H&t Group Plc Regulatory News (HAT)

Preliminary results

For the year ended 31 December 2010

H&T Group ("H&T" or the "Group"), is pleased to announce its preliminary results for the year ended 31 December 2010.

John Nichols, chief executive of H&T Group, commented:

"I am pleased to report a strong year for H&T with continued profit growth and excellent cashflow generation. A final dividend of 6.0p is proposed, taking the full-year dividend to 9.5p, a 17% increase on 2009.

Profit before tax increased by 38% to £25.5m, supported by growth across all business segments and a strengthening gold price. The Group experienced strong lending and underlying pledge book growth during 2010. Continued success in the gold purchasing market and high disposition margins in both purchasing and pawnbroking activities have also led to a substantial cash generation. Net debt of £27.0m compares to £42.3m twelve months ago.

Current trading continues to perform in line with market expectations and I am pleased to announce that H&T is the UK's first pawnbroker to secure a pledge book of over £40m. We also continue to successfully implement our growth strategy, with provisional lease terms currently agreed on a further 14 sites."

Financial highlights

Operational and other highlights

Ø The national footprint reached 135 stores at 31 December 2010 (2009: 122) with 13 new stores opened during 2010 (2009: 17)

Ø New store openings in 2009 and 2010 have performed, on average, ahead of the Board's expectations

Ø Success in the market for gold purchasing continues to support new store profitability in the early stages of development

Ø The pawnbroking business experienced record levels of lending in 2010, driven by an increased average loan and additional new stores. Redemption showed a marginal improvement year on year

Ø Working capital improvements and a reduction in aged pledge balances contributed £4.9m to profit before tax in the year

Ø In addition, the Group operated 45 Gold Bar retail mall units at 31 December 2010 (2009: 54)

Preliminary results

For the year ended 31 December 2010

Enquiries:

Chairman's Statement

It is pleasing to report that the Group has had another successful year in 2010 and has achieved both year on year store expansion and EPS growth of 29.2%. The business has shown that despite the long standing nature of its pawnbroking business it has the entrepreneurial skills to have become a major participant in the gold buying market in the UK. In addition the development of a new jewellery centre with improved processes will enable us to strengthen our position in UK jewellery retailing.

Financial Performance

The Group has delivered a further year of profit growth. Since its flotation in 2006, pre-tax profits have risen from £5.1m in 2006 to £25.5m in the current year. During this time the Group has also achieved estate growth from 77 stores to 135 at the year end, and has increased the gross pledge book from £25.2m to £39.5m.

The core pawnbroking business continues to perform well with a record level of lending in 2010. The Group has also seen an improvement in redemption as well as strong disposition profits; this improvement is important as it demonstrates our ability to develop long term relationships with our customers. The fact that the business has outperformed our expectation at the beginning of the year is due to gold purchasing being more profitable through the price increases in this fundamental commodity. Working capital improvements and new processes at the jewellery centre have also resulted in a one-off profit contribution of £4.9m for the year. This and the additional gold purchasing profit has in part been invested into the Group's core pawnbroking activities through continued new store development. The Group opened 13 new stores in the year taking its portfolio to 135 stores at the year end (2009: 122). While pawnbroking remains at the core of the current new store programme, the early profitability of new stores has been assisted by the strength of gold purchasing at these locations. New stores are carefully scrutinized by the board for the development of their pawnbroking business, as well as gold purchasing. On average, these new stores continue to meet our expectations for the future.

A key highlight is the material strengthening of the Group's balance sheet, from both the working capital contribution and the cash generated by gold purchasing. As a consequence, net debt at 31 December 2010 is £27.0m, down from £42.3m a year earlier.

Basic earnings per share are up from 37.75 pence in 2009 to 48.77 pence in 2010.

Economic and Market Background

Against the continued uncertainty of world currencies and the prevailing low interest rates in many countries we have seen a significant rise in the sterling gold price. In a fundamental way this change, together with the marketing of gold purchasing, mostly by competitors, has led to a much wider recognition in the UK of gold as a store of value and as a source of cash whether by its sale or its use as loan collateral. Though inevitably the gold price will remain volatile it is likely that its increasing role in meeting many people's financial needs will continue.  

