Last checked at 6 Mar 2018 07:00
| 6 March 2018 |
Headlam Group plc
('Headlam' or the 'Company')
Final Results
Headlam Group plc (LSE: HEAD), Europe's largest distributor of floorcoverings, is pleased to announce its final results for the year ended 31 December 2017.
Financial Highlights:
· Total revenue increased 2.0% to £707.8 million (2016: £693.6 million) despite weaker markets for the majority of the second half of the year
· Like-for-like revenue* growth in the UK and Continental Europe of 0.5% and 4.2% respectively (2016: UK 4.2%; Continental Europe 3.1%) represented a positive performance against a strong 2016 comparator
· Gross margin improvement of 50 basis points to 31.1% (2016: 30.6%) achieved through a concerted focus on margin enhancement initiatives
· Underlying** profit before tax increased by 7.5% to £43.1 million (2016: £40.1 million)
· Profit before tax increased by 6.7% to £40.7 million (2016: £38.2 million)
· Basic earnings per share increased by 6.3% to 39.1 pence (2016: 36.8 pence)
· Total ordinary dividend in respect of 2017 increased by 10.0% to 24.80 pence (2016: 22.55 pence)
· Strong operating cash generation at 109.8% of underlying** EBITDA (2016: 94.2%)
*Like-for-like revenue is calculated based on constant currency from activities and businesses that made a full contribution in both the 2017 and 2016 periods and is adjusted for any variances in working days
**Before non-underlying items being intangibles amortisation relating to businesses acquired, acquisitions fees and non-recurring costs relating to personnel changes
Operational Highlights:
· Considerable new expertise added to the Board, Senior Management Team and at managerial level, both in the UK and Continental Europe, including the appointment of Chris Payne as Chief Financial Officer
· Three acquisitions completed during the year, most notably Domus Group of Companies Limited which meaningfully diversifies and broadens the Company's overall position in the market
· Efficiency actions and initiatives implemented, with a more unitised approach across the Company's businesses
Post Year-End:
· Strong acquisition pipeline reflecting the revised and refocused acquisition strategy, with ample opportunities to supplement growth and broaden market position
· Earnings enhancing acquisition of Dersimo BV, a highly-regarded floorcoverings distribution business based in the Netherlands, completed on 2 March 2018
· Amanda Aldridge appointed to the Board as a Non-Executive Director
· Exclusivity secured on a site for a new distribution centre in the Ipswich area
· Full year expectations remain unchanged for 2018, despite continuation of weaker markets
Steve Wilson, Chief Executive, said:
"We are pleased with our performance during 2017, having exhibited further growth against what was qualitatively viewed as an overall flat market, robustness in the face of a weaker second half of the year, and improved profitability as a consequence of our focus on efficiency initiatives. The acquisitions of Domus and Dersimo illustrate that we have ample opportunities to grow and broaden our overall leading position in the industry while continuing to invest in the business to support organic growth. I personally wish to thank all our people for their contribution to the 2017 result, and look forward to delivering further improvements in 2018."
Enquiries:
Headlam Group plc | Tel: 01675 433 000 | ||
Steve Wilson, Chief Executive Catherine Miles, Director of Communications |
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Investec Bank plc (Corporate Broker) | Tel: 020 7597 5970 | ||
Garry Levin / David Flin / Alex Wright |
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Buchanan (Financial PR and IR) | Tel: 020 7466 5000 | ||
Mark Court / Sophie Wills / Catriona Flint
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Notes for Editors:
Headlam is Europe's largest distributor of floorcoverings having grown significantly via organic growth and acquisition since 1992.
Headlam's core business provides the distribution link between suppliers and customers of floorcoverings, providing suppliers with the greatest coverage and customer penetration for their products across the UK and Continental Europe, and customers with the broadest range of products supported by next day delivery.
The Company is engaged with suppliers across 16 primary countries whose products cover a significant proportion of the floorcoverings market including carpet, residential vinyl, engineered wood, laminate, luxury vinyl tiles, ceramic tiles, underlay and commercial flooring. The Company's customers are within both the residential and commercial sectors and comprise principally independent retailers and flooring contractors.
The Company comprises 63 wholly-owned businesses in the UK and Continental Europe (UK 59, Continental Europe 4) each operating under their own trade brand and utilising their individual sales team which achieves greater market penetration.
Each of the businesses is supported by the Company's centralised and financial resources and extensive distribution network across the UK and Continental Europe.
www.headlam.com
Chairman's Statement
As previously announced, having been on the Board of Headlam for almost half of the 25 years the Company has been operating, I am stepping down at the end of May 2018 after 12 years.
Between 2013, the year I became Chairman, and 2017, the Company has grown revenue and underlying profit before tax by 17.4% and 63.1% respectively, and paid and declared total dividends of 114.85 pence per share (in respect of the five years). This fantastic achievement is testament to the hard work, commitment and endeavour of all our employees across the UK and Continental Europe.
Headlam is a market-leading business with financial strength and, through years of investment and continuous development of operational expertise, has created significant barriers to entry in the UK market. Allied to this, the Company has ample opportunities to grow and improve its performance.
Since 2016, concerted actions and initiatives have been underway in the recognition that, despite the Company's recent successful history, its performance and operations could be further improved in a number of areas. These recent actions have been validated by the Company's performance during 2017, most notably in the area of gross and underlying operating margin improvement, which increased by 50 and 30 basis points respectively compared with 2016.
The Company demonstrated both resilience and robustness during 2017 and continued to grow despite softer market conditions compared with 2016. The outturn in 2017 is testament to the business model, collective industry experience, and an inherent predictability to the pattern of the revenue stream year-on-year, despite the lack of a tangible order book within the core business.
I believe the actions and initiatives put in place, operationally and in the areas of governance and corporate responsibility, will ensure a continued improvement in the Company's performance and its overall success.
We have made several notable additions to the Board and Senior Management Team during 2017 and early 2018 which will further assist in providing the necessary expertise and guidance to the Company going forward, and I remain confident about the Company's future prospects.
I have greatly valued and enjoyed my time at Headlam, particularly the support and interaction with my fellow Board members and a vast number of the Company's employees which has proven to be invaluable. I would like to express my sincere thanks to all of Headlam's stakeholders for their continued support of the Company and wish everyone well for the future.
Dick Peters
Non-Executive Chairman
6 March 2018
Chief Executive's Review
Introduction
We are pleased with our performance during 2017, not just in terms of the financial results, which were particularly pleasing given the softness in the UK market during the majority of the second half of the year, but also the progress made towards improving our operational processes and increasing efficiency across the Company.
We have a clear intent to build on our market-leading position and financial strength, to deliver growth, enhanced customer service, operational and margin improvement and an enriched culture in order to create value for the benefit of all our stakeholders.
