Interim Results

MFI Furniture Group PLC 21 July 2005 21 July 2005 Interim results for the 24 weeks to 11 June 2005 Financial highlights - Sales up 7.7% to Â£757m - Howden Joinery up 14% to Â£259m - UK Retail up 3% to Â£429m; net orders down 2% - France Retail up 14% to Â£64m - Pre-tax profit of Â£58.5m (2004: Â£30.1m restated*) - Pre-tax profit before exceptional items of Â£22.9m (2004: Â£31.1m restated*) - Earnings per share of 7.2p (2004: 3.5p restated*) - Earnings per share before exceptional items of 2.4p (2004: 3.7p restated*) - Interim dividend per share maintained at 2.0p * restated for FRS17 (see note 13) Business highlights - Supply chain stable - Continued sales and profit growth at Howden Joinery - Progress in UK Retail - Â£16m of cost savings in first half - Traditional price / value proposition being restored - Strengthened management team - France Retail responding well to the refurbishment programme - Managing the pension deficit downwards - Group gross margin stable at 50% John Hancock, Chief Executive, said: 'Following a difficult period the Group is now making progress, albeit in a highly competitive marketplace. The first half has seen another strong performance from Howdens. We are confident that the supply chain is stable and we remain focused on rebuilding profitability in the UK Retail division, notwithstanding the tougher conditions in our markets. We continue to manage our costs and gross margins against the background of what remains a competitive market.' - ends - Contacts: MFI Furniture Group Plc John Hancock, Chief Executive Officer 020 8913 5319 Mark Robson, 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 11 June 2005 Group turnover increased by 7.7% to Â£757 million, compared with Â£703 million for the same period last year. Profit before tax and exceptional items was Â£22.9 million, compared with Â£31.1 million last year. Basic earnings per share, excluding exceptional items, decreased to 2.4 pence per share. Comparatives for 2004 have been restated to comply with FRS 17 'Retirement benefits'. Exceptional operating items include Â£5.4 million of supply chain disruption costs and UK redundancy costs, a carry over from the work we undertook in 2004, and a net credit from restructuring our pension arrangements of Â£41.1 million which is explained in more detail later in this report. Exceptional items comprise a profit on property disposals of Â£7.2 million and provisions of Â£7.3 million, representing Â£5.7 million of closure costs and Â£1.6 million for future trading losses, in respect of the closure of Hygena @ Currys. Operational review Howden Joinery Operating profits were Â£43.6 million, up 27% from Â£34.3 million last year, on an increase in turnover of 14% to Â£259 million. Same depot sales growth was 11% compared to 20% for the same period last year. The focus in the early part of the year was on gross margin improvement in the more mature depots and this action has helped grow the operating margin to 16.9%, compared to 15.1% for the same period last year. The rate of sales growth slowed, reflecting the greater maturity of the depot portfolio, the relatively low level of depot openings in 2003/2004 and no annualised benefit from the selling price increases put through at the end of 2003. More recently, actions have been taken to increase sales and, as anticipated at the time of the AGM in May, the performance of the promotion in the last four weeks of the first half has considerably improved the overall first half performance. During the period we commenced a trial of new bedroom ranges and, if successful, we expect to eventually roll these out to all depots. We have extended 19 depots and plan to extend a further 18 by the end of the year. We have opened six depots and relocated five in the first 24 weeks and are on target to open a further 34 in the second half, which would give a total of around 360 depots trading by the year-end. We continue learning from our 15 depot pilot in the SouthEast of the United States. Losses in the period are Â£3.6 million, against Â£3.3 million last year, in line with expectations. The new product, sourced from our UK factories but tailored for the US market, has been well received by our customers and we aim to increase the pilot to 20 depots by the end of the year. The Howden pilot in France, with depots in Lille and Paris, progresses well and we will be expanding this pilot with a further nine depots in the second half, making a total of 11 depots selling product manufactured in our factories in the UK. Unlike the US operation, the French operation benefits from the existing UK infrustructure and supply chain arrangements. UK Retail H1 2005 H1 2004 Â£m Â£m Opening net order book 38 26 Net orders 477 489 (2)% Deliveries (429) (416) 3% Closing net order book 86 99 Net orders taken during the period were 2% down on the same period last year (same store net orders 4% lower than the same period last year). UK retail sales, at Â£429 million, grew 3% with same store sales up 2%. The opening order book was relatively high and, as expected, this has unwound contributing to the growth in UK Retail sales. Pre-exceptional operating losses were Â£12.9 million, down from Â£2.3 