(HEAD) Headlam Group

RNS Number : 8317I Headlam Group PLC 19 March 2010

19 March 2010

Preliminary Results for the Year Ended 31 December 2009 Headlam Group plc ("Headlam"), Europe's leading floorcoverings distributor, announces its final results for the year ended

31 December 2009.

Financial highlights

2009 2008 Change
£000 £000
Revenue 533,793 557,296 -4.2%
Operating profit before impairment 25,969 41,722 -37.8%
Profit before tax and impairment 23,275 40,120 -42.0%
Impairment of assets held for sale (1,211) - -
Profit before tax 22,064 40,120 -45.0%
Basic earnings per share 19.1p 34.5p -44.6%
Dividend per share 11.0p 19.7p -44.2%

Key points

· UK revenues decrease by 6.1% on a like for like basis
· Continental European revenues decrease by 8.3% on a like for like basis
· Cash generated from operations increased by 59.2% to £43.7 million
· Dividend cover ratio consistent with 2008 at 1.7 times

Tony Brewer, Headlam's Group Chief Executive, said:

"Following a more positive end to 2009, we are optimistic about a return to growth in 2010. However, market conditions, particularly in the UK, continue to be challenging, which has made normal seasonal trends and predictability difficult to establish.

Notwithstanding the current uncertainty, we believe the management and structure is in place to enable us to continue

out-performing the market and take advantage of any improvement in the economy."

Enquiries:

Headlam Group plc

Tony Brewer, Group Chief Executive Tel: 01675 433000

Stephen Wilson, Group Finance Director

Chairman's Statement

As anticipated, 2009 proved to be a challenging year following the downturn in market conditions that prevailed in the second half of 2008 and into the first half of 2009. More encouragingly, we experienced an improving trading trend in the second half of 2009, particularly the final quarter, as contraction in the floorcovering market appeared to cease, albeit at a level reduced on previous year.

Total sales revenue for 2009 amounted to £533.8 million, a decline of 4.2% on the previous year. Profit before tax declined by 45.0% to £22.1 million. Notwithstanding the decline in revenue, we believe the group has out-performed the floorcovering market and by retaining our fundamental operating structure, we are well positioned to take advantage as conditions improve.

Earnings and dividend

The board has elected to maintain a dividend cover ratio in line with 2008 and is therefore recommending a final dividend of 7.3p per share. Total dividend for the year will decrease by 44.2% from 19.7p to 11.0p per share.

The final dividend, if approved by shareholders at the Annual General Meeting, will be paid on 1 July 2010, to shareholders on the register at the close of business on 4 June 2010.

Strategy

Of significant importance to the group's strategy are the autonomous activities and initiatives of our individual businesses. Whilst we implemented limited re-structuring in the autumn of 2008, we have essentially retained the same operational structure throughout 2009 in order to preserve our service levels and maintain operating capacity. Based on our trading experience towards the end of 2009, which has broadly continued into 2010, it is our intention to retain the current business structure for the foreseeable future.

The separate management teams are focused on the responsibilities specific to their business, covering activity with suppliers, product and customers, whilst complying with defined operating and financial policies. The performance measurement of our management teams and their subsequent reward is based on the achievement of their individual business objectives.

The group strategy for senior and operational management is to maintain our concentration on floorcovering distribution and enlarge our activities in the UK and Continental Europe. This will allow us to develop further the business as markets improve, through a combination of organic growth and appropriate floorcovering acquisitions as opportunities are assessed and concluded.

Operations

We believe the group has benefited significantly, in difficult markets, from the autonomous initiatives of our 49 businesses, operating from 18 principal distribution centres in the UK, each one focused on maximising activity in their target geographical areas and various product categories.

We very much appreciate the ongoing support from both our suppliers, in creating and launching new products and our customers, principally the independent flooring retailers and contractors. The ongoing success of our customers creates the opportunity to out-perform the market.

Through a constant process of development, we have launched 2,900 new products across our core residential activities of carpet, vinyl and laminate. During the year, 648,000 point of sale items, principally display stands and pattern books, were positioned into independent flooring retailers and flooring contractors by our 347 external sales people.

All three businesses in Continental Europe have made a positive contribution. Our operations in France and Switzerland performed well and in the Netherlands, progress was made despite a more challenging market.

Management and employees

Andrew Simpson, who has been instrumental in the development of Headlam, in his position as Managing Director of UK Operations since 1991, has informed the board of his intention to retire. We thank Andrew for his major contribution to the development of individual managers and the group as a whole.