2017 Financial Performance
Total revenue grew to £707.8 million in 2017, an increase of 2.0% on 2016 (1.2% in constant currency), with like-for-like revenue* growth in the UK and Continental Europe of 0.5% and 4.2% respectively representing a positive performance against a strong 2016 comparator. The second half of 2017 was characterised by weaker markets, with the first half delivering revenue growth of 4.0% compared with 2.0% for the year as a whole. Despite slower top-line growth, the Company was able to deliver an improved profit performance, increasing underlying** profit before tax by 7.5% to £43.1 million (2016: £40.1 million) due to the concerted focus on margin enhancement and efficiencies throughout 2017.
The gross margin improvement of 50 basis points to 31.1% in 2017 (2016: 30.6%) was achieved through more effective organisation and streamlining of the Company's businesses' processes, with the largest contributor being the elimination of inconsistent pricing practices coupled with a move towards a more unitised pricing policy. Other actions implemented during 2017, and as detailed in the interim results announcement in August 2017, included reduction in the inventory aged profile, warehouse reconfiguration to improve capacity and delivery efficiency and an increasing focus on higher margin and exclusive products.
While the improvement in gross margin through a more cohesive and focused approach was pleasingly evident during 2017, the contributions from other efficiency initiatives will only begin to be realisable from 2018 onwards. Of key interest is the outcome from stock reordering trials and from other initiatives relating to more effective utilisation of the delivery fleet and expenditure incurred on goods and services not for resale.
Investments and Acquisitions
Investments
In Continental Europe we appointed a new Managing Director, Pascal Pinard, in January 2018 to lead our French business, LMS. Pascal brings a wealth of international experience gained from 30 years in the floorcoverings industry, and it is anticipated that this positive step will address LMS's decline in performance which has been evident for a number of years. We remain encouraged by the performance of our Dutch business despite its currently modest size, and though the Swiss business may have been hampered by some transitional management gaps, actions are underway to address these and we remain confident that, with time, the business will regain its previous level of performance.
We believe the countries from which we operate in Continental Europe represent a platform for growth and potential consolidation, being a much more fragmented marketplace compared with the UK, and we will look to make further investments should the right opportunities arise, as illustrated by the Dutch acquisition announced today and detailed below.
Significant investment and capital expenditure is expected to be undertaken during 2018 and 2019 in relation to the proposed new distribution centre in the Ipswich area, with capital expenditure anticipated to total approximately £24 million. We are now in a meaningful position to progress our plans having secured exclusivity in January 2018 on a site identified in late 2017. The site meets all our requirements in terms of investment criteria, operational considerations, growth capacity, and the support it will provide to several of our businesses in the wider area. Hopefully this will end the frustrating wait for a larger footprint in this part of the UK to support growth, and we are determined to commence operations from the centre as soon as possible having drawn up a schedule of works and stages which would see us able to do so in late 2019 or early 2020.
Acquisitions
We completed three acquisitions during the year, Mitchell Carpets Limited, McMillan Flooring Distributors Limited and Domus Group of Companies Limited ('Domus'), for an anticipated total consideration of £31.9 million and increasing our total number of businesses to 62 at the year-end. All three acquisitions added key strategic locations in the UK and further supplemented our network, while Domus additionally significantly increased the Company's presence in the commercial specification market.
During 2017 the Company largely refocused its acquisition strategy towards acquiring market-leading businesses with meaningful income streams that bring strategic benefits, further geographic coverage, increase or expand the Company's market presence into certain underweight product lines and market segments, and provide market segment consolidation opportunities. The strategy is aimed at diversifying and broadening the Company's overall position in the floorcoverings market by providing a complement to the Company's market-leading and long-established core distribution business which is characterised by the supply of high volume small value orders into both the residential and commercial sectors. During 2017, the Company's average order value was £133 (2016: £127).
The earnings enhancing acquisition of Domus as announced in December 2017 is a perfect illustration of the refocused acquisition strategy. Acquired for £24.2 million of cash on completion with deferred discounted consideration of £4.9 million, Domus is the UK's leading specification consultant and supplier of hard surfaces for premium construction and refurbishment projects, with a core product offering of premium ceramic tiles and additionally engineered flooring for application in the residential and commercial project markets. Domus's areas of expertise and position in the marketplace is almost entirely complementary to Headlam's, with minimal overlap in terms of product lines, suppliers and customer base, and we look forward to exploring the available growth opportunities.
In addition, we are delighted to announce today the acquisition of Dersimo BV ('Dersimo') based in Western Netherlands, bringing our total number of businesses to 63. For the year ended 31 December 2017, Dersimo's revenue and profit before tax amounted to €10.1 million and €0.4 million respectively. Established in 1972, Dersimo is a highly-regarded family-owned floorcoverings distribution business involved in both the residential and commercial sectors and employing 23 people. The acquisition of Dersimo is also earnings enhancing and firmly in-line with the refocused acquisition strategy, providing an increased weighting in the commercial sector in the Netherlands where we were previously underweight, improved geographic coverage across the country, and a much more meaningful overall market position. Combined with our existing Dutch business Headlam BV, the acquisition is believed to positions us within the top three or four in the Dutch marketplace in terms of size. Dersimo will continue to be operated as a standalone business under its own trade brand and from its existing premises. Going forward it is anticipated that Dersimo and Headlam BV will support each other in terms of deliveries and stock giving rise to operating efficiencies.
The pipeline of acquisition opportunities remains strong but it is the Company's intention to retain a disciplined approach, targeting only the most rewarding opportunities without recourse to excessive leverage.
Dividends
The following Financial Review reiterates our polices in relation to progressive ordinary dividends and the potential returning of surplus cash to shareholders via special dividends when circumstances permit. In-line with the Board's ordinary dividend policy, a final dividend of 17.25 pence (2016: 15.85 pence) has been proposed, payable on 6 July 2018 to shareholders on the register at 1 June 2018, bringing the total ordinary dividend declared and proposed in respect of 2017 to 24.80 pence (2016: 22.55 pence). This 10.0% increase in the total ordinary dividend reflects the Company's ongoing commitment to increasing the ordinary dividend based upon basic earnings per share uplift, and the slight improvement arising from the cover ratio being rounded to 1.6.
Our People
To help deliver our strategic aims, considerable new expertise has been added during 2017 and the beginning of 2018 to complement the unrivalled knowledge and unique collective experience of the industry held by the existing members of the Board, the Senior Management Team and our business leaders.
At Board level, Tony Judge, who has worked at the Company since March 1992, was appointed as Chief Operating Officer in March 2017; Chris Payne joined the Company as Chief Financial Officer in September 2017; and, subsequent to the period-end, Amanda Aldridge was appointed a Non-Executive Director.
