Interim Results

Headlam Group PLC 15 August 2000 Interim Results for the six month period to 30 June 2000 Headlam Group plc, the leading floorcoverings and windowcoverings distributor, announces pre tax profits before goodwill amortisation up 24.0% for the six month period ended 30 June 2000. FINANCIAL HIGHLIGHTS Six months ended 30 June 2000 1999 Change Turnover £221.5m £169.9m +30.3% Profit before goodwill £14.0m £11.3m +24.0% amortisation and taxation Profit before taxation £12.1m £10.7m +13.1% Basic earnings per share before goodwill amortisation 11.7p 10.8p +8.3% Dividend per share 2.8p 2.45p +14.3% Key points - strong first half from core businesses - recent acquisitions integrating and performing well - European contribution stronger than anticipated - Group on target to achieve its strategic goals Commenting on the results, Ian Kirkham, Chief Executive, said: 'Headlam continues to make good progress. Our European businesses are integrating well and we continue to be the lead consolidator in a fragmented European floorcovering distribution market. I am confident that we will have another successful year and we remain on target to achieve our strategic goals.' Enquiries: Headlam Group plc Ian Kirkham, Chief Executive Tel: 020 7457 2345 Stephen Wilson, Finance Director Thereafter: 01604 234121 Gavin Anderson & Company Richard Constant/Julian Wilson Tel: 020 7457 2345 Chairman's Statement I am pleased to report an encouraging start to the year with profit before goodwill amortisation and taxation rising 24% to £14.0 million (1999: £11.3 million) on sales which increased to £221.5 million (1999: £169.9 million). Earnings per share, excluding goodwill amortisation, increased by 8.3%. An interim dividend of 2.8p per ordinary share (1999: 2.45p), an increase of 14.3%, will be paid on 5 January 2001 to shareholders on the register at 8 December 2000. Floorcoverings During the first half of the year we increased our UK distribution presence by making two small acquisitions and, in January, we added Belcolor AG Flooring in Switzerland to our European distribution businesses, creating a strong market presence in Holland, France and Switzerland. We continue to record good progress in all three sectors of our floorcovering operations. Our UK distribution businesses achieved a good first half performance despite incurring exceptional costs associated with the planned relocation of three operations to new premises during the first quarter of 2000. Gradus improved its performance helped by an increase in its contract carpet business. European activities continue the trend of improving sales and profits whilst Belcolor's contribution was ahead of initial expectations. The success of our European strategy has encouraged us to identify a number of other potential acquisitions with the objective of establishing additional coverage in European countries not currently served by our floorcovering distribution division. The European floorcovering industry remains highly fragmented and provides the group with an exciting opportunity as we continue to play a leading part in the consolidation of a significant market place. Windowcoverings In May 1999, the group acquired Eclipse Blinds. Following post acquisition rationalisation and the introduction of a new management team, we now have in place a streamlined operation which can optimise its performance. These measures have reduced the group's exposure to some of the smaller Eclipse subsidiaries and is enabling Eclipse management to concentrate on fewer, more meaningful businesses. The fragmented nature of the windowcovering markets has many characteristics which are aligned to the operating skills of the group and offer excellent growth opportunities for the future. While some of our original fabric businesses continue to perform well in difficult market conditions, elsewhere, due to increased import penetration and the persistent strength of sterling, other parts are becoming less attractive, making European exports more difficult. Even though these businesses currently remain profitable your board plans to reduce its exposure to them and concentrate on those parts of the group which offer greater returns. Prospects We are pleased to report that our core businesses continue to perform well and we are deriving a very positive contribution from our European floorcovering activities. It is likely that the tough trading conditions in the fabric businesses will contain the group's overall performance this year. We have now begun the process of realigning the windowcoverings division with the emphasis on developing only those businesses which offer an attractive and sustainable earnings profile. By concentrating on the core floorcoverings operation and higher margin windowcoverings business, your board is confident that it has established a sound platform for future growth. Financial review Accounting policies The financial statements have been prepared on a basis, which is consistent with previous years. Divisional analysis The segmental analysis