million profit last year. Actions are being taken to address the underperformance of the UK Retail division. First, we have restored our traditional price/value offer with a price promise to our customers. Although we have incurred increased advertising expenditure, we have re-established our customer franchise and have seen double-digit volume growth in sales with resultant market share gains. The performance of the new product introduced in the second half of 2004 was good, with especially strong performance in bedrooms and in the sub Â£500 price band, and represented 24% of orders in the first half of the year. Secondly, we have started to look at a longer term solution to ensure that our service levels are where we want them to be. The introduction of the Customer Charter has incorporated new guidelines on service and is one of the most significant changes to the business in the first half. It has only been possible to implement following the growing confidence we have in the new supply chain systems. Early indications are that it has been well received by our customers and it benefits the business in two main areas: â€¢Introduces new levels of discipline and consistency of service across the business. â€¢Reduces the level of failed delivery, customer refunds and remedial costs. In addition we are recovering costs by charging customers for delivery, changing delivery dates and cancelling orders. Thirdly, we have undertaken a comprehensive review of the Hygena @ Currys business. Although the business demonstrated some success, the sales growth was insufficient to generate a financial return that justified continuing in the longer term. As a result we announced on 11 May 2005 with Dixons Group to end the venture. Closure costs will be Â£5.7 million and additional trading losses of Â£1.6 million are expected as we phase out the closure of the concessions. The business made losses of circa Â£5 million on turnover of Â£25 million in 2004. Fourthly we are making good progress with the Â£40 million cost reduction programme that we announced in December. Four keys areas have been addressed, namely: â€¢ Head office/central function job losses and reduction in consulting spend â€¢ Reduced marketing spend in all areas other than direct advertising â€¢ Reduction in store costs as a result of fewer product refits and store refurbishments â€¢ Renegotiated logistics and customer service costs, including charging for home delivery To date we have achieved Â£16 million of savings with further progress expected in the second half of the year, as the introduction of home delivery charging only commenced at the conclusion of the Winter Sale in March. We have consciously spent more than plan on direct advertising but this investment has helped re-establish our customer franchise and improve our gross margin from our planned level. Finally, we have strengthened the management team with four new appointments to the Group Executive Committee. Andrew Livingstone will be joining us from B&Q, where he is Trading director for B&Q showrooms, to take commercial responsibility for UK Retail following Mark Horgan's decision to leave the Group at the end of August. Three internal appointments include Robin Proctor - Supply Chain director, Rob Fenwick - Manufacturing director and Steve Round - Managing Director of our French Retail business to enhance the representation and commercial involvement of their operations. France Retail Sales in France, at Â£64 million, were up 14% on last year with same store growth of 10% in local currency. Profits were Â£2.7 million before SAP disruption costs of Â£0.3 million. This compares to Â£1.4 million for the same period last year and reflects benefits from the store refurbishment and infrastructure investment over the past few years. Sourcing The sourcing joint venture in Asia has developed with over 500 product lines now being sourced from Asia. The value of product sourced from Asia throughout 2005 is forecast to be Â£25 million, compared to Â£5 million in 2004. In addition to components for our manufacturing operations we are now sourcing leather upholstery and will be sourcing appliances and bathrooms in the second half. These products are providing significant gross margin benefit to the operating divisions, with some benefit retained in the joint venture which is expected to generate a small profit in 2005. Supply chain Since December 2004, significant progress has been made in achieving supply chain stability, with the system now showing the ability to handle record orders during the Winter Sale and enabling the business to deliver high despatch volumes consistently and efficiently over many weeks. This contrasts dramatically with the performance in the latter part of 2004. Our two key performance indicators of 'percentage of home delivery errors' and 'number of stock lines with extended delays' have been improving throughout the first half to levels better than those achieved under the old systems. We are now seeing the 'home delivery error rate' at below 5%, compared to 12% before the implementation of the new systems, and the number of stock lines with extended delay is circa 100. The growing confidence in the system has given us