As previously announced, Dick Peters, the Company's Non-Executive Chairman, is stepping down from the Board on 31 May 2018 after 12 years and Philip Lawrence, a Non-Executive Director since June 2015, will be appointed Non-Executive Chairman with effect from 1 June 2018. I would again like to offer my sincere thanks and gratitude to Dick for his invaluable contribution to the development of Headlam over the past 12 years, and to Philip for assuming the position of Chairman allowing the Company to continue building on Dick's legacy and Philip's in-depth knowledge.
At a Senior Management and managerial level, we have made key appointments in the areas of Human Resources, Health & Safety, Communications, Company Secretarial and Legal Counsel. The introduction of these additional resources and expertise will be instrumental in enabling us to uphold the highest standards in all areas of operational processes, governance and corporate responsibility. We remain firmly committed to the continued investment in our business to support its operational and financial performance, the delivery of the strategic aims, and the success and wellbeing of all our employees.
Current Trading
Against a very strong January 2017 comparator, the Company's overall like-for-like revenue* declined 5.9% in January 2018, with the UK showing a more pronounced reduction, 6.7%, predominantly due to the performance of the residential sector and the adverse impact of a reduction of orders from one of our larger customers. In contrast, Continental Europe delivered a strongly positive result for the residential sector in the month, 6.5% on a like-for-like revenue* basis. The negative UK performance in the month was largely attributable to a very soft first working week following the New Year holiday, with the rest of the month showing some recovery but remaining moderately below our expectations.
The like-for-like revenue* performance in February 2018 was similar to January 2018, with a continued reduction of orders from the larger customer mentioned above and generally softer markets. However, given the very early stage in the year and our greater focus on profit rather than top-line growth, with organic revenue growth being a lesser contributor to the Company achieving its overall plans and expectations, our expectations for 2018 remain unchanged at this stage despite the weaker markets.
Conclusion
As previously stated, we are pleased with our performance during 2017, exhibiting further growth against what was qualitatively viewed as an overall flat market, robustness in the face of a weaker second half of the year, and improved profitability as a consequence of our focus on efficiency initiatives. The acquisitions of Domus and Dersimo illustrate that we have ample opportunities to grow and broaden our overall leading position in the industry while continuing to invest in the business to support organic growth. I personally wish to thank all our people for their contribution to the 2017 result, and look forward to delivering further improvements in 2018.
Steve Wilson
Chief Executive
6 March 2018
*Like-for-like revenue is calculated based on constant currency from activities and businesses that made a full contribution in both the 2017 and 2016 periods and is adjusted for any variances in working days
**Before non-underlying items being intangibles amortisation relating to businesses acquired, acquisitions fees and non-recurring costs relating to personnel changes
Financial Review
Revenue
During the year, total revenue improved by 2.0% from £693.6 million to £707.8 million, an increase of £14.2 million.
Like-for-like revenue* growth in the UK and Continental Europe was 0.5% and 4.2% respectively.
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| £000 | % | £000 | % |
Revenue for the year ended 31 December 2016 | |||||
UK |
| 602,104 | 86.8 |
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Continental Europe | 91,468 | 13.2 |
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| 693,572 | 100.0 |
Items contributing to growth during the 12-month period to 31 December 2017
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| UK: |
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| Like-for-like* growth | 3,043 | 0.5 |
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| One less working day | (2,421) | (0.4) |
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| Acquisitions | 4,508 | 0.8 |
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| 5,130 | 0.9 |
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| Continental Europe: |
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| Like-for-like* growth | 3,860 | 4.2 |
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| Changes in working days | (617) | (0.7) |
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| Translation effect | 5,819 | - |
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| 9,062 | 9.9 |
Total movement |
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| 14,192 | 2.0 | |
Revenue for the year ended 31 December 2017 | |||||
UK |
| 607,234 | 85.8 |
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Continental Europe | 100,530 | 14.2 |
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| 707,764 | 100.0 |
*Like-for-like revenue is calculated based on constant currency from activities and businesses that made a full contribution in both the 2017 and 2016 periods and is adjusted for any variances in working days
UK
The Company's UK overall growth of 0.9% was achieved in a softer market compared with 2016, particularly in the commercial sector, and was based on organic growth of £3.0 million, contributions from acquired businesses amounting to £4.5 million and then, due to 2016 having one additional working day, lost revenue opportunity in 2017 amounting to £2.4 million.
The residential sector represented 70.4% of UK revenue in 2017 and increased by 1.0% on a like-for-like* basis. Conversely the commercial sector, representing 29.6% of UK revenue in 2017, decreased by 0.7% on a like-for-like* basis.
Continental Europe
The contribution and performance from the Continental European businesses improved throughout the year with the first half like-for-like revenue* growth of 3.0% increasing to 4.3% during the second half giving rise to an annual increase of 4.2%. Continental Europe accounted for 14.2% of total revenue in 2017, up from 13.2% in 2016. Each of the businesses on the Continent performed well in the year, in particular the businesses in the Netherlands and France showing good revenue growth, and the Swiss business showed growth at more modest levels compared to 2016. The weighting between residential and commercial sector revenue in Continental Europe showed a slight movement towards residential compared with 2016, accounting for 52.6% of revenue (2016: 50.7%).
Gross margin
Gross margin increased by 50 basis points in the year from 30.6% to 31.1%. As detailed in the Chief Executive's Review, this was largely as a result of more effective organisation and the successful implementation of 'self-help' measures aimed at ensuring the Company maintained pricing discipline. Many of the measures were instigated toward the end of 2016 and were effectively maintained during 2017.
Expenses
Combined distribution and administrative expenses increased by 3.1%, up £5.3 million to £178.7 million. On an underlying basis the increase was marginally lower at 2.8% which largely reflects inflationary increases and the cost of living award given to all employees earning £42,500 or below of 2.0%. The percentage proportions of distribution and administration expenses of total expenses for 2017 remained largely unaltered compared with 2016, being 73.0% and 27.0% respectively (2016: 73.8% and 26.2%).
The increase in people cost of£1.2 million was again the largest underlying component increase, being 32.3% of the gross underlying expenses increase before currency translation reflecting the 2% cost of living award to staff.
The investment in sampling decreased year-on-year by £1.1 million following an efficiency focus to minimise sampling spend, particularly in the Company's Lifestyle branded products. Legal and professional fees increased by £1.0 million largely as a result of strategic objective related spend.
The non-underlying costs are discussed in more detail in the notes to the accounts.