shown in note 1 to the interim financial statements shows the group's activities under Floorcoverings and Windowcoverings. Previously the analysis was Floorcoverings and Furnishings. Whilst there is no change in the businesses included in each division compared with previous years, the board is of the opinion that the term Windowcoverings more accurately reflects the majority of business activities included within this division and its intention to concentrate on these markets in the future. Turnover and profit During the period, the group's turnover increased by 30.3% from £169.9 million to £221.5 million. Turnover from continuing operations increased by 23.5% from £169.9 million to £209.9 million and includes a full six month contribution from JHS, Eclipse and LMS which were all acquired during the first half of 1999. Acquisitions during the period contributed £11.5 million. The group's profit on ordinary activities before interest increased by 23.1% from £11.7 million to £14.4 million. The contribution from continuing operations during the period amounted to £14.0 million, an increase of 19.7% on the previous year and acquisitions added a further £0.4 million. The group's gross profit margin increased during the period from 30.5% to 31.4% whilst net operating expenses expressed as a percentage of turnover increased from 23.7% to 25.0%. Net operating margins decreased from 6.9% to 6.5% due to a significant increase in goodwill amortisation, exceptional costs incurred in relocating three UK floorcovering businesses and weaker margins in the fabrics businesses. Goodwill amortisation The goodwill arising on the acquisitions during the period has been capitalised and assigned a useful economic life of 20 years. Goodwill has been amortised during the period on a timing basis in order to match with post acquisition income. Taxation on profit on ordinary activities The underlying rate of tax during the period was 30.0% (1999: 31%) giving rise to a charge of £4.2 million. This rate should be maintained for the full year providing the group's overseas businesses are able to fully utilise the available taxation relief. Earnings per share Basic earnings per share, excluding goodwill amortisation, increased by 8.3% from 10.8p to 11.7.p. Working capital Stock investment increased during the period compared with the position at 30 June 1999. With the exception of the fabrics businesses, which showed a decrease during the period, all areas of the group showed rising investment as a result of increased product development and ranges. As ever, the group continues to balance the commitment to customer service with the need to maintain firm working capital control. Trade creditors reduced in certain areas of the group due to a combination of the realignment of one off settlement terms, amendments to settlement in favour of improved trading returns and currency translations, which on alike for like basis decreased trade creditors at 30 June 2000 by £1.0 million. Capital expenditure The group's gross capital expenditure during the period amounted to £3.4 million (1999: £1.4 million). This expenditure was mainly incurred on the warehouse and distribution centre at Coleshill. Whilst there are further costs to be incurred during the second half of 2000 to complete the project, these will not be significant. £2.9 million was received during the period for the property which was previously occupied by the West Midlands floorcovering businesses which have now moved to Coleshill. Group indebtedness and cash flows Group net indebtedness at the end of the period amounted to £46.9 million compared with £32.4 million at 30 June 1999. An analysis of net debt is provided in note 5 to the interim financial statements. The group's interest cost increased from £1.0 million to £2.3 million and includes a full six months funding cost for the acquisitions completed during the first half of 1999. Interest cover decreased from 11.8 times to 7.0 and balance sheet gearing increased from 29% to 37%. The increase in group debt is due principally to the board's current policy of funding acquisitions with debt. Cash inflow from operating activities during the period amounted to £6.3 million compared with £10.3 million for the previous period. The reduction occurred due to the increased investment in working capital, which amounted to £12.1 million compared with £3.6 million for the previous period. Cash outflows before financing during the period amounted to £8.8 million compared with £15.0 million during the first half of 1999. The decrease was due to a substantial reduction in funds committed to acquisitions, £7.6 million, compared with £22.4 incurred in the corresponding period last year. During the period, cash balances decreased by £10.1 million compared with £13.0 million during the first half of 1999. Treasury management and financial instruments The group operates a policy of centralised treasury management to cover its funding arrangements, foreign exchange and interest rate exposure. The group's financial