) Net current assets 30,818 40,490 Total assets less current liabilities 150,893 81,671 Creditors: amounts falling due after more than one year (30,993) (23,238) Provisions for liabilities and charges (451) (380) Net assets 119,449 58,053 Capital and reserves Called up share capital 4,220 3,473 Share premium account 47,838 47,525 Revaluation reserve 3,866 3,924 Special reserve 49,654 - Profit and loss account 13,871 3,131 Shareholders' funds Equity 119,399 58,003 Non equity 50 50 119,449 58,053 Consolidated cash flow statement for the year ended 31 December 1999 1999 1998 £000 £000 Net cash inflow from operating activities 32,000 26,158 Returns on investments and servicing of finance (3,056) (2,381) Taxation (7,700) (5,469) Capital expenditure and financial investment (9,978) (711) Acquisitions and disposals (22,605) 1,452 Equity dividends paid (4,381) (5,042) Cash (outflow)/inflow before financing (15,720) 14,007 Financing Issue of shares 661 352 Expenses paid in connection with share issues (330) - Redemption of preference shares (12,121) - Increase/(reduction) in debt 14,836 (13,018) 3,046 (12,666) (Decrease)/increase in cash in year (12,674) 1,341 Reconciliation of net cash flow to movements in net debt 1999 1998 £000 £000 (Decrease)/increase in cash in year (12,674) 1,341 Cash (inflow)/outflow from (increase)/reduction in debt (14,836) 13,018 Change in debt resulting from cash flows (27,510) 14,359 Debt (acquired)/disposed of with subsidiaries (2,513) 369 New finance leases and similar hire purchase contracts (1,770) (936) Translation difference 583 (154) Movement in net debt in the year (31,210) 13,638 Net debt at 1 January (2,421) (16,059) Net debt at 31 December (33,631) (2,421) Consolidated statement of total recognised gains and losses for the year ended 31 December 1999 1999 1998 £000 £000 Profit for the financial year 19,230 15,770 Currency translation differences on foreign currency net investments (87) 4 Unrealised surplus on revaluation of properties - 2,787 Total recognised gains and losses for the financial year 19,143 18,561 Note of consolidated historical cost profits and losses for the year ended 31 December 1999 1999 1998 £000 £000 Reported profit on ordinary activities before taxation 28,724 22,857 Difference between an historical cost depreciation charge and the actual depreciation charge calculated on the revalued amount 58 23 Historical cost profit on ordinary activities before taxation 28,782 22,880 Historical cost profit for the year retained after taxation and dividends 10,827 9,973 Reconciliation of movements in consolidated shareholders' funds for the year ended 31 December 1999 1999 1998 £000 £000 Profit for the financial year 19,230 15,770 Dividends Equity shares (8,332) (5,817) Non equity shares (129) (3) Retained profit for the financial year 10,769 9,950 Negative goodwill taken to profit and loss account on liquidation of subsidiary undertaking - (24) Equity share capital issued 51,044 1,117 Cost of share issues (330) - Contribution to Qualifying Employee Share Trust - (765) Currency translation differences on foreign currency net investments (87) 4 Revaluation of properties - 2,787 Net addition to shareholders' funds 61,396 13,069 Shareholders' funds at 1 January 58,053 44,984 Shareholders' funds at 31 December 119,449 58,053 Segmental analysis Operating Turnover profit By activity £000 £000 1999 Floorcoverings 300,752 26,535 Furnishings 86,126 6,227 386,878 32,762 Central operations (942) 31,820 1998 Floorcoverings 268,449 22,544 Furnishings 59,144 3,595 327,593 26,139 Central operations (987) 25,152 Earnings per share The calculation of earnings per share is based on the average number of ordinary shares in issue during the year of 78,436,955 (1998: 68,344,741). The weighted average number of ordinary shares used for the diluted earnings per share calculation is 79,360,933 (1998: 68,998,228). Reconciliation of group operating profit to net cash inflow from operating activities 1999 1998 £000 £000 Operating profit 31,820 25,152 Negative goodwill taken to profit and loss account on liquidation of subsidiary undertaking - (24) Depreciation 3,937 3,172 Goodwill amortisation 2,439 Profit on sale of fixed tangible assets (91) (10) Movement in stocks (5,231) (2,141) Movement in debtors (7,308) 599 Movement in creditors 6,434 (590) Net cash inflow from operating activities 32,000 26,158 The interim financial statements for the year ended 31 December 1999 will be posted to shareholders shortly and copies will be available from that date from the company's registered office.

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