the ability to introduce the Customer Charter with its expected associated cost savings as well as give our sales teams the trust to sell product without recourse. The system remains complex and fragile and will require further development before we can proceed to installing the next phases covering manufacturing, warehousing and retail. Financial review Gross margin The Group's gross margin was stable at 50.0%, compared to 50.1% last year. This reflects an improved gross margin (0.9 percentage points impact to the Group) at Howdens, offset by a reduction in the gross margin in UK Retail (1.0 percentage points impact to the Group). The UK Retail gross margin reflects our deliberate policy during the Winter Sale, following the customer service issues in 2004, to re-establish the customer franchise with highly competitive pricing. Overheads We highlighted in December that the costs for UK Retail would increase by Â£47 million per annum. In addition we have deliberately increased the level of advertising in UK Retail to re-establish the customer franchise, with sales volumes and logistics costs growing by low double-digits. The cost reduction programme refered to above has partially mitigated this but Group pre-exceptional overheads, including Howden Joinery, have grown by Â£32 million compared to last year. Tax The effective rate of tax for the year is expected to be 38.5% on pre-exceptional profits. This is higher than the standard rate of corporation tax as tax relief is unavailable on a proportion of the capital expenditure incurred on the UK store refurbishment programme, most of which is expensed to the profit and loss account as depreciation over a period of four years. Cash flow The operating cash inflow in the period before exceptional items was Â£ 59.2 million. After taking into account capital investment, dividends, tax and property disposals, net debt has decreased by Â£ 52.4 million to Â£ 9.8 million. This includes monies held in escrow, for future insurance claims under the structural guarantee, which have increased by Â£1.0 million to Â£10.4 million. Structural guarantee We continue to take extensive legal and taxation advice and have instigated legal action against HM Revenue & Customs to recover the VAT paid on the structural guarantees. We are carrying the tax paid of Â£60.5 million on our balance sheet as a debtor without any provision and further disclosure is given in note 12 to the accompanying notes to the financial statements. Pensions As at 26 December 2004 the pre-tax deficit in the Group UK pension plans, calculated in accordance with FRS17, was Â£294.6 million (Â£206.2 million after deferred tax). This included the additional liabilities announced on 6 May 2004 arising from a failure to equalise the pension age for men and women at age 65. Under FRS17 valuation methods, these additional liabilities were estimated at Â£50 million. In May 2005 the Group wrote to certain members of the UK pension plans offering them a cash payment in exchange for giving up any claim a member may have to possible additional pension benefits arising from the equalisation issue. As at 11 June 2005, approximately 90% by value of those to whom the offer was made had accepted the cash option and the additional liabilities were therefore reduced from Â£50 million to Â£5 million. The aggregate cost of the cash offer was Â£15.9 million including Â£0.3 million fees. On 14 March 2005 we announced that a Â£12 million cash settlement had been received from one of the third parties on whose advice the Group and the pension plan trustees had relied. The Board continues to take advice and consider with the Trustees the actions required to obtain recovery, if material, from any other parties. In the context of the triennial valuations taking place in 2005, the Board will also be discussing with the Trustees further ways of addressing the deficit in the funding of the UK pension plans. Dividend The Board has declared an interim dividend of 2.0 pence per share (2004: 2.0 pence), level with last year. This will be paid on 21 October 2005 to shareholders on the register at the close of business on 30 September 2005. Shares will be quoted ex-dividend from 28 September 2005. We remain committed to a progressive dividend policy and will gradually weight the pay out towards the final dividend as we restore profitability to the UK retail business. Group Board Bob Wilson has decided to retire from his position of executive director in April 2006 after serving 8 years as a director and developing and managing one of the largest and most efficient kitchen manufacturing operations in the world. We are very grateful to Bob for his tremendous contribution over the 29 years he has worked for MFI. Shaun O'Callaghan resigned from the Board on 20 July 2005 to pursue other interests and we thank him for his significant contribution as interim CFO from September 2004 to May 2005. Shaun will remain with the Company until the end of September 2005. Trading update and outlook As stated in our interim results last year, we will provide timely trading updates separately from our Results Announcements. The next trading updates will be in September covering the UK Retail August bank