Costs relating to the currency translation of the Continental European businesses amounted to £1.6 million, reflecting the degree to which Sterling depreciated against the Euro and Swiss Franc in 2017.
| Total expenses | Distribution | Administration | |||
| £000 | % | £000 | % | £000 | % |
Expenses for 2016 | 173,359 |
| 127,982 | 73.8 | 45,377 | 26.2 |
Significant movements in 2017: |
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People cost | 1,211 | 32.3 | 2,391 | 204.7 | (1,180) | (45.7) |
Vehicle expenses | 483 | 12.9 | 537 | 46.0 | (54) | (2.1) |
Carriage and packaging costs | 293 | 7.8 | 293 | 25.1 | - | - |
Sampling investment | (1,051) | (28.0) | (1,051) | (90.0) | - | - |
Bad debts | 348 | 9.3 | 348 | 29.8 | - | - |
Depreciation | (234) | (6.2) | (120) | (10.3) | (114) | (4.4) |
Legal and professional fees | 1,023 | 27.3 | - | - | 1,023 | 39.6 |
IT | 418 | 11.1 | - | - | 418 | 16.2 |
Prior year exchange gain | 471 | 12.6 | - | - | 471 | 18.2 |
Pension costs | 415 | 11.1 | - | - | 415 | 16.1 |
Other | (100) | (2.7) | (1,230) | (105.3) | 1,130 | 43.8 |
Underlying sub total | 3,277 | 87.4 | 1,168 | 100.0 | 2,109 | 81.7 |
Non-underlying | 472 | 12.6 | - | - | 472 | 18.3 |
Total before currency translation | 3,749 | 100.0 | 1,168 | 100.0 | 2,581 | 100.0 |
Currency translation | 1,589 |
| 1,326 |
| 263 |
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Expenses for 2017 | 178,697 |
| 130,476 | 73.0 | 48,221 | 27.0 |
Operating profit
The underlying operating profit for 2017 increased by 6.6% compared to 2016 with the operating margin at 6.2%, improving from 5.9%, reflecting the absolute gain in gross margin due to the pricing discipline initiatives instigated toward the end of 2016. The operating margin generated by the incremental revenue ('drop through rate') of 19.1% compared with10.9% in 2016 demonstrates the strong operational gearing inherent in the business model.
| Underlying | Non-underlying | Total | |
| £000 | £000 | £000 | |
Operating profit 2016 | 41,072 | (1,927) | 39,145 | |
Gross margin improvement in 2017 |
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Volume benefit | 3,011 | - | 3,011 | |
Pricing benefit | 3,137 | - | 3,137 | |
| 1,429 | - | 1,429 | |
| 7,577 | - | 7,577 | |
Expenses increase |
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Distribution | (1,557) | - | (1,557) | |
Administration | (1,745) | (472) | (2,217) | |
Effect of acquisitions | (1,564) | - | (1,564) | |
Total increase | (4,866) | (472) | (5,338) | |
Operating profit 2017 | 43,783 | (2,399) | 41,384 | |
Drop through rate % | 19.1 |
| 15.8 | |
Operating margin % | 6.2 |
| 5.8 | |
Improvement % | 6.6 |
| 5.7 |
Tax
The underlying effective tax rate for 2017 was 18.5% (2016: 18.9%) which is lower than the headline rate of corporation tax in the UK of 19.25%. The main reason for this difference was due to a release in provisions for uncertain tax positions following the ongoing review of the level of tax risks in the Company. The anticipated effective underlying rate for 2018 is expected to be 17.5%. The full effective rate of tax in 2017 was 19.1% (2016: 18.9%) since some of the non-underlying costs were disallowable for tax.
The Company is committed to being fully compliant with the relevant tax laws and compliance obligations regarding the filing of tax returns, payment and collection of tax. The Company maintains an open relationship with HM Revenue & Customs and currently operates with a level of tax compliance risk that is rated as "low".
Earnings and dividends
Ordinary dividends
The Board's ordinary dividend policy is aimed at improving both the interim and final dividends, such that the total of the interim and final dividends for any particular year increases in line with the basic earnings per ordinary share for that year.
When declaring the interim and recommending the final dividend, the Board considers the Company's cash resource and adequacy of distributable reserves.
Over the last five years (inclusive of 2017), the Company's total ordinary dividends and basic earnings per ordinary share have grown at a compound average growth rate of 12.8% and 21.4% respectively.
Year ending 31 December | Basic EPS pence | Total Ordinary Dividend pence | Cover ratio |
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2013 | 18.0 | 15.30 | 1.2 |
2014 | 28.6 | 17.50 | 1.6 |
2015 | 33.8 | 20.70 | 1.6 |
2016 | 36.8 | 22.55 | 1.6 |
2017 | 39.1 | 24.80 | 1.6 |
The relationship between ordinary dividends and basic earnings per share can alternatively be expressed as a cover ratio as shown above.
The Board believes that although there is a continuing underlying risk relating to potential volatility around future maintainable growth in European floorcovering markets and the consequential impact this could have on earnings, it is nonetheless of the view that the current policy should continue during the medium-term. Additionally, and subject to the nature and term of any adverse movement in earnings and assessments around future trading, the Board may allow a change in the cover ratio in order to maintain the dividend.
In implementing the policy, the Board ensures the parent company has sufficient distributable reserves from which to make the distribution. The table below illustrates the reserves position for the last five years and the ability of the parent to fund the dividend payment as measured by the number of years cover. On average, over the last five years, the parent has maintained reserves sufficient to cover 4.4 years of dividend. Details of current year distributable reserves are shown in the retained earnings column in the Statement of Changes in Equity.
| Distributable reserves | Proposed |
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| Parent | Group | Dividends | Years |
Year ending 31 December | £000 | £000 | £000 | cover |
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2013 | 71,220 | 124,465 | 12,689 | 5.6 |
2014 | 57,241 | 126,018 | 14,655 | 3.9 |
2015 | 76,452 | 137,603 | 22,464 | 4.4 |
2016 | 85,795 | 143,315 | 25,729 | 3.3 |
2017 | 105,128 | 157,903 | 20,932 | 5.0 |
Special dividends
The Company has previously undertaken an expansive investment programme to improve and increase the capacity and reach of its infrastructure.
However, from time to time, the Company's commitment to expansionary capital expenditure will pause, as was the case during 2016 and 2017 and therefore, subject to ongoing levels of cash generation being maintained, the Company may carry a capital position in excess of that which would be required to maintain its asset base
This situation may leave the way open for a return of surplus capital to shareholders, and in the Board's opinion, this can be best achieved through the payment of special dividends as was the case in 2016 and 2017, amounting to 6.0 pence and 8.0 pence per share respectively.