David Grove, after three years as a non-executive director, has decided to step down from the board to concentrate on his other business interests. We would like to thank David for his positive contribution.

With the benefit of our group structure, we have continued with our policy of internal promotion and career progression where possible. This enables employees to progress their career to sales representatives, sales and general management and in certain cases, senior management positions.

We wish to thank all of our management and employees for their contribution to the group's performance in 2009.

Outlook

With market conditions continuing to be challenging and whilst uncertainty prevails, we have taken a prudent approach to our financial and operating plan for 2010 and set realistic growth targets for sales representatives and management teams.

The core dynamics of the group are well developed and with our autonomous management teams focused on the objectives before them, we are confident of producing a positive outcome for the year.

Graham Waldron, Chairman

Chief Executive's Review

During 2009, revenue from the UK businesses collectively declined by 6.1% on a like for like basis. As reported previously, the decline in revenue was 10.7% in the first half. A generally improving performance in the second half, resulting in a like for like deficit of only 1.8%, culminated with the final quarter actually producing improved revenue of 1.0% against the corresponding period in 2008.

Various market indicators would suggest that residential and commercial floorcovering markets suffered a substantial decline during the year and therefore, we believe our result represents a solid performance.

We will continue with our strategy of concentrating on floorcovering distribution in the UK and Continental Europe. Utilising the business and management structure through which we operate, we are confident of continuing to out-perform the floorcovering market and develop our business, principally by organic growth and appropriate strategic acquisitions.

UK operations

The UK operations now incorporate 49 individual businesses, operating from 18 distribution centres and 13 service centres. The management teams of these businesses are positioned within five market sectors, dependent upon geographical focus and product offering.

Whilst we have not undertaken any significant restructuring during 2009, we have been extremely prudent with staff recruitment and therefore staff numbers in the UK, which peaked at 1,874 in 2008, have reduced from 1,729 in January 2009, to 1,661 in December 2009. Currently, the total number of staff in the UK is 1,655.

Following the restructuring in 2008 and the retention of that structure into 2009, we have ensured that our high service levels are maintained, which incorporates the ongoing launch of new products, a comprehensive stock holding and distribution infrastructure, to provide an efficient next day delivery service to our customers.

The five market sectors are:

Regional multi-product: These 20 businesses, which maximise their geographical market position by selling both residential and commercial floorcovering, now represent 53.8% of UK sales revenue.

National multi-product: The Mercado network of businesses, with a presence throughout England, Wales and Northern Ireland, selling residential and commercial floorcovering produced a robust performance.

Regional commercial: The 15 operations in this sector increased their revenue during the year. Through organic growth, investment and potential acquisitions, we believe this is a particular area of growth, with regard to the number of locations and revenue.

Residential specialist: The 14 businesses that represent our residential specialist activities have also increased revenue and now account for 16.5% of total UK revenue. The market presence and trade brands of our various residential specialist businesses has been strengthened through increased point of sale and an enhanced product offering, giving this business sector a particularly strong opportunity for growth over the coming years.

Commercial specialist: During the autumn of 2009, we decided to merge the sales and marketing activity of two commercial specialist businesses into the main commercial JHS brand, providing JHS with a much stronger sales and marketing platform for future growth.

Suppliers

It is encouraging that our suppliers have remained stable during this challenging period. We work very closely with our principal suppliers, both from a group perspective and through our individual management teams. This ensures an ongoing process of development and new product launches, to ensure that our customers in both the residential and commercial sectors are at the forefront of all new initiatives introduced into the UK market.

Products

Carpet remains our largest product category, accounting for 44.7% of UK revenue. We have an extremely broad base of products covering all aspects of the market and consumer taste, from base grade polypropylene to luxury woollen products.

Sales of carpet, which continue to be dominated by plain styles, produced an encouraging performance, with a revenue decline of 5.9%. This was achieved through the activity of our sales representatives positioning 2,112 new products, through 502,000 point of sale items. Our sales representatives also generated an increased proportion of sales from full rolls, which amounted to 27.5% of our carpet revenue.

Residential vinyl benefits from an ongoing improvement in production techniques, creating attractive cost-effective flooring. We were able to introduce 470 new products, marketed with 102,000 point of sale items into independent retailers.

Wood and laminate experienced the same market challenges as our other residential product categories, however, through a continual process of product launches, we were able to maintain our market position.

Rugs are an increasing presence through both independent and national retailers. The acquisition of Oriental Weavers' UK distribution activities in the spring of 2009 further enhanced our position as we develop into a leading UK supplier of both traditional and contemporary rugs.