holiday promotion and in mid-December to include Howdens' important Autumn trading period. Trading conditions in the second half are difficult to predict and the UK Retail division remains more susceptible to any changes in trading conditions than Howden Joinery. We continue to manage the costs and gross margin in what remains a competitive market. Ian Peacock John Hancock 21 July 2005 FINANCIAL HIGHLIGHTS 24 weeks 24 weeks 52 weeks to to to 11 12 25 June June December 2005 2004 2004 Unaudited Unaudited Audited (restated)(restated) Â£m Â£m Â£m Turnover (including share of joint venture) 758.8 704.6 1,518.5 Turnover (excluding share of joint venture) 757.3 703.2 1,514.6 Gross margin (before exceptional items) 50.0% 50.1% 49.4% Operating profit margin (before exceptional items) 3.8% 4.9% 4.2% Profit before tax 58.5 30.1 20.6 Profit before tax and exceptional items 22.9 31.1 54.5 DIVIDEND PER SHARE Interim 2.0p 2.0p 2.0p Final n/a n/a 2.0p Full year dividend n/a n/a 4.0p BASIC EARNINGS PER SHARE Basic earnings per share 7.2p 3.5p 1.3p Basic earnings per share before exceptional items 2.4p 3.7p 5.5p OTHER FINANCIAL INFORMATION Net assets 250.8 322.7 218.5 CONSOLIDATED PROFIT AND LOSS ACCOUNT 24 weeks to 11 June 2004 24 weeks 52 weeks to 25 Dec 2004 (restated*) Before Exceptional to 12 June Before Exceptional exceptional items 2004 exceptional items items (note 6) Total (restated*) items (note 5) Total Unaudited Unaudited Unaudited Unaudited Audited Audited Audited Â£m Â£m Â£m Â£m Â£m Â£m Â£m Turnover Group and share of joint venture 2 758.8 - 758.8 704.6 1,518.5 - 1,518.5 Less: share of joint venture (1.5) - (1.5) (1.4) (3.9) - (3.9) -------- -------- -------- -------- -------- ------- ------- Group turnover 757.3 - 757.3 703.2 1,514.6 - 1,514.6 Cost of sales (378.4) (0.4) (378.8) (350.6) (762.7) (3.1) (765.8) -------- -------- -------- -------- -------- ------- ------- Gross profit 378.9 (0.4) 378.5 352.6 751.9 (3.1) 748.8 Selling and distribution costs (316.5) (5.0) (321.5) (286.6) (623.6) (32.8) (656.4) Administrative expenses (33.5) 41.1 7.6 (31.6) (64.0) 4.0 (60.0) -------- -------- -------- -------- -------- ------- ------- Operating profit 28.9 35.7 64.6 34.4 64.3 (31.9) 32.4 Share of operating loss of joint venture (1.0) - (1.0) (0.9) (2.1) - (2.1) -------- -------- -------- -------- -------- ------- ------- Total operating profit - Group and share of joint venture 27.9 35.7 63.6 33.5 62.2 (31.9) 30.3 Exceptional item - net profit/(loss) on disposal of fixed assets - 7.2 7.2 (1.0) - (2.0) (2.0) Exceptional item - provision for closure of an operation - (7.3) (7.3) - - - - -------- -------- -------- -------- -------- ------- ------- Profit on ordinary activities before interest 27.9 35.6 63.5 32.5 62.2 (33.9) 28.3 Interest receivable and similar income 1.8 - 1.8 0.8 2.0 - 2.0 Interest payable and similar charges (2.0) - (2.0) (0.7) (4.3) - (4.3) Other finance charges - FRS17 pension 13 (4.8) - (4.8) (2.5) (5.4) - (5.4) -------- -------- -------- -------- -------- ------- ------- Profit on ordinary activities before taxation 2 22.9 35.6 58.5 30.1 54.5 (33.9) 20.6 Tax on profit on ordinary activities 3 (8.8) (7.6) (16.4) (10.0) (22.8) 9.6 (13.2) -------- -------- -------- -------- -------- ------- ------- Profit for the financial period 14.1 28.0 42.1 20.1 31.7 (24.3) 7.4 Dividends 4 (11.7) - (11.7) (11.6) (23.2) - (23.2) -------- -------- -------- -------- -------- ------- ------- Retained profit 5 2.4 28.0 30.4 8.5 8.5 (24.3) (15.8) ======== ======== ======== ======== ======== ======= ======= Earnings per share Basic earnings per 10p ordinary share 7 7.2p 3.5p 1.3p ======== ======== ======== ======== ======== ======= ======= Diluted earnings per 10p ordinary share 7 7.0p 3.3p 1.2p ======== ======== ======== ======== ======== ======= ======= Earnings per share (before exceptional items) Basic earnings per 10p ordinary share 7 2.4p 3.7p 5.5p ======== ======== ======== ======== ======== ======= ======= Diluted earnings per 10p ordinary share 7 2.3p 3.5p 5.3p ======== ======== ======== ======== ======== ======= ======= * Restated for FRS 17 - see note 13 CONSOLIDATED BALANCE SHEET 24 weeks to 24 weeks to 52 weeks to 11 June 12 June 25 December Notes 2005 2004 2004 Unaudited Unaudited Audited (restated*) (restated*) FIXED ASSETS Â£m Â£m Â£m Intangible assets 13.4 14.1 13.7 Tangible assets 345.2 389.8 381.6 Investments 8.3 8.9 8.1 -------- -------- --------- Total fixed assets 366.9 412.8 403.4 -------- -------- --------- CURRENT ASSETS Stocks 237.7 188.3 238.4 Debtors 8 239.0 206.2 217.9 Investments 10.4 13.8 9.4 Cash at bank and in hand 11 64.8 40.3 28.4 -------- -------- --------- 551.9 448.6 494.1 -------- -------- --------- CREDITORS FALLING DUE WITHIN ONE YEAR 393.2 362.7 359.3 Net current assets 158.7 85.9 134.8 Total assets less current liabilities 525.6 498.7 538.2 CREDITORS FALLING DUE AFTER MORE THAN ONE YEAR 85.0 25.7 100.0 PROVISIONS FOR LIABILITIES AND CHARGES 14.0 16.2 13.5 -------- -------- --------- Net assets excluding net pension liability 426.6 456.8 424.7 Net pension liability 13 175.8 134.1 206.2 -------- -------- --------- NET ASSETS 250.8 322.7 218.5 ======== ======== ========= CAPITAL AND RESERVES Called up share capital 5 