As outlined in the Final Results announcement and Annual Report and Accounts for the year ended 31 December 2015, the conditions that will apply to any special dividend payments are; i) the Company's forecast average net debt in the year in which the special dividend is paid should be approximately equal to or less than 0.5 of EBITDA; ii) the cover ratio of the aggregated ordinary and special dividends when expressed in terms of dividend cover will not be less than one and; iii) the payment must be made from available distributable reserves.
Having assessed the Company's cash effect of its future spend in the investment programme (for example in the development of the Ipswich distribution centre in 2018 and 2019) and in pursuing the strategic aim of acquisitive growth, the Company is not declaring a special dividend for 2018.
Dividend Timings
Dividend announcements, approvals and payments are typically expected to be as follows:
| Status and date |
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Dividend | Announced | Approval | payment date |
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Current ordinary interim | Declared August | The Board August | January in the year following announcement |
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Current ordinary final | Recommended March | AGM by shareholders May | July |
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Goodwill and Other Intangible Assets
The recent acquisition of Domus Group of Companies Limited ('Domus') has caused the Board to consider and then re-evaluate the Company's approach to valuing goodwill and the associated intangible assets generated. The two smaller acquisitions made earlier in 2017 were treated in a similar way to previous acquisitions whereby any intangible assets generated from the customer relationships or order books, which were typically low value, were fully written down in the year of acquisition. This approach was deemed to be inappropriate for the much larger acquisition of Domus.
In arriving at a value for goodwill and the associated intangible assets, the Group has taken a judgment on the discounted fair value of the contingent consideration (a maximum gross value of£2.7 million) which is payable three years after completion. Similarly, the Company has taken judgments over attributing values for the intangible assets of order book, brand value and customer relationships together with a useful economic life over which to amortise the assets. This ranges from circa two years for the order book, to 15 years for the brand and ten years for the customer relationships. After evaluating the above, this leaves the Group with a residual goodwill value of £23.0 million which reflects the overall value to the Group as a result of having a more diverse product range and route to market.
The amortisation charge to the Consolidated Income Statement for this transaction was £0.1 million in 2017 and is expected to be £1.3 million in 2018, although this will decline in future years as the intangible assets become fully written down.
Going forward it is anticipated that this revised approach will be applied to future acquisitions meaning there is likely to be an assessment of goodwill, intangible asset value and associated amortisation in the Consolidated Income Statement for each transaction carried out.
Employee benefits
The liability attaching to employee benefits is as follows:
| 2017 £000 | 2016 £000 |
Current liabilities | 2,235 | 2,169 |
Non-current liabilities | 10,481 | 20,781 |
Total | 12,716 | 22,950 |
Whilst the liability relates to both the UK and Swiss defined benefit pension plans, its composition is dominated by the UK plan. The year-on-year decrease in the deficit amounts to £10.2 million. This was mainly caused by the positive changes in the returns on asset performance, liability experience gains andminor changes in the demographic assumptions offset by a decrease in the liability discount rate assumption from 2.7% to 2.4%.
Cash flow
Net cash flow from operating activities
During the year, net cash flow from operating activities increased by £10.6 million from £32.6 million to £43.2 million. The key drivers of the positive cash flow generation are shown in the table below.
| 2017 | 2016 |
| £000 | £000 |
Cash flows from operating activities |
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|
Profit before tax for the year | 40,719 | 38,179 |
Depreciation, amortisation and impairment | 5,845 | 5,276 |
Net finance cost | 665 | 966 |
Profit on sale of property, plant and equipment | (45) | (15) |
Share-based payments | 1,218 | 1,239 |
Working capital changes | 6,108 | (1,998) |
Cash generated from the operations | 54,510 | 43,648 |
Interest paid | (761) | (1,133) |
Tax paid | (8,388) | (7,703) |
Pension contributions | (2,164) | (2,171) |
Net cash from operating activities | 43,197 | 32,641 |
Cash generated from operations increased year-on-year by £10.6 million driven by profit before tax, an improvement in working capital and an increase in amortisation resulting from the acquisitions in 2017. To offset these cash inflows, there was an increase in the tax payment during the year of £0.7 million.
Cash flows from investing and financing activities
The table below summarises the cash flow movements arising from investing and financing activities during the year. The overall net cash outflow from the two activities was £60.4 million, with the two main factors being the payment of dividends and the acquisition consideration and associated fees, largely related to Domus.
|
| ||||||||||||||||||||||||||||||||||||||||||
|
|
Net debt
As detailed in the table below, Group net funds at the end of the year decreased by £17.3 million (32.9%), from £52.6 million to £35.3 million mainly as a result of the net cash outflows arising from operating, investing and financing activities outlined above.
Group | At 1 January2017 £000 |
Cashflows£000 |
Translation differences£000 | At 31 December 2017£000 |
Cash at bank and in hand | 59,343 | (17,240) | (73) | 42,030 |
Bank overdraft | (4) | 4 | - | - |
Debt due within one year | (224) | - | (9) | (233) |
Debt due after one year | (6,493) | 230 | (256) | (6,519) |
| 52,622 | (17,006) | (338) | 35,278 |
Funding and going concern
The Company increased its existing UK banking facilities by a further £25.0 million on 8 December 2017. The increased facility was equally split across the two separate agreements the Company has in place with Barclays Bank PLC and HSBC Bank Plc. The increased banking arrangements retain the original terms and end dates of 14 December 2021. The Sterling committed facilities increase from £47.5 million to £72.5 million, with maintained Euro facilities of €8.6 million. The Company also has short-term uncommitted facilities which amount to £25.0 million, and are renewable on an annual basis. In addition, the Company has existing facilities of £7.8 million in Continental Europe.
The Company maintains sufficient banking facilities to fund its operations and investments, and as at 31 December 2017 94.0% of the total facilities were undrawn as shown below.
| Drawn £000 | Undrawn £000 | Total facility £000 |
Less than one year | 233 | 32,343 | 32,576 |
Over one year and less than five years | 6,519 | 73,369 | 79,888 |
| 6,752 | 105,712 | 112,464 |
Having reviewed the Company's resources and a range of likely outcomes, the Board believes there are reasonable grounds for stating that the Company has adequate resources to continue in operational existence for a period no shorter than 12 months from the date of this Financial Review and it is appropriate to adopt the going concern basis in preparing the Company's financial accounts.