Final Dividend

Subject to shareholder approval, a final dividend of 6.00 pence per ordinary share (2009: 5.60 pence) will be paid on 2 June 2011 to shareholders on the register at the close of business on 6 May 2011. The shares will be marked ex-dividend on 4 May 2011. This will bring the full year dividend to 9.5 pence per share, including a 1.00 pence special interim dividend paid during the year. This represents an increase of 17% over the 2009 total dividend of 8.10 pence.

The growth in dividend reflects the good performance of the Group in 2010 and the Board's view in future prospects.

Prospects

The Group continues to hold good prospects for organic growth across its core pawnbroking business. Recent experience has shown that the development of greenfield sites achieves this growth in a satisfactory manner which has made it less attractive to make acquisitions though we continue to seek good opportunities that fit into our business model of pawnbroking, gold purchase and jewellery retailing. The Board expects to open 15-20 greenfield sites in 2011. Gold purchasing volumes remain satisfactory and while margins are expected to be lower in 2011, we still anticipate that this business sector will continue to be a significant contributor to profits in 2011.

Finally I would like to thank our staff and customers for their loyalty; and all our staff for their hard work and contribution to these excellent results.

Peter D McNamara

Chairman

Chief Executive's Review

INTRODUCTION

I am pleased to report another strong set of results for the Group. A strong trading performance and continued expansion has driven growth across all business segments. Gross profit has risen 30.5% to £66.8m (2009: £51.2m) and profit before tax is up 37.8% to £25.5m (2009: £18.5m). One off working capital improvements and a reduction in aged pledge balances have also contributed £4.9m to gross profits in the period.

The Group's core pawnbroking business has performed well, achieving a record level of lending in the period and again delivering good underlying growth in the gross pledge book to £39.5m. This is a pleasing result given the increased availability of gold purchasing as an option for the consumer.

Gold purchasing itself has remained a strong source of profit and cash flow for the Group as H&T has retained a strong presence and continues to benefit from seizing an early initiative in this market. The Group has reduced its net debt significantly in the year, down from £42.3m at 31 December 2009 to £27.0m at 31 December 2010.

Another benefit to profitability and cash flow has been the rising gold price during the year. The average gold price in 2010 of £794 per troy ounce was 28% higher than in 2009 and has allowed the Group to enjoy higher than expected disposition margins. It has also supported an increased average loan ensuring that the Group remains competitive on the high street.

The Group continues its strategy of expansion, adding a further 12 greenfield sites in 2010, making 1 acquisition and completing 1 relocation. It is a credit to our staff that the core estate continues to perform well, while over the period since IPO 70 new stores have either been opened or acquired by the Group. This has provided additional valuable experience to the management team. At 31 December 2010 the Group had 180 branded outlets of either H&T Pawnbrokers or H&T Gold Bar across the UK.

REVIEW OF OPERATIONS

Pawn Service Charge

Pawnbroking remains the Group's core business and is the largest and most resilient component of Group profit, contributing £23.2m in 2010, a headline increase of 3.9% (2009: £22.3m). Removing auction profits, as these were impacted by exceptional proceeds in H1 2009, reveals stronger underlying growth in interest collections of 7.7%.

This growth has been achieved by a record level of lending during the year, itself driving an increase in the gross pledge book to £39.5m at 31 December 2010 (2009 reported: £38.2m, 2009 pre-aged pledge: £36.6m).

Lending growth at the Group's newer stores and an increased average loan has offset competitive pressure in some of the Group's more mature stores.

The increased average loan size of £151 (2009: £136) has ensured the Group remains competitive on the high street, whether in relation to competition from other pawnbrokers or the increased availability of gold purchasing as an option to the consumer. The Group has marginally improved its redemption rate during 2010.