62.6 62.2 62.3 Share premium account 5 80.1 66.9 77.2 Revaluation reserve 5 16.2 21.8 21.8 ESOP reserve 5 (54.3) (45.5) (55.1) Other reserves 5 28.1 28.1 28.1 Profit and loss account 5 118.1 189.2 84.2 -------- -------- --------- Equity shareholders' funds 250.8 322.7 218.5 ======== ======== ========= * Restated for FRS 17 - see note 13. CONSOLIDATED CASH FLOW STATEMENT 24 weeks to 24 weeks to 52 weeks to 11 June 12 June 25 December 2005 2004 2004 Notes Unaudited Unaudited Audited Â£m Â£m Â£m Net cash inflow from operating activities 9 59.2 82.2 66.7 Returns on investments and servicing of finance 10 (0.9) 0.1 (1.4) Taxation (5.6) (17.5) (33.7) Capital expenditure and financial investment (net) 10 9.8 (27.8) (75.7) Equity dividends paid (11.6) (11.6) (23.2) ------- ------- ------- Cash inflow / (outflow) before use of liquid resources and financing 50.9 25.4 (67.3) Management of liquid resources (1.0) (2.0) 2.4 Financing 10 (13.3) (31.3) 44.6 ------- ------- ------- Increase/(decrease) in cash in the period 36.6 (7.9) (20.3) ======= ======= ======= RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS Increase/(decrease) in cash in the period 36.6 (7.9) (20.3) Cash movement on: - debt and lease financing 11 15.0 25.0 (50.0) - cash flow from increase in liquid resources 11 1.0 2.0 (2.4) ------- ------- ------- Change in net (debt)/funds resulting from cash flows 52.6 19.1 (72.7) Effect of foreign exchange rate changes 11 (0.2) (0.6) (0.1) ------- ------- ------- Movement in net (debt)/funds in the period 52.4 18.5 (72.8) Net (debt)/funds at the beginning of the period 11 (62.2) 10.6 10.6 ------- ------- ------- Net (debt)/funds at the end of the period 11 (9.8) 29.1 (62.2) ======= ======= ======= STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES 24 weeks to 24 weeks to 52 weeks to 11 June 12 June 25 December 2005 2004 2004 Unaudited Unaudited Audited (restated*) (restated*) Â£m Â£m Â£m Profit for the financial period 42.1 20.1 7.4 Translation differences on foreign currency denominated net investments (0.7) (2.4) (3.0) Net effect of adopting FRS17 - (128.6) (199.2) -------- -------- --------- Total recognised gains and losses relating to the period 41.4 (110.9) (194.8) ======== ========= Prior year adjustment (FRS17) (202.3) -------- Total gains and losses recognised since last annual report and financial statements (160.9) ======== RECONCILIATION OF MOVEMENTS IN EQUITY SHAREHOLDERS' FUNDS 24 weeks to 24 weeks to 52 weeks to 11 June 11 June 25 December 2005 2004 2004 Unaudited Unaudited Audited (restated*) (restated*) Â£m Â£m Â£m Total recognised gains and losses for the period 41.4 (110.9) (194.8) Dividends (11.6) (11.6) (23.2) Net amortisation of/(additions to) ESOP trust 0.8 (3.3) (12.9) Shares issued 1.7 1.3 2.2 -------- -------- -------- Net addition/(reduction) to equity shareholders' funds 32.3 (124.5) (228.7) -------- -------- -------- Opening equity shareholders' funds as previously stated 420.8 447.2 447.2 Net effect of adopting FRS17 (202.3) - - -------- -------- -------- Adjusted equity shareholders' funds at beginning of period 218.5 - - -------- -------- -------- Equity shareholders' funds at end of the period 250.8 322.7 218.5 ======== ======== ======== * Restated for FRS 17 - see note 13. NOTES TO THE FINANCIAL STATEMENTS 1 BASIS OF PREPARATION The financial information for the 24 weeks to 11 June 2005 and 12 June 2004 is unaudited. The accounting policies are consistent with those applied to the audited financial statements for the 52 weeks to 25 December 2004, except that the Group has adopted FRS17 'Retirement Benefits' in full in 2005. The Group is required to adopt FRS17 retrospectively and so we have restated the comparative figures. The effect of the restatement is shown in note 13. 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 25 December 2004, on which the auditors made an unqualified report, have been delivered to the Registrar of Companies. 2 SEGMENTAL ANALYSIS All results are from continuing operations. Unallocated net assets comprise balances in respect of dividends and net funds. The analysis of turnover by destination is not materially different to the analysis of turnover by origin. 24 weeks to 24 weeks to 52 weeks to 11 June 12 June 2004 25 December 2004 2005 (restated) (restated) TURNOVER Â£m Â£m Â£m Howden Joinery 258.7 227.0 559.1 UK Retail 428.9 415.6 825.1 France Retail 64.3 56.3 119.4 Howden Millwork 3.6 3.0 7.3 Other operations 1.8 1.3 3.7 -------- -------- ---------- 757.3 703.2 1,514.6 Joint venture operations 1.5 1.4 3.9 -------- -------- ---------- Total 758.8 704.6 1,518.5 ======== ======== ========== NOTES TO THE FINANCIAL STATEMENTS 2 SEGMENTAL ANALYSIS (continued) 24 weeks to 11 June 2005 52 weeks to 25 December 2004 (restated) PROFIT Before Exceptional Total 24 weeks to Before Exceptional Total BEFORE exceptional items 12 June 2004 exceptional items TAXATION items (restated) items Â£m Â£m Â£m Â£m Â£m Â£m Â£m Howden Joinery 43.6 - 43.6 34.3 102.8 2.5 105.3 UK Retail (12.9) (5.1) (18.0) 2.3 (31.3) (14.0) (45.3) France Retail 2.7 (0.3) 2.4 1.4 2.0 (0.4) 1.6 Howden Millwork (3.6) - (3.6) (3.3) (8.6) - (8.6) Other operations (0.9) - (0.9) (0.3) (0.6) - (0.6) Operating exceptional item re