instruments, other than derivatives, comprise cash, borrowings and various items that arise directly from its operations such as trade debtors and trade creditors. The main purpose of these financial instruments is to raise finance for the group's trading operations and acquisition activities. The group also undertakes derivative transactions for interest rate swaps and forward foreign currency contracts. The purpose of such transactions is to manage the interest rate and currency risks arising from the group's sources of finance and operations. It is, and has been throughout the period under review, the group's policy that trading in financial instruments is not permitted. The main risks arising from the group's financial instruments are interest rate risk, liquidity risk and foreign currency risk. The board reviews and agrees policies for managing each of these risks and the policies have remained unchanged during the period under review. Headlam Group plc Consolidated profit and loss account (unaudited) Six months Six months The year ended ended ended 30 June 30 June 31 Dec 2000 1999 1999 Note £000 £000 £000 Turnover 1 Continuing operations 209,935 169,925 386,878 Acquisitions 11,539 - - ======== ======= ======== 221,474 169,925 386,878 Cost of sales (151,891) (118,010) (271,030) ======== ======= ======== Gross profit 69,583 51,915 115,848 Net operating expenses (55,211) (40,216) (84,028) ======== ======= ======= Operating profit 1 Continuing operations 13,962 11,699 31,820 Acquisitions 410 - - ======== ======= ======= Operating profit before goodwill amortisation 16,282 12,304 34,259 Goodwill amortisation (1,910) (605) (2,439) 14,372 11,699 31,820 Net interest payable and other similar items (2,315) (1,039) (3,096) ====== ====== ====== Profit on ordinary activities before taxation 12,057 10,660 28,724 Taxation on profit on ordinary activities (4,190) (3,492) (9,494) ====== ====== ======== Profit for the financial period 7,867 7,168 19,230 Dividends paid and proposed on equity and non-equity shares (2,343) (2,168) (8,461) ======= ====== ====== Profit retained for equity shareholders 5,524 5,000 10,769 ======= ====== ======= Earnings per share Basic before goodwill amortisation 2 11.7p 10.8p 27.5p ----- ----- ----- after goodwill amortisation 2 9.4p 9.9p 24.4p ----- ----- ----- Diluted before goodwill amortisation 2 11.6p 10.7p 27.2p ----- ----- ----- after goodwill amortisation 2 9.3p 9.8p 24.1p ----- ---- ----- Consolidated balance sheet (unaudited) At At At 30 June 30 June 31 Dec 2000 1999 1999 £000 £000 £000 Note Fixed assets 72,315 68,156 69,787 Intangible assets 55,946 43,966 49,822 Tangible assets 516 - 466 ------- ------ ------- Investments 128,777 112,122 120,075 ======= ======= ======= Current assets 90,809 81,449 81,784 Stocks 87,456 82,446 86,230 Debtors 28 57 28 Investments 996 10,389 10,871 ------- ------- ------- Cash at bank and in hand 179,289 174,341 178,913 ======== ======= ======= Creditors Amounts falling due within one year (145,309) (139,313) (148,095) ------- ------ ------ Net current assets 33,980 35,028 30,818 ======= ====== ====== Total assets less current liabilities 162,757 147,150 150,893 Creditors Amounts falling due after more than one year (36,522) (33,346) (30,993) Provisions for liabilities and charges (836) (394) (451) -------- ------ ------- Net Assets 125,399 113,410 119,449 ======== ======= ======= Capital and reserves Called up share capital 4,229 4,214 4,220 Share premium account 48,097 47,508 47,838 Revaluation reserve 3,866 3,924 3,866 Special reserve 49,654 49,654 49,654 Profit and loss account 19,553 8,110 13,871 ------- ----- ------ Shareholders' funds Equity 125,349 113,360 119,399 Non-equity 50 50 50 ------ ----- ------ 125,399 113,410 119,449 ====== ======= ======= Financial gearing after capitalisation of goodwill 37% 29% 28% ------ ---- ---- before capitalisation of goodwill 88% 72% 68% ------ ---- ---- Consolidated cash flow statement (unaudited) Six months Six months The year ended ended ended 30 June 30 June 31 Dec 2000 1999 1999 Note £000 £000 £000 Net cash inflow from operating activities 4 6,333 10,337 32,000 Returns on investments and servicing of finance (2,204) (1,054) (3,056) Taxation (2,785) (506) (7,700) Capital expenditure and financial investment (531) (1,357) (9,978) Acquisitions and disposals (7,614) (22,421) (22,605) Equity dividends paid (2,035) - (4,381) ------ ------- ------- Cash outflow before financing (8,839) (15,001) (15,720) Financing Issue of shares 268 323 661 Expenses paid in connection with share issues - (330) (330) Redemption of preference shares - (12,121) (12,121) (Reduction)/increase in debt (1,576) 14,134 14,836 -------- ------- ------- Cash (outflow)/inflow from financing (1,308) 2,006 3,046 -------- ------- ------- Decrease in cash in the period (10,147) (12,995) (12,674) ========= ======== ======== Reconciliation of net cash inflow to movements in net debt (unaudited) Six months Six months The year ended ended ended 30 June 30 June 31 Dec 2000 1999 1999 £000 £000 £000 Decrease in cash