Chris Payne
Chief Financial Officer
6 March 2018
Consolidated Income Statement
for the year ended 31 December 2017
| Note | Underlying 2017 £000 | Non-underlying 2017 £000 | Total 2017 £000 | Underlying 2016 £000 | Non-underlying 2016 £000 | Total 2016 £000 |
Revenue | 1 | 707,764 | - | 707,764 | 693,572 | - | 693,572 |
Cost of sales |
| (487,683) | - | (487,683) | (481,068) | - | (481,068) |
Gross profit |
| 220,081 | - | 220,081 | 212,504 | - | 212,504 |
Distribution costs |
| (130,476) | - | (130,476) | (127,982) | - | (127,982) |
Administrative expenses |
| (45,822) | (2,399) | (48,221) | (43,450) | (1,927) | (45,377) |
Operating profit | 1 | 43,783 | (2,399) | 41,384 | 41,072 | (1,927) | 39,145 |
Finance income |
| 578 | - | 578 | 756 | - | 756 |
Finance expenses |
| (1,243) | - | (1,243) | (1,722) | - | (1,722) |
Net finance costs |
| (665) | - | (665) | (966) | - | (966) |
Profit before tax | 1 | 43,118 | (2,399) | 40,719 | 40,106 | (1,927) | 38,179 |
Taxation | 3 | (7,976) | 179 | (7,797) | (7,601) | 385 | (7,216) |
Profit for the year attributable to the equity shareholders |
|
35,142 |
(2,220) |
32,922 |
32,505 |
(1,542) |
30,963 |
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
Basic | 4 | 41.7p |
| 39.1p | 38.7p |
| 36.8p |
Diluted | 4 | 41.5p |
| 38.9p | 38.5p |
| 36.6p |
|
|
|
|
|
|
|
|
Ordinary dividend per share |
|
|
|
|
|
|
|
Interim dividend proposed for the financial year |
5 |
|
|
7.55p |
|
|
6.70p |
Final dividend proposed for the financial year |
5 |
|
|
17.25p |
|
|
15.85p |
Special dividend proposed for the financial year |
5 |
|
|
- |
|
|
8.00p |
All Group operations during the financial years were continuing operations.
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2017
|
| 2017 £000 | 2016 £000 |
Profit for the year attributable to the equity shareholders |
| 32,922 | 30,963 |
Other comprehensive income: |
|
|
|
Items that will never be reclassified to profit or loss |
|
|
|
Remeasurement of defined benefit plans |
| 9,127 | (4,336) |
Related tax |
| (1,729) | 961 |
Impact of change in UK tax rates on deferred tax |
| - | (183) |
|
| 7,398 | (3,558) |
Items that are or may be reclassified to profit or loss |
|
|
|
Foreign exchange translation differences arising on translation of overseas operations |
| (277) | 1,707 |
Effective portion of changes in fair value of cash flow hedges |
| (154) | 572 |
Transfers to profit or loss on cash flow hedges |
| (77) | 175 |
Related tax |
| 43 | (148) |
Impact of change in UK tax rates on deferred tax |
| - | (3) |
|
| (465) | 2,303 |
Other comprehensive income/(expense) for the year |
| 6,933 | (1,255) |
Total comprehensive income attributable to the equity shareholders for the year |
| 39,855 | 29,708 |
Statement of Financial Position
at 31 December 2017
|
|
| ||
| Note |
| 2017 £000 |
2016 £000 |
Assets |
|
|
|
|
Non-current assets |
|
|
|
|
Property, plant and equipment |
|
| 101,631 | 102,934 |
Intangible assets |
|
| 44,662 | 10,388 |
Deferred tax assets |
|
| 648 | 1,138 |
|
|
| 146,941 | 114,460 |
Current assets |
|
|
|
|
Inventories |
|
| 131,566 | 126,037 |
Trade and other receivables |
|
| 127,976 | 128,934 |
Cash and cash equivalents |
|
| 42,030 | 59,343 |
|
|
| 301,572 | 314,314 |
Total assets | 1 |
| 448,513 | 428,774 |
Liabilities |
|
|
|
|
Current liabilities |
|
|
|
|
Bank overdraft |
|
| - | (4) |
Other interest-bearing loans and borrowings |
|
| (233) | (224) |
Trade and other payables |
|
| (190,299) | (183,304) |
Employee benefits |
|
| (2,235) | (2,169) |
Income tax payable |
|
| (6,339) | (6,824) |
|
|
| (199,106) | (192,525) |
Non-current liabilities |
|
|
|
|
Other interest-bearing loans and borrowings |
|
| (6,519) | (6,493) |
Trade and other payables |
|
| (4,938) | - |
Provisions |
|
| (2,048) | (1,531) |
Deferred tax liabilities |
|
| (6,847) | (4,077) |
Employee benefits |
|
| (10,481) | (20,781) |
|
|
| (30,833) | (32,882) |
Total liabilities | 1 |
| (229,939) | (225,407) |
Net assets |
|
| 218,574 | 203,367 |
Equity attributable to equity holders of the parent |
|
|
|
|
Share capital |
|
| 4,268 | 4,268 |
Share premium |
|
| 53,512 | 53,512 |
Other reserves |
|
| 2,891 | 2,272 |
Retained earnings |
|
| 157,903 | 143,315 |
Total equity |
|
| 218,574 | 203,367 |
Statement of Changes in Equity
for the year ended 31 December 2017
| Share capital £000 | Share premium £000 | Capital redemption reserve £000 | Translation reserve £000 | Cash flow hedging reserve £000 | Treasury reserve £000 | Retained earnings £000 | Total equity £000 |
Balance at 1 January 2016 | 4,268 | 53,512 | 88 | 5,429 | (516) | (5,276) | 137,603 | 195,108 |
Profit for the year attributable to the equity shareholders |
- |
- |
- |
- |
- |
- |
30,963 |
30,963 |
Other comprehensive income/(expense) | - | - | - | 1,707 | 747 | - | (3,709) | (1,255) |
Total comprehensive income/(expense) for the year |
- |
- |
- |
1,707 |
747 |
- |
27,254 |
29,708 |
Transactions with equity shareholders, recorded directly in equity |
|
|
|
|
|
|
|
|
Share-based payments | - | - | - | - | - | - | 1,239 | 1,239 |
Share options exercised by employees | - | - | - | - | - | 740 | (317) | 423 |
Consideration for purchase of own shares | - | - | - | - | - | (647) | - | (647) |
Current tax on share options | - | - | - | - | - | - | 21 | 21 |
Deferred tax on share options | - | - | - | - | - | - | (21) | (21) |
Dividends to equity holders | - | - | - | - | - | - | (22,464) | (22,464) |
Total contributions by and distributions to equity shareholders |
- |
- |
- |
- |
- |
93 |
(21,542) |
(21449) |
Balance at 31 December 2016 | 4,268 | 53,512 | 88 | 7,136 | 231 | (5,183) | 143,315 | 203,367 |
Balance at 1 January 2017 | 4,268 | 53,512 | 88 | 7,136 | 231 | (5,183) | 143,315 | 203,367 |
Profit for the year attributable to the equity shareholders |