supply chain computer system - - - - - (20.0) (20.0) Operating exceptional item re pensions (note - 41.1 41.1 - - - - 6b) -------- -------- ------- ----------- -------- -------- -------- Total operating profit 28.9 35.7 64.6 34.4 64.3 (31.9) 32.4 Joint venture operations (1.0) - (1.0) (0.9) (2.1) - (2.1) -------- -------- ------- ----------- -------- -------- -------- Total operating profit (group and JVs) 27.9 35.7 63.6 33.5 62.2 (31.9) 30.3 Profit/ (loss) on disposal of fixed assets - 7.2 7.2 (1.0) - (2.0) (2.0) Provision for closure of an operation - (7.3) (7.3) - - - - Net interest (payable)/ receivable (0.2) - (0.2) 0.1 (2.3) - (2.3) FRS17 pension finance charges (4.8) - (4.8) (2.5) (5.4) - (5.4) -------- -------- ------- ----------- -------- -------- -------- Profit before 22.9 35.6 58.5 30.1 54.5 (33.9) 20.6 taxation ======== ======== ======= =========== ======== ======== ======== NOTES TO THE FINANCIAL STATEMENTS 2 SEGMENTAL ANALYSIS (continued) 24 weeks to 11 24 weeks to 52 weeks to 25 June 2005 12 June 2004 December 2004 Total Total Total (restated) (restated) NET Â£m Â£m Â£m ASSETS Howden Joinery 87.5 79.6 77.1 UK Retail 147.3 190.5 170.5 France Retail 26.8 29.9 34.1 Howden Millwork 8.2 3.7 8.8 Other operations 2.2 1.3 1.7 Joint venture operations 0.2 0.9 0.1 -------- --------- --------- 272.2 305.9 292.3 Unallocated net assets/ (liabilities) (21.4) 16.8 (73.8) -------- --------- --------- Total 250.8 322.7 218.5 ======== ========= ========= 3 TAXATION The taxation charge is calculated at 38.5% of profit before exceptional items (24 weeks to 12 June 2004: 32.2%, 52 weeks to 25 December 2004: 41.8%), being the estimated effective rate of taxation for the 2005 financial year. 4 DIVIDEND The interim dividend of 2.0p per share (June 2004: 2.0p), will be paid on 21 October 2005 to shareholders on the register of members at the close of business on 30 September 2005. The shares will be quoted ex-dividend from 28 September 2005. 5 SHARE CAPITAL AND RESERVES Share Share premium Revaluation ESOP Other Profit and capital account reserve reserve reserves loss account Â£m Â£m Â£m Â£m Â£m Â£m As at 25 December 2004 62.3 77.2 21.8 (55.1) 28.1 286.5 Restatement on adopting FRS17 (note 13) - - - - - (202.3) ------- -------- ------- ------- ------- ------- As at 25 December 2004 - restated 62.3 77.2 21.8 (55.1) 28.1 84.2 Retained profit for the period - - - - - 30.4 Shares issued 0.3 2.9 - - - (1.5) Net amortisation of ESOPs - - - 0.8 - - Realised revaluation profit - - (5.6) - - 5.6 Foreign exchange - - - - - (0.6) ------- -------- ------- ------- ------- ------- As at 11 June 2005 62.6 80.1 16.2 (54.3) 28.1 118.1 ======= ======== ======= ======= ======= ======= 6 EXCEPTIONAL ITEMS (a) Exceptional items - supply chain The exceptional items included in operating profit of Â£5.4m before tax (52 weeks to 25 December 2004: Â£31.9m, 24 weeks to 11 June 2004: Â£nil), are made up as follows: Â£m Â£m Additional delivery and associated remedial costs 1.2 Additional staff and consultancy costs 3.9 Redundancy costs 0.3 ------ Total operating exceptional costs before tax 5.4 Tax credit on operating exceptional items at 30% (1.6) ------ Total operating exceptional costs after tax 3.8 ====== NOTES TO THE FINANCIAL STATEMENTS 6 Exceptional items (continued) These pre-tax costs are included within profit and loss account headings as follows: P&L account heading Â£m Cost of sales 0.4 Selling and distribution costs 5.0 -------- 5.4 ======== (b) Exceptional item - pensions On 6 May 2004, the Group announced additional pension liabilities arising from a failure to equalise the pension age for men and women at age 65. Under FRS17 valuation methods, these additional liabilities were estimated at Â£50m. In May 2005 the Group wrote to certain members of the UK pension plans offering them an immediate cash payment in exchange for giving up any claim a member may have to possible additional pension benefits arising from the equalisation issue. Up to 11 June 2005, 87.4 % by value of the eligible members have accepted the cash offer. This will lead to a total cash payment of Â£15.6m in respect of all members who have accepted the cash offer before 11 June 2005. The cash will be paid before the end of July, and the expense for all members who accepted the offer before 11 June 2005 has been recognised in these accounts. The effect of these settlements is to reduce the additional liability (originally estimated at Â£50m on an FRS17 basis) by Â£45.0m. This reduction in liability has also been reflected in these accounts. There are still a small number of cash offers to members where we are waiting for the members to reply. The closing date for the offers was 8 July 2005. Based on the responses we have had so far, we expect that there will be some further payments in the second half of 2005, and a corresponding further reduction in the deficit. On 14 March 2005 the group announced that it had received a cash settlement of Â£12.0m from one of the third parties on whose advice the Group and the pension plan trustees had relied. The cash payments and the reduction in deficit for all offers accepted before 11 June 2005, together with the cash settlement received from a third party and