Retail Jewellery Sales

Retail turnover increased by 19.2% to £19.6m (2009: £16.4m) driven by expansion in the store estate. On a like-for-like basis retail turnover was flat year-on-year which given the challenging high street environment and the underlying price point and therefore, affordability of gold is a pleasing result.

This reflects the excellent value proposition offered by the Group in relation to other retailers and the continued investment into both staff training and store design. Improved management information from the Group's new I.T. system, combined with improved distribution capabilities as a result of the relocation of the Group's jewellery centre has also led to an improved sales / stock mix.

The Group continues to focus on retail as an important revenue stream as it can act as a valuable means of disposition in the event of a fall in the gold price.

Pawnbroking Scrap

H&T has a natural hedge to offset any potential fall in jewellery sales as its alternative disposition method is to scrap the gold for the then current gold price. Scrap profits from the disposition of items forfeited from the Group's pledge book contributed £9.0m in 2010 (2009: £2.1m). Of the total one off profit contribution of £4.9m, £2.1m has been realised within Pawnbroking Scrap as a result of the disposal of aged pledge balances held at the end of 2009.

Gold Purchasing

Gold purchasing profit rose significantly in 2010 as a result of strong purchasing volumes at stores, a full year contribution from the Group's Gold Bar operation and the rising price of gold.

Total gold purchasing profit of £20.1m (2009: £13.5m) has also benefited from an improvement in the Group's working capital processes, delivering an estimated £2.8m of the £4.9m one-off gross profit contribution in the year.

The Group has benefited from heightened public awareness of both gold purchasing as a service and the value inherent in their jewellery. Purchase volumes across the store estate, while down from their peak in H2 2009, have remained relatively stable throughout 2010. This is a pleasing result given the changing competitive environment and reflects the competitive pricing offered.

The Group's first mover advantage and hence longevity in this market has also helped build brand recognition and trust among our customers. H&T's Gold Bar retail mall units remain a profitable and flexible business with 45 units in operation at the year end (2009: 54).

The sterling gold price has also benefitted performance in this highly cash generative segment. The higher absolute price benefits scrap proceeds, but also a rising price environment helps sustain higher than expected margins due to the time lag between purchase and disposition.

Cheque Cashing

Revenues net of bad debt and provisions from the Group's Third Party Cheque Cashing and Pay Day Advance products increased to £5.1m (2009: £4.8m) and now contribute 7.7% of gross profit (2009: 9.4%).

Commission earned from third party cheque cashing declined by 8.2% in the year, affected by both the current economic climate and gradual withdrawal of cheques from the banking system. Improved debt collection rates offset this decline however, resulting in broadly flat net revenues year-on-year.

Net revenues from the Group's Pay Day Advance product increased by 6.1% during the year with new stores and further improved debt collections offsetting increased competition from on-line providers. The Group is currently developing more sophisticated credit scoring models in order to widen acceptance criteria and grow this product, whilst maintaining the current strong debt performance.

Kwik Loan

The Kwik Loan loan book has benefited from the gradual withdrawal of the cheque guarantee card resulting in some customers converting from the Pay Day Advance product to Kwik Loan. The loan book increased to £1.0m at the year end (2009: £0.6m).

REGULATION

The 1986 European Commission Consumer Credit Directive has been replaced by the 2008 Consumer Credit Directive, with implementation due from 1 February 2011.

Further consumer protection mechanisms have been introduced with new rights of withdrawal applying to all credit agreements and a new right of partial early repayment being the among the key changes. Another focus has been to improve harmonisation across credit industries and geographies.

It is not anticipated that the EC directive will have a material impact on the pawnbroking industry.

BUSINESS STRATEGY AND OUTLOOK

The Group seeks to retain its position as the U.K.'s leading pawnbroker by size of pledge book, driving growth via both organic and new store development, and by the introduction of new products and services.