Commercial flooring activities target various aspects of the commercial flooring market through flooring contractors. Products are supplied into a variety of sectors including education, healthcare, offices and retail stores and whilst sales revenue declined by 6.3%, this again would suggest an out performance of the general commercial market.

Market presence

We have increased the market presence of our various businesses, through sales representatives positioning new point of sale on a daily basis, into independent flooring retailers. This is achieved through our traditional multi-product distribution businesses and the specialist residential activities.

With the involvement and support of our suppliers, we are launching a new initiative under the Lifestyle Floors brand, to enable our multi-product distribution businesses to further strengthen their market presence within independent retailers.

Customers

The number of active accounts was stable at 41,334 (2008: 41,539.) Whilst debtor days moved marginally from 44.3 to 45.4 days, the widespread activity of our customers and payment in accordance with terms reflects the underlying strength of the independent floorcovering retailer and contractor.

Continental Europe

Our businesses in France, Switzerland and the Netherlands, produced a solid performance during the year. Market conditions in France and Switzerland enabled our businesses to further develop their activities in both residential and commercial flooring.

The Netherlands proved to be a more difficult marketplace. However, with the benefit of the new 65,000 square feet distribution centre, which became operational in the spring of 2009, both Lethem Vergeer and Silvester were able to produce a satisfactory performance.

Acquisitions

We are currently assessing a number of opportunities, particularly in the UK, and would be hopeful that during the course of 2010 we will be able to complete acquisitions to enhance our market position in both residential and commercial floorcovering.

We will continue to evaluate potential acquisitions, to enlarge our core business activities in the UK and Continental Europe.

Investments

We are continuing with the project to relocate Faithfulls, our regional multi-product business in the south east of England, to a development site in Hadleigh, near Ipswich. We would anticipate finalising the purchase of land during the course of this year, with the construction of a 127,500 square feet purpose built freehold distribution centre completing in the summer of 2011.

We have since 2004, occupied on a leasehold basis, 50% of a distribution centre in Rochdale, from which National Carpets operate. We are currently concluding the purchase of the 110,000 square feet freehold distribution centre which will give us ownership of the total site and provide National Carpets with increased capacity and an opportunity to enlarge its activities.

With the growth of our regional commercial businesses, it is still the group's intention to increase the number of service centres in key geographical locations.

Outlook

Following a more positive end to 2009, we are optimistic about a return to growth in 2010. However, market conditions, particularly in the UK, continue to be challenging, which has made normal seasonal trends and predictability difficult to establish.

Notwithstanding the current uncertainty, we believe the management and structure is in place to enable us to continue out-performing the market and take advantage of any improvement in the economy.

Financial review

Trading

Revenue

Group revenues declined during the year by 4.2% from £557.3 million to £533.8 million.

In the UK, like for like revenue decreased by 6.1% and revenue from the Continental European businesses, reduced on a like for like basis by 8.3%. However, group revenue has benefited from currency gains amounting to £11.6 million.

Gross margin

Gross margin, expressed as a percentage of revenue, decreased from 31.3% to 30.4%, the reduction occurring because of a change in product mix and the absence of any significant price increases during the year. The change in product mix was attributable to the higher proportion of roll sales during the year.

Inflationary pressures still remain a concern because of the continuing weakness of Sterling and in particular, the affect on cost of goods sourced from Continental Europe.

Expenses

Distribution and administration expenses, collectively representing 25.8% (2008: 23.8%) of revenue, increased by 3.5% compared with the previous year.

Distribution expenses amounting to £100.7 million (2008: £98.5 million) have increased by 2.2% compared with last year, the increase being wholly attributable to the currency effects arising from the translation of the Continental European businesses. Underlying this overall position is a decrease in expense associated with the contraction in the number of commercial vehicles and fuel which has been offset by pay increases introduced at the start of the year.

Administration expenses increased by 7.0% from £34.4 million to £36.8 million due to a combination of currency translation and the charge associated with impairment of assets held for sale. The underlying position reveals an offset with pay increases generally equating to reductions in property related expenses.

Impairment of assets held for sale

During early 2010, we disposed of two vacant properties. In both instances, the selling price was less than book value. The impairment, amounting to £1.2 million, has been recognised in the 2009 results by transferring the properties to assets held for sale at their market value and recognising the loss in the Income Statement.

We now have two vacant properties remaining in the freehold property portfolio, which are currently being marketed for disposal. However, given the limited interest, it is unlikely that these properties will be sold in the foreseeable future.