the associated legal fees, have been treated as exceptional items, included in operating profit, in the first half of 2005. The effect of these items is: Â£m Â£m Reduction in pension deficit following acceptance of cash offer 45.0 Cost of cash offer (15.6) Cash settlement received from third party 12.0 Professional fees incurred (0.3) ------ Total net operating exceptional credit before tax 41.1 Tax charge on operating exceptional items at 30% (11.1) ------- Total net operating exceptional credit after tax 30.0 ======= These pre-tax credits/(charges) are included within Administrative expenses. (c) Profit on disposal of fixed assets The profit on disposal of fixed assets of Â£7.2m (52 weeks to 25 December 2004: loss of Â£2.0m. 24 weeks to 12 June 2004: loss of Â£1.0m), represents net gains on disposal of land and buildings and fixtures and fittings. The associated deferred tax credit is Â£0.3m (25 December 2004 and 12 June 2004: Â£nil). NOTES TO THE FINANCIAL STATEMENTS 6 Exceptional items (continued) (d) Exceptional provision for closure As announced in our press release of 11 May 2005, the Group has agreed with our joint venture partners to end the venture, Hygena at Currys, by mutual agreement following a comprehensive review of the business. A closure programme for the Hygena concessions, which trade in 130 of Currys' 370 stores, is in place and we expect it to be finished by September 2005. In accordance with FRS3, we have made a provision for the costs of closure of this business, and have treated it as a post-operating exceptional item. The provision comprises the following items: Â£m Â£m Costs of closure 5.7 Provision for future operating losses 1.6 --------- Total operating exceptional costs before tax 7.3 Tax credit on operating exceptional items at 30% (2.2) --------- Total exceptional provision for closure after tax 5.1 ========= 7 EARNINGS PER SHARE 24 weeks to 11 June 2005 24 weeks to 12 June 2004 52 weeks to 25 December 2004 Earnings Weighted Earnings Earnings Weighted Earnings Earnings Weighted Earnings average per share (restated) average per share (restated) average per share number number (restated) number (restated) of of of shares shares shares Â£m m p Â£m m p Â£m m p Earnings per share (eps) Basic earnings per share 42.1 583.5 7.2 20.1 571.4 3.5 7.4 581.0 1.3 Effect of dilutive share options - 15.6 (0.2) - 37.2 (0.2) - 17.9 (0.1) ------ ------- ------ ----- ------ ------ ------ ------- ------ Diluted earnings per share 42.1 599.1 7.0 20.1 608.6 3.3 7.4 598.9 1.2 ------ ------- ------ ----- ------ ------ ------ ------- ------ Eps before exceptional items Basic earnings 42.1 583.5 7.2 20.1 571.4 3.5 7.4 581.0 1.3 per share Exceptional items (28.0) - (4.8) 1.0 - 0.2 24.3 - 3.2 ------ ------- ------ ----- ------ ------ ------ ------- ------ Basic eps before exceptional items 14.1 583.5 2.4 21.1 571.4 3.7 31.7 581.0 5.5 ------ ------- ------ ----- ------ ------ ------ ------- ------ Diluted earnings per share 42.1 599.1 7.0 20.1 608.6 3.3 7.4 598.9 1.0 Exceptional items (28.0) - (4.7) 1.0 - 0.2 24.3 - 4.3 ------ ------- ------ ----- ------ ------ ------ ------- ------ Diluted eps before exceptional items 14.1 599.1 2.3 21.1 608.6 3.5 31.7 598.9 5.3 ------ ------- ------ ----- ------ ------ ------ ------- ------ 8 DEBTORS 24 weeks to 24 weeks to 52 weeks to 11 June 12 June 25 December 2005 2004 2004 Â£m Â£m Â£m Debtors and prepayments - due within one year 178.5 149.1 157.4 VAT paid re structural guarantee - due after one year (note 12) 60.5 57.1 60.5 --------- ---------- --------- Total 239.0 206.2 217.9 ========= ========== ========= NOTES TO THE FINANCIAL STATEMENTS 9 CASH FLOW STATEMENT Reconciliation of operating profit to operating cash flows: 24 weeks to 24 weeks to 52 weeks to 11 June 12 June 25 December 2005 2004 2004 (restated) (restated) Â£m Â£m Â£m Operating profit before exceptional items 28.9 34.4 64.3 Depreciation and amortisation charge 29.9 24.0 57.8 Amortisation of fixed asset investments 0.8 4.2 - Decrease / (increase) in stocks 0.7 7.4 (42.7) (Increase) in debtors (21.1) (7.1) (15.4) Increase in creditors and provisions 14.4 30.0 45.3 -------- ---------- --------- 53.6 92.9 109.3 Net cash inflow/(outflow) - operating exceptionals 5.6 - (28.1) Net cash outflow - VAT paid re structural guarantee - (10.7) (14.5) -------- ---------- --------- Net cash inflow from operating activities 59.2 82.2 66.7 ======== ========== ========= 10 ANALYSIS OF CASH FLOWS FOR HEADINGS NETTED IN THE CASH FLOW STATEMENT 24 weeks to 24 weeks to 52 weeks to 11 June 12 June 25 December 2005 2004 2004 (restated) (restated) Â£m Â£m Â£m Returns on investments and servicing of finance Interest received 1.8 0.8 2.0 Interest paid (2.7) (0.7) (3.4) --------- --------- --------- Net (outflow)/inflow on investments and servicing of finance (0.9) 0.1 (1.4) ========= ========= ========= Capital expenditure and financial investment Payments to acquire tangible fixed assets (20.1) (32.4) (82.8) Receipts from sales of tangible fixed assets 30.7 5.3 8.2 Investment in joint ventures (0.8) (0.7) (1.1) --------- --------- --------- Net inflow/(outflow) from capital expenditure and financial investment 9.8 (27.8) (75.7) ========= ========= ========= Financing