Within existing outlets, H&T aims to build upon brand recognition and excellent customer retention levels, as well as attracting new customers by:

- A focus on customer service

- Competitive pricing

- Enhanced marketing

- Maintaining a reputation of fairness and honesty

Significant growth has also been achieved via the expansion of the store estate. Of the 135 stores at the year end, 43% have been added within the last 4 years either via acquisition or greenfield rollout. The Group continually seeks to evolve its roll out strategy in order to enhance shareholder returns; a goal supported by the benefit of significant management experience and new store performance data collected over the last four years.

Developing new products and services remains a key focus for the Group. During the year, the Group bought a small on-line pawnbroking operation for a total consideration of £80,000, as part of the strategy to also widen distribution platforms of existing services.

Review of the Pawnbroking Market

The pawnbroking market continues to evolve with higher potential returns attracting more players into the industry and in reaction to new dynamics introduced by the rise in gold purchasing. Both factors have raised awareness of pawnbroking as a service, and drawn more customers into H&T's stores. Still however, only a small minority of the population have ever visited a pawnbrokers and the Board believe that the potential market is considerably greater. One of the first obstacles to securing this market is to change people's perceptions of pawnbrokers and the Group continues to drive this with its open and modern store layouts.

The pawnbroking market remains fragmented providing the opportunities for organic and acquisitional growth. Although there are no official statistics, the Board estimate there to be 500 - 750 locations around the UK where pawnbroking is offered as a core service, with an additional 1,000 - 1,500 locations where it is offered as an ancillary service. 

 Current Trading and Outlook

The Group still holds good prospects for organic growth as the store estate is still relatively immature with respect to pawnbroking activities. Of the Group's total pledge book, 11% is accounted for by the 47 greenfield sites opened in the last four years.

As determined by market conditions, future growth is also likely to be driven via expansion of the Group's geographical footprint. The Board currently expect to open 15-20 greenfield sites in 2011, with provisional lease terms having been agreed on 14 sites as at 23 February 2011. Potential acquisitions, given the Group's balance sheet strength, will continue to be assessed on a case by case basis.

Current trading remains in line with expectations, and while gold purchasing volumes remain relatively constant, the Board is mindful of the sustainability of the margin in this business segment. The Board believes that current consensus forecasts represent a reasonable expectation of financial performance for the year ending 31 December 2011.

I would also like to thank all our people whose skills, commitment and enthusiasm continue to drive our success, and give us confidence in the future.

John G Nichols

Chief Executive

Finance Director's Review

A key highlight during the year has been the Group's cash generation. In spite of the working capital intensive nature of the Group's pawnbroking and unsecured lending businesses, and the continued capital expenditure requirements of the store expansion programme, net debt has reduced significantly during the year. Net debt at 31 December 2010 was £27.0m, down from £42.3m twelve months earlier.

The Group's gold purchasing activities and working capital improvements made during 2010 have contributed significant cash inflows, resulting in a material strengthening of the Group's balance sheet. At 31 December 2010, the Group had £17.1m of available funds upon which it is able to draw under its current credit agreement. The Group is well placed to fund any suitable acquisitions and hence deliver earnings accretion to shareholders.

Another highlight is the proposed final dividend of 6.0p, which takes the full year dividend to 9.5p - a 17% increase year on year. It also maintains our track record of dividend growth in every year since the Group's flotation in 2006, despite the capital expenditure required to fund the Group's store expansion programme and the dilutive earnings profile of a new store in its early years.

Earnings per share covers the dividend by 5.2x and even excluding the working capital and one off gains of £4.9m, cover is 4.1x. Cashflow dividend cover, defined as available cashflow for either equity distribution or debt repayment divided by the actual dividend paid in the year, is 5.7x, even post substantial capital expenditure payments during the year.

Other key areas of note include:

Other direct and administrative expenses

Other direct and administrative expenses rose from £30.1m in 2009 to £38.1m in 2010. The increase was driven by the full year effect of stores opened in 2009, the 13 new stores opened in 2010 and the full year effect of the Gold Bar retail mall units during the year.