- |
- |
- |
- |
- |
- |
32,922 |
32,922 |
Other comprehensive income | - | - | - | (277) | (231) | - | 7,441 | 6,933 |
Total comprehensive income/(expense) for the year |
- |
- |
- |
(277) |
(231) |
- |
40,363 |
39,855 |
Transactions with equity shareholders, recorded directly in equity |
|
|
|
|
|
|
|
|
Share-based payments | - | - | - | - | - | - | 1,218 | 1,218 |
Share options exercised by employees | - | - | - | - | - | 2,307 | (1,504) | 803 |
Consideration for purchase of own shares | - | - | - | - | - | (1,180) | - | (1,180) |
Current tax on share options | - | - | - | - | - | - | 102 | 102 |
Deferred tax on share options | - | - | - | - | - | - | 138 | 138 |
Dividends to equity holders | - | - | - | - | - | - | (25,729) | (25,729) |
Total contributions by and distributions to equity shareholders |
- |
- |
- |
- |
- |
1,127 |
(25,775) |
(24,648) |
Balance at 31 December 2017 | 4,268 | 53,512 | 88 | 6,859 | - | (4,056) | 157,903 | 218,574 |
Cash Flow Statement
for the year ended 31 December 2017
|
| Group |
| ||||||
|
| 2017 £000 | 2016 £000 |
| |||||
Cash flows from operating activities |
|
|
|
| |||||
Profit before tax for the year |
| 40,719 | 38,179 |
| |||||
Adjustments for: |
|
|
|
| |||||
Depreciation, amortisation and impairment |
| 5,845 | 5,276 |
| |||||
Finance income |
| (578) | (756) |
| |||||
Finance expense |
| 1,243 | 1,722 |
| |||||
(Profit)/loss on sale of property, plant and equipment |
| (45) | (15) |
| |||||
Share-based payments |
| 1,218 | 1,239 |
| |||||
Operating cash flows before changes in working capital and other payables |
| 48,402 | 45,645 |
| |||||
Change in inventories |
| (2,210) | (5,895) |
| |||||
Change in trade and other receivables |
| 7,564 | (6,467) |
| |||||
Change in trade and other payables |
| 754 | 10,365 |
| |||||
Cash generated from the operations |
| 54,510 | 43,648 |
| |||||
Interest paid |
| (761) | (1,133) |
| |||||
Tax paid |
| (8,388) | (7,703) |
| |||||
Additional contributions to defined benefit plan |
| (2,164) | (2,171) |
| |||||
Net cash flow from operating activities |
| 43,197 | 32,641 |
| |||||
Cash flows from investing activities |
|
|
|
| |||||
Proceeds from sale of property, plant and equipment |
| 190 | 401 |
| |||||
Interest received |
| 576 | 752 |
| |||||
Acquisition of subsidiaries, net of cash acquired |
| (24,763) | - |
| |||||
Repayment of acquired borrowings on acquisition |
| (7,042) | - |
| |||||
Acquisition of property, plant and equipment |
| (3,058) | (2,963) |
|
|
|
|
|
|
Net cash flow from investing activities |
| (34,097) | (1,810) |
| |||||
Cash flows from financing activities |
|
|
|
| |||||
Proceeds from the issue of treasury shares |
| 803 | 423 |
| |||||
Payment to acquire own shares |
| (1,180) | (647) |
| |||||
Drawdown of borrowings |
| 25,000 | 6,456 |
| |||||
Repayment of borrowings |
| (25,230) | (20,000) |
| |||||
Dividends paid |
| (25,729) | (22,464) |
| |||||
Net cash flow from financing activities |
| (26,336) | (36,232) |
| |||||
Net (decrease)/increase in cash and cash equivalents |
| (17,236) | (5,401) |
| |||||
Cash and cash equivalents at 1 January |
| 59,339 | 63,932 |
| |||||
Effect of exchange rate fluctuations on cash held |
| (73) | 808 |
| |||||
Cash and cash equivalents at 31 December |
| 42,030 | 59,339 |
| |||||
Notes
1 Segment reporting
On 31 December 2017, the Group had 59 operating segments in the UK and three operating segments in Continental Europe. Each segment represents an individual trading operation, and each operation is wholly aligned to the sales, marketing, supply and distribution of floorcovering products. The operating results of each operation are regularly reviewed by the Chief Operating Decision Maker, which is deemed to be the Group Chief Executive. Discrete financial information is available for each segment and used by the Group Chief Executive to assess performance and decide on resource allocation.
The operating segments have been aggregated to the extent that they have similar economic characteristics. The key economic indicators considered by management in assessing whether operating segments have similar economic characteristics are the products supplied, the type and class of customer, method of sale and distribution and the regulatory environment in which they operate.
As each operating segment is a trading operation wholly aligned to the sales, marketing, supply and distribution of floorcovering products, management considers all segments have similar economic characteristics except for the regulatory environment in which they operate, which is determined by the country in which the operating segment resides.
The Group's internal management structure and financial reporting systems differentiate the operating segments on the basis of the differing economic characteristics in the UK and Continental Europe and accordingly present these as two separate reportable segments. This distinction is embedded in the construction of operating reports reviewed by the Group Chief Executive, the Board and the executive management team and forms the basis for the presentation of operating segment information given below.
| UK | Continental Europe | Total | |||
| 2017 £000 | 2016 £000 | 2017 £000 | 2016 £000 | 2017 £000 | 2016 £000 |
Revenue |
|
|
|
|
|
|
External revenues | 607,234 | 602,104 | 100,530 | 91,468 | 707,764 | 693,572 |
Reportable segment underlying operating profit |
44,765 |
40,944 |
1,271 |
793 |
46,036 |
41,737 |
Reportable segment assets | 297,325 | 263,968 | 44,515 | 44,516 | 341,840 | 308,484 |
Reportable segment liabilities | (179,016) | (167,754) | (25,021) | (23,801) | (204,037) | (191,555) |
During the year there were no inter-segment revenues for the reportable segments (2016: £nil).