Shares issued 1.7 1.3 2.2 Payments to acquire own shares - (7.6) (7.6) (Decrease) / increase in bank finance (15.0) (25.0) 50.0 --------- --------- --------- Net (outflow) / inflow for financing (13.3) (31.3) 44.6 ========= ========= ========= NOTES TO THE FINANCIAL STATEMENTS 11 ANALYSIS OF NET FUNDS/(DEBT) Cash at Bank Current Total net bank loans Net funds/ asset funds/ (debt) and in hand (debt) investments Â£m Â£m Â£m Â£m Â£m 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 Cash flow (12.4) (75.0) (87.4) (4.4) (91.8) Exchange movement 0.5 - 0.5 - 0.5 ------- ------- ------- ------- ------- As at 25 December 2004 28.4 (100.0) (71.6) 9.4 (62.2) Cash flow 36.6 15.0 51.6 1.0 52.6 Exchange movement (0.2) - (0.2) - (0.2) ------- ------- ------- ------- ------- As at 11 June 2005 64.8 (85.0) (20.2) 10.4 (9.8) ======= ======= ======= ======= ======= 12 HM REVENUE & CUSTOMS 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) is paid 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 on the sale of the warranties and the relevant tax has been paid to HM Revenue & Customs. 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 on the basis that this amount is recoverable. To date, the following amounts have been recorded: Cumulative 2005 2004 2003 2002 2001 Â£m Â£m Â£m Â£m Â£m Â£m Reduction in VAT 60.5 - 10.5 20.7 22.0 7.3 IPT paid (15.3) - (2.3) (5.3) (5.6) (2.1) External insurance premium/ expenses (7.7) - (1.2) (2.5) (2.8) (1.2) Reinsurance premium to Group company (12.5) - (2.1) (4.2) (4.5) (1.7) Underwriting profit recognised by 4.1 1.2 1.9 1.0 - - Group company ------- ------- ------- ------ ------ ------ Profit taken to profit and loss account 29.1 1.2 6.8 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 Company Limited. The maximum potential exposure, if the Group were to lose its case, is Â£60.5m, but this would be expected to be offset by the recovery of approximately Â£15.3m of insurance premium tax paid on the sale of extended structural guarantees. All of the Â£60.5m had been paid to HM Revenue & Customs at the half year end. NOTES TO THE FINANCIAL STATEMENTS 13 PENSIONS The Group has adopted FRS17 'Retirement Benefits' in full with effect from 26 December 2004. On adopting FRS17, we are required to change the accounting treatment of our defined benefit pension schemes. Under FRS17 we are required to include the assets and liabilities of these schemes on the Group balance sheet. Current service costs, curtailment and settlement gains and losses, and net financial returns are included in the profit and loss account in the period to which they relate. Actuarial gains and losses are included in the statement of total recognised gains and losses. We are required to show the effect of adopting FRS17 retrospectively and so we have restated our comparative figures as shown below: GROUP PROFIT AND LOSS ACCOUNT Profit on Net interest Profit for the ordinary receivable/ financial activities (payable) period before interest Â£m Â£m Â£m 52 weeks to 25 Dec 2004 ------------------------- As previously stated 27.3 (2.3) 10.5 Effect of adopting FRS17 1.0 (5.4) (3.1) ---------- -------- --------- As restated 28.3 (7.7) 7.4 ---------- -------- --------- 24 weeks to 12 June 2004 -------------------------- As previously stated 32.0 0.1 21.5 Effect of adopting FRS17 0.5 (2.5) (1.4) ---------- -------- --------- As restated 32.5 (2.4) 20.1 ---------- -------- --------- GROUP BALANCE SHEET Gross pension Net pension P&L Reserve provision liabilities (included in Provisions for liabilities & charges) Â£m Â£m Â£m 52 weeks to 25 Dec 2004 As previously stated (7.4) - 286.5 Effect of adopting FRS17 7.4 (206.2) (202.3) ----------- ------- ------ As restated - (206.2) 84.2 ----------- ------- ------ 24 weeks to 12 June 2004 As previously stated (5.9) - 319.2 Effect of adopting FRS17 5.9 (134.1) (130.0) ----------- ------- ------ As restated - (134.1) 189.2 ----------- ------- ------ We have not revised any of the assumptions used to calculate our actuarial valuation in the 24 weeks to 11 June 2005. We have used the same assumptions as at 25 December 2004, and they are disclosed in the 2004 annual report and accounts. The change in the pension deficit between 25 December 2004 and 11 June 2005 is due to the following factors: Analysis of the movement in the scheme deficit during the current Â£m period Deficit as at 25 December 2004 (before tax) (294.6) Total operating charge (10.9) Contributions 14.6 Net return on scheme assets and liabilities (4.8) Reduction due to exceptional item (note 6) 45.0 ------ Deficit as at 11 June 2005 (before tax) (250.7) ------ Tax credit on the deficit at 30% 74.9 ------ Deficit as at 11 June 2005 (after tax) (175.8) ====== 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 11 June 2005 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 13. 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 International Standards on Auditing (UK and Ireland), 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 11 June 2005. Deloitte & Touche LLP Chartered Accountants London 21 July 2005 This information is provided by RNS The company news service from the London Stock Exchange

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