Finance costs

Interest on bank loans fell during 2010 to £2.1 million (2009: £2.2 million), reflecting a lower average loan balance during the year but a higher average margin following the Group's refinancing in 2009.

H&T's interest cover ratio (EBITDA to interest) was 15.1x (2009: 10.6x). The Group's the net debt to EBITDA ratio fell to 0.86x (2009: 1.8x).

Profit before taxation

Profit before taxation, and fair value movement in interest rate swaps increased by £7.7 million from £18.3 million in 2009 to £26.0 million in 2010. 

Earnings per share

Basic earnings per share for 2010 was 48.77 pence compared with 37.75 pence in 2009. Diluted earnings per share for 2010 was 47.52 pence compared with 37.54 pence in 2009.

Capital Expenditure

Capital expenditure during the year on property, plant and equipment was £3.7 million (2009: £3.9 million) of which £2.4 million related to the 13 new greenfield stores opened during the year and the relocation of the Group's jewellery centre.

Return On Capital Employed (ROCE)

ROCE, defined as profit before tax, interest receivable, finance costs and movement in fair value of interest rate swap as a proportion of net current assets and tangible and intangible fixed assets (excluding goodwill), increased from 28.4% in 2009 to 37.7% in 2010.

Excluding the working capital contribution of £4.9m, the ROCE in 2010 is 32.9%

Alex Maby

Finance Director

Consolidated statement of comprehensive income

Year ended 31 December 2010

All results derive from continuing operations.

Consolidated statement of changes in equity

Year ended 31 December 2010

Consolidated balance sheet

At 31 December 2010

Consolidated cash flow statement

Year ended 31 December 2010

Notes to the preliminary announcement

Year ended 31 December 2010

1. Finance information and basis of preparation

The financial information has been abridged from the audited financial statements for the year ended 31 December 2010.

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2010 or 2009, but is derived from those accounts. Statutory accounts for 2009 have been delivered to the Registrar of Companies and those for 2010 will be delivered following the company's annual general meeting. The auditors have reported on those accounts: their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498 (2) or (3) Companies Act 2006 or equivalent preceding legislation

Whilst the financial information included in this preliminary announcement has been prepared in accordance with International Financial Reporting Standards ('IFRS'), this announcement does not itself contain sufficient information to comply with IFRS. The Group will be publishing full financial statements that comply with IFRS in April.

2. Business and geographical statements

Business segments

For reporting purposes, the Group is currently organised into six segments - Pawnbroking, Gold purchasing, Retail, Pawnbroking scrap, Cheque cashing and Other financial services. The principal activities by segment are as follows:

Pawnbroking: 

Pawnbroking is a loan secured against a collateral (the pledge). In the case of the Group over 95% of the collaterals against which amounts are lent is jewellery made of gold, precious metals and/or diamonds. The pawnbroking contract is a six month credit agreement bearing a monthly average interest rate of 8%. The contract is governed by the terms of the Consumer Credit Act 2008 (previously the Consumer Credit Act 2002). If the customer does not redeem the goods by repaying the secured loan before the end of the contract, the Group is required to dispose of the goods either through public auctions if the value of the pledge is over £75 (disposal proceeds being reported in this segment) or, if the value of the pledge is £75 or under, through public auctions or the Retail or Scrap activities of the Group.

Gold Purchasing

Gold is bought direct from customers through all of the Group's stores and more recently through 45 Gold Bar units located in shopping centres throughout England and Wales. The transaction is straight forward with the store or unit agreeing a price with the customer and purchasing the goods for cash on the spot. Gold Purchasing revenues comprise proceeds from scrap sales on goods sourced from the Group's purchasing operations.

Retail Jewellery Sales: 

The Group's retail proposition is primarily gold and jewellery and the majority of the retail sales are forfeited items from the pawnbroking pledge book or purchased second-hand jewellery. The retail offering is complemented with a small amount of new jewellery purchased from third parties by the Group.