Net finance costs

Net finance costs increased by 68.2% from £1.6 million to £2.7 million as a result of a significant change in the income and expense associated with the defined benefit plan. During the year, the return on plan assets reduced from £3.9 million to

£3.1 million whilst interest on the plan's obligations increased from £4.1 million to £4.2 million. The net finance costs associated with funding the group's operations were largely unchanged.

Taxation

The effective tax rate for the year was 28.0%. Going forward, we anticipate a progressive increase in the group's underlying rate, which over the medium term, is likely to rise to just over 30.0%.

Dividends

Dividend cover has been maintained at a level which is consistent with the prior year ratio of 1.7 times. Therefore, total dividends for 2009, amounting to 11.0p per share, have decreased by 44.2% on the previous year. During the year, the board has taken the opportunity to rebase the weighting between the interim and final dividend increasing the interim to approximately one third of the total dividend for the year. The board anticipate maintaining this balance for the future.

Cash flows and net funds

Cash generated from operations

Cash flows from operations before net movement in working capital, declined by 33.2% during the year from £47.1 million to £31.5 million due primarily to the decrease in profit before tax for the year.

Investment in net working capital reduced substantially compared with last year moving from a net cash outflow of £19.7 million in 2008 to a net cash inflow of £12.2 million during the year as the group rebalanced its requirements to service the reduction in revenue activity. As a result cash generated from operations increased from £27.4 million to £43.7 million.

Investment in inventories and trade receivables decreased by £6.6 million and £3.0 million respectively, and following the change in purchasing activity during the second half of 2008, which occurred because of the reduction in revenue, purchasing resumed during the year but at levels supporting the group's current need. This resulted in a cash inflow from trade and other payables amounting to £2.5 million.

Cash flows from investing and financing activities

Net cash outflows from investing activities totalled £5.8million compared with £7.1 million during 2008. Investment in property, plant and equipment amounted to £7.3million compared with £10.7 million for 2008. The two main areas of expenditure related to completing the Dutch property, £2.4 million, and acquiring the freehold interest, £3.1 million, of the site located in Kidderminster which was formerly occupied on a leasehold basis.

Net cash flow from financing activities moved from a cash inflow of £13.1 million during 2008 to a cash outflow of £15.2 million in 2009, the principal differences between the two years being the proceeds from borrowings amounting to £33.7 million in 2008, an absence of share buy-back activity in 2009 and a reduction in dividends paid.

Changes in net funds

Group net funds increased from £0.7 million to £9.7 million during the year as detailed in the table below.

At At
1 January Cash Translation 31 December
2009 flows differences 2009
£000 £000 £000 £000
Cash at bank and in hand 35,193 11,102 (558) 45,737
Bank overdraft - (758) - (758)
35,193 10,344 (558) 44,979
Debt due within one year (4,506) 3,244 362 (900)
Debt due after one year (30,000) (4,396) 4 (34,392)
687 9,192 (192) 9,687

Employee benefits

During the year, the employee benefits net deficit, as measured under IAS 19, increased by £8.2 million from £14.6 million to £22.8 million. The adverse movement on the UK defined benefit pension plan was the principal cause with the deficit increasing from £12.9 million to £21.8 million as a result of a significant increase in the defined benefit obligation brought about by a decline in bond yields.

As at 31 December 2009, membership of the UK plan totalled 870 and consisted of 103 active, 460 deferred and 307 pensioners. Given the increase in the defined benefit obligation, the company has elected to offer deferred members the opportunity to transfer out of the plan. The cost of funding the offer, if all deferred members, included in the offer, elect to accept, based on the position as at 31 December 2009, would be approximately £12.0 million. This would be expected to reduce the defined benefit obligation by approximately £22.6 million from £88.3 million to £65.7 million, leading to significant reduction in the group's exposure to the funding risks associated with defined benefit pension plans.

Facilities and going concern

The group's total bank facilities amount to £80.5 million. The UK facilities of £65.0 million are comprised of £35.0 million relating to on demand facilities, which are renewed on an annual basis and a five-year term loan amounting to £30.0 million that matures in July 2012. The group's two principal UK banks have indicated that it is their intention to renew the on demand facilities for a further twelve months.

The facilities relating to the Continental European businesses amount to £15.5 million and include a facility amounting to

£5.3 million, which is repayable over a ten year term ending November 2019. The remaining facilities are renewed annually. The group's banking partners in Continental Europe have also signalled their intent to provide continued support.