in the period (10,147) (12,995) (12,674) Cash outflow/(inflow) from reduction/(increase) in debt 1,576 (14,134) (14,836) --------- -------- ------- Change in debt resulting from cash flows (8,571) (27,129) (27,510) Debt acquired with subsidiaries (3,079) (2,513) (2,513) New finance leases and similar hire purchase contracts (869) (567) (1,770) Translation difference (731) 190 583 ------- ------ ------ Movement in net debt in the period (13,250) (30,019) (31,210) Net debt at begining of period (33,631) (2,421) (2,421) ------- ------- ------- Net debt at end of period (46,881) (32,440) (33,631) ======== ====== ========= Consolidated statement of total recognised gains and losses (unaudited) Six months Six months The year ended ended ended 30 June 30 June 31 Dec 2000 1999 1999 £000 £000 £000 Profit for the financial period 7,867 7,168 19,230 Currency translation differences on foreign currency net investments 158 (21) (87) ----- ----- ----- Total recognised gains and losses for the financial period 8,025 7,147 19,143 ====== ===== ===== Notes to the interim financial statements(unaudited) 1.Segmental analysis By activity Turnover Six months Six months The year ended ended ended 30 June 30 June 31 Dec 2000 1999 1999 £000 £000 £000 Floorcoverings 172,722 135,015 300,752 Windowcoverings 48,752 34,910 86,126 -------- ------ ------- 221,474 169,925 386,878 Operating profit Floorcoverings 12,820 10,126 26,535 Windowcoverings 2,060 2,075 6,227 ------ ----- ----- 14,880 12,201 0 ======= ====== ===== Central operations (508) (502) (942) ------ ----- ----- 14,372 11,699 (942) ====== ===== ===== By origin Six months Six months The year Turnover ended ended ended 30 June 30 June 31 Dec 2000 1999 1999 £000 £000 £000 UK 175,737 153,980 334,927 Continental Europe 35,843 12,130 38,146 North America 9,894 3,815 13,805 ----- ----- ------ 221,474 169,925 386,878 ======= ======= ======= Operating profit UK 12,594 11,079 28,893 Continental Europe 1,163 255 1,620 North America 615 365 1,307 ----- ----- ----- 14,372 11,699 31,820 ===== ====== ====== Notes to the interim financial statements (unaudited) 2.Earnings per share The calculation of earnings per share is based on the average number of ordinary shares in issue during the first six months of the year of 83,560,274 (1999:70,934,902). The weighted average number of ordinary shares used for the diluted earnings per share calculation is 84,337,502 (1999:71,782,628). 3.Acquisitions The following companies were acquired during the period. Details of the consideration paid, amounts treated as goodwill and the net assets acquired are set out below. These values are provisional and, following completion of the ongoing review, will be finalised in subsequent financial statements. Fair value of assets Consideration Goodwill acquired £000 £000 £000 Belcolor AG Flooring 6,086 4,078 2,008 Other 1,694 268 1,426 Acquisition costs 114 114 - ----- ----- ----- 7,894 4,460 3,434 ===== ===== ===== 4.Reconciliation of group operating profit to net cash inflow from operating ativities Six months Six months The year ended ended ended 30 June 30 June 31 Dec 2000 1999 1999 £000 £000 £000 Operating profit 14,372 11,699 31,820 Depreciation 2,157 1,637 3,937 Goodwill amortisation 1,910 605 2,439 Profit on sale of fixed tangible assets - (12) (91) Movement in stocks (4,752) (2,007) (5,231) Movement in debtors 328 (1,037) (7,308) Movement in creditors (7,685) (548) 6,434 ------- ------ ------ Net cash inflow from operating activities 6,330 10,337 32,000 ======== ======== ======= 5. Analysis of net debt At 1 At 30 Jan Translation June 2000 Cashflow Acquisitions Non-cash difference 2000 £000 £000 £000 £000 £000 £000 Cash at bank in hand 10,871 (10,155) 210 - 70 996 Bank overdraft (793) (202) - - (276) (1,271) ------ ------ ----- ---- ---- ------ 10,078 (10,357) 210 - (206) (275) Debt due within one year (11,677) 4,747 (1,171) (95) (141) (8,337) Debt due after one year (28,094) (3,785) (1,864) 95 (384) (34,032) Finance leases and similar hire purchase contracts (3,938) 614 (44) (869) - (4,237) ------- ---- ----- ---- ---- ----- (33,631) (8,781) (2,869) (869) (731) (46,881) ======== ====== ====== ===== ==== ======= 6. The interim financial statements have been prepared using accounting policies stated in the Group's report and accounts for the year ended 31 December 1999 and are unaudited. The summary of results for the year ended 31 December 1999 does not constitute full financial statements within the meaning of the Companies Act 1985. The report and full financial statements for that period have been filed with the Registrar of Companies and contain an unqualified audit report within the meaning of the Companies Act 1985 and the auditors have not made any statement under section 237(2) or 237(3) of the Companies Act 1985. 7. The interim financial statements for the six months ended 30 June 2000 will be posted to shareholders on 29 August 2000 and copies will be available from that date from the Company's registered office.

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