Notes to the preliminary announcement

Year ended 31 December 2010

2. Business and geographical statements (continued)

Pawnbroking scrap: 

Pawnbroking Scrap comprises all other proceeds from gold scrap sales other than those reported within Gold Purchasing. Items that are damaged beyond repair, are slow moving or surplus may be smelted and sold at the current gold spot price.

Cheque cashing: 

This segment comprises two products:

·; Third Party Cheque Encashment which is the provision of cash in exchange for a cheque payable to our customer for a commission fee based on the face value of the cheque.

·; Pay Day Advance which is a simple form of credit where the advance is repaid by post dated cheques presented by the customer at the point of the loan. The Group applies a 13% charge per 30 days on the value of the advance. At the end of the 30 days, the customer has a choice to either extend the advance for another 30 days, repay the advance or allow the cheques to be deposited in the Group's bank account.

Both products are subject to bad debt risk which is reflected in the commissions and fees applied.

Other financial services: 

This segment comprises:

·; KwikLoan product which is an unsecured loan repayable over 12 months of up to £750. The Group earns approximately £300 gross interest on a £500 loan over 12 months.

·; The Prepaid debit card product where the Group earns a commission when selling the card or when the customer is topping up their card.

·; The foreign exchange currency (Euro and US Dollar) service where the Group earns a commission when selling or buying foreign currencies. This service is currently on trial in a limited number of stores.

Only the KwikLoan product is subject to bad debt risk which is reflected in the interest rate offered.

Further details on each activity are included in the Chief Executive's Review.

Notes to the preliminary announcement

Year ended 31 December 2010

2. Business and geographical segments (continued)

Segment information about these businesses is presented below:

Gross profit is stated after charging bad debt expenses and the direct costs of stock items sold or scrapped in the period. Other operating expenses of the stores are included in other direct expenses. The Group is unable to meaningfully allocate the other direct expenses of operating the stores between segments as the activities are conducted from the same stores, utilising the same assets and staff. The Group is also unable to meaningfully allocate Group administrative expenses, or financing costs or income between the segments. Accordingly, the Group is unable to meaningfully disclose an allocation of items included in the income statement below Gross profit, which represents the reported segment results.

The Group does not apply any inter-segment charges when items are transferred between the pawnbroking activity and the retail or scrap activities.

Notes to the preliminary announcement

Year ended 31 December 2010

2. Business and geographical segments (continued)

(*) The Group cannot meaningfully allocate this information by segment due to the fact that all the segments operate from the same stores and the assets in use are common to all segments.

Notes to the preliminary announcement

Year ended 31 December 2010

2. Business and geographical segments (continued)

Geographical segments

The Group's operations are located entirely in the United Kingdom and all sales are within the United Kingdom. Accordingly, no further geographical segments analysis is presented.

3. Finance costs

Notes to the preliminary announcement

Year ended 31 December 2010

4. Tax charge on profit

a) Tax on profit on ordinary activities

(b) Factors affecting the tax charge for the year

The tax assessed for the year is higher than that resulting from applying a blended standard rate of corporation tax in the UK of 28% (2009 - 28%). The differences are explained below:

Notes to the preliminary announcement

Year ended 31 December 2010

5. Earnings per share

Basic earnings per share is calculated by dividing the profit for the year attributable to equity shareholders by the weighted average number of ordinary shares in issue during the year.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. With respect to the Group these represent share options and conditional shares granted to employees where the exercise price is less than the average market price of the Company's ordinary shares during the year.

Reconciliations of the earnings per ordinary share and weighted average number of shares used in the calculations are set out below:

Notes to the preliminary announcement

Year ended 31 December 2010

6. Notes to the cash flow statement

Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less.

Notes to the preliminary announcement

Year ended 31 December 2010

7. Earnings before Interest, Tax, Depreciation and Amortisation ("EBITDA")

EBITDA is defined as Earnings Before Interest, Taxation, Depreciation and Amortisation. It is calculated by adding back depreciation and amortisation to the operating profit as follows:

The Board considers EBITDA as a key measure of the Group's financial performance.