Having reviewed the group's resources and a range of likely trading out-turns, the directors believe they have reasonable grounds for stating that the group has adequate resources to continue in operational existence for the foreseeable future and that it is appropriate to adopt the going concern basis in preparing the group's financial statements.

Consolidated Income Statement

for the year ended 31 December 2009

Note 2009 2008
£000 £000
Revenue 1 533,793 557,296
Cost of sales (371,533) (382,670)
Gross profit 162,260 174,626
Distribution expenses (100,698) (98,517)
Administrative expenses (36,804) (34,387)
Operating profit 1 24,758 41,722
Finance income 3,764 7,016
Finance expenses (6,458) (8,618)
Net finance costs (2,694) (1,602)

Profit before tax 22,064 40,120
Taxation (6,168) (11,433)
Profit for the year attributable to the equity 15,896 28,687

shareholders

Dividend paid per share 3 19.70p 23.10p

Earnings per share
Basic 2 19.1p 34.5p
Diluted 2 19.1p 34.5p

All group operations during the financial years were continuing operations.

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2009

£000 £000
Profit for the year attributable to the equity 15,896 28,687

shareholders

Other comprehensive income: Foreign exchange translation differences arising on
translation of overseas operations (1,808) 6,631
Actuarial gains and losses on defined benefit plans (10,042) (4,245)
Effective portion of changes in fair value of cash flow (157) (800)

hedges
Transfers to profit or loss on cash flow hedges 781 (48)
Income tax on other comprehensive income 2,854 1,304
Other comprehensive (expenses)/income (8,372) 2,842
Total comprehensive income attributable to the equity 7,524 31,529

shareholders

Consolidated Statement of Changes in Equity

for the year ended 31 December 2009

Capital Cash flow
Share Share redemption Translation hedging Treasury Retained Total
capital premium reserve reserve reserve reserve earnings equity
£000 £000 £000 £000 £000 £000 £000 £000

Balance at
1 January 2008 4,268 53,512 88 474 - (11,604) 103,303 150,041

Total comprehensive income for
the period - - - 6,631 (848) - 25,746 31,529

Transactions with equity shareholders, recorded directly in equity
Share-based payments - - - - - - 426 426

Consideration for purchase of
own shares - - - - - (2,204) - (2,204)

Share options exercised by
employees - - - - - 751 - 751

Deferred tax on share options

Dividends to equity holders
- - - - - - (19,182) (19,182)

Total contributions by and distributions to equity
shareholders - - - - - (1,453) (18,983) (20,436)

Balance at
31 December 2008 4,268 53,512 88 7,105 (848) (13,057) 110,066 161,134

Balance at
1 January 2009 4,268 53,512 88 7,105 (848) (13,057) 110,066 161,134

Total comprehensive income for
the period - - - (1,808) 624 - 8,708 7,524

Transactions with equity shareholders, recorded directly in equity
Share-based payments - - - - - - 316 316

Deferred tax on share options

Dividends to equity holders
- - - - - - (16,354) (16,354)

Total contributions by and distributions to equity
shareholders - - - - - - (16,029) (16,029)

Balance at
31 December 2009 4,268 53,512 88 5,297 (224) (13,057) 102,745 152,629

Consolidated Balance Sheet

at 31 December 2009

Restated *
Notes 2009 2008
£000 £000

Assets Non-current assets
Property, plant and equipment 96,530 99,741
Intangible assets 13,210 13,210
Deferred tax assets 4 4,731 1,516
114,471 114,467

Current assets
Inventories 99,637 107,597
Trade and other receivables 101,149 105,942
Cash and cash equivalents 45,737 35,193
Assets held for sale 2,275 -
248,798 248,732
Total assets 1 363,269 363,199

Liabilities Current liabilities
Bank overdraft (758) -
Other interest-bearing loans and borrowings (900) (4,506)
Trade and other payables (143,216) (143,369)
Employee benefits (2,506) (2,428)
Income tax payable (8,615) (9,546)
(155,995) (159,849)

Non-current liabilities
Other interest-bearing loans and borrowings (34,392) (30,000)
Employee benefits (20,253) (12,216)
(54,645) (42,216)
Total liabilities 1 (210,640) (202,065)
Net assets 152,629 161,134

Equity attributable to equity holders of the parent
Share capital 4,268 4,268
Share premium 53,512 53,512
Other reserves (7,896) (6,712)
Retained earnings 102,745 110,066

Total equity 152,629 161,134