Reconciliations of reportable segment profit, assets and liabilities and other material items:
| 2017 £000 | 2016 £000 |
Profit for the year |
|
|
Total profit for reportable segments | 46,036 | 41,737 |
Non-underlying items | (2,399) | (1,927) |
Unallocated expense | (2,253) | (665) |
Operating profit | 41,384 | 39,145 |
Finance income | 578 | 756 |
Finance expense | (1,243) | (1,722) |
Profit before taxation | 40,719 | 38,179 |
Taxation | (7,797) | (7,216) |
Profit for the year | 32,922 | 30,963 |
| 2017 £000 | 2016 £000 |
Assets Total assets for reportable segments |
341,840 |
308,484 |
Unallocated assets: |
|
|
Properties, plant and equipment | 89,379 | 90,981 |
Deferred tax assets | 648 | 1,138 |
Cash and cash equivalents | 16,646 | 28,171 |
Total assets | 448,513 | 428,774 |
Liabilities |
|
|
Total liabilities for reportable segments | (204,037) | (191,555) |
Unallocated liabilities: |
|
|
Employee benefits | (12,716) | (22,951) |
Income tax payable | (6,339) | (6,824) |
Deferred tax liabilities | (6,847) | (4,077) |
Total liabilities | (229,939) | (225,407) |
| UK £000 | Continental Europe £000 | Reportable segment total £000 | Unallocated £000 | Consolidated total £000 |
Other material items 2017 |
|
|
|
|
|
Capital expenditure | 2,443 | 615 | 3,058 | - | 3,058 |
Depreciation | 1,933 | 690 | 2,623 | 2,291 | 4,914 |
Non-underlying items | 1,722 | 677 | 2,399 | - | 2,399 |
Other material items 2016 |
|
|
|
|
|
Capital expenditure | 1,808 | 872 | 2,680 | 283 | 2,963 |
Depreciation | 2,388 | 732 | 3,120 | 2,156 | 5,276 |
Non-underlying items | - | - | - | 1,927 | 1,927 |
In the UK the Group's freehold properties are held within Headlam Group plc and a rent is charged to the operating segments for the period of use. Therefore, the operating reports reviewed by the Group Chief Executive show all the UK properties as unallocated and the operating segments report a segment result that includes a property rent. This is reflected in the above disclosure.
Each segment is a continuing operation.
The Group Chief Executive, the Board and the senior executive management team have access to information that provides details on revenue by principal product group for the two reportable segments, as set out in the following table:
Revenue by principal product group and geographic origin is summarised below:
| UK | Continental Europe | Total | |||
| 2017 £000 | 2016 £000 | 2017 £000 | 2016 £000 | 2017 £000 | 2016 £000 |
Revenue |
|
|
|
|
|
|
Residential | 427,484 | 422,048 | 52,920 | 46,337 | 480,404 | 468,385 |
Commercial | 179,750 | 180,056 | 47,610 | 45,131 | 227,360 | 225,187 |
| 607,234 | 602,104 | 100,530 | 91,468 | 707,764 | 693,572 |
2 Non-underlying items
In order to illustrate the underlying trading performance of the Group, presentation has been made of performance measures excluding those items which it is considered would distort the comparability of the Group's results. These non-underlying items are defined as those items that, by virtue of their nature, size or expected frequency, warrant separate additional disclosure in the financial statements in order to fully understand the underlying performance of the Group.
Non-underlying items of £2,399,000 relate to intangibles amortisation relating to businesses acquired, acquisitions fees and non-recurring costs relating to personnel changes, and the related tax of £179,000 on these costs, see table below.
| 2017 £000 | 2016 £000 |
Non-recurring people costs | 677 | 1,927 |
Amortisation of intangibles | 931 | - |
Acquisitions fees | 791 | - |
| 2,399 | 1,927 |
3 Taxation
Recognised in the income statement
| 2017 £000 | 2016 £000 |
Current tax expense: |
|
|
Current year | 8,548 | 8,434 |
Adjustments for prior years | (567) | (878) |
| 7,981 | 7,556 |
Deferred tax expense: |
|
|
Origination and reversal of temporary differences | (39) | (202) |
Effect of change in tax rates | (27) | (104) |
Adjustments for prior years | (118) | (34) |
| (184) | (340) |
Total tax in income statement | 7,797 | 7,216 |
| 2017 £000 | 2016 £000 |
Tax relating to items (charged)/credited to equity |
|
|
Current tax on: |
|
|
Income and expenses recognised directly in equity | (150) | (2) |
Deferred tax on: |
|
|
Share options | (138) | 21 |
Income and expenses recognised directly in equity | (18) | - |
Deferred tax on other comprehensive income: |
|
|
Defined benefit plans | 1,729 | (778) |
Cash flow hedge | (43) | 132 |
Total tax reported directly in reserves | 1,380 | (627) |
Factors that may affect future current and total tax charges
The UK headline corporation tax rate for the period was 19.25% (2016:20%). The UK Budget on 16 March 2016 included a rate reduction to 17% from 1 April 2020 which was enacted during the prior year. The majority of the deferred tax balance in respect of UK entities has therefore been calculated at 17% (2016:17%) on the basis that most of the balances will materially reverse after 1 April 2020.
In addition, a further reduction in the French corporation tax rate to 25% by 2022 was enacted in December 2017 which has also been taken into account in the calculation of the related deferred tax balance.
Reconciliation of effective tax rate
| 2017 | 2016 | ||
| % | £000 | % | £000 |
Profit before tax |
| 40,719 |
| 38,179 |
Tax using the UK corporation tax rate | 19.3 | 7,836 | 20.0 | 7,636 |
Effect of change in UK tax rate | (0.1) | (30) | (0.1) | (42) |
Effect of change in overseas tax rate | (0.1) | (27) | (0.2) | (58) |
Non-deductible expenses | 1.6 | 646 | 1.5 | 588 |
Effect of tax rates in foreign jurisdictions | 0.1 | 57 | 0.0 | 4 |
Adjustments in respect of prior years | (1.7) | (685) | (2.3) | (912) |
Total tax in income statement | 19.1 | 7,797 | 18.9 | 7,216 |
4 Earnings per share
| 2017 £000 | 2016 £000 |
Earnings |
|
|
Earnings for underlying basic and underlying diluted earnings per share | 35,142 | 32,505 |
Earnings for basic and diluted earnings per share | 32,922 | 30,963 |
| 2017 | 2016 |
Number of shares |
|
|
Issued ordinary shares at 31 December | 85,363,743 | 85,363,743 |
Effect of shares held in treasury | (1,183,451) | (1,330,339) |
Weighted average number of ordinary shares for the purposes of basic earnings per share | 84,180,292 | 84,033,404 |
Effect of diluted potential ordinary shares: |
|
|
Weighted average number of ordinary shares at 31 December | 84,180,292 | 84,033,404 |
Dilutive effect of share options | 549,488 | 458,697 |
Weighted average number of ordinary shares for the purposes of diluted earnings per share | 84,729,780 | 84,492,101 |
5 Dividends
| 2017 £000 | 2016 £000 |
Interim dividend for 2016 of 6.70p paid 3 January 2017 | 5,637 | - |
Special dividend for 2016 of 8.00p paid 24 April 2017 | 6,732 | - |
Final dividend for 2016 of 15.85p paid 1 July 2017 | 13,360 | - |
Interim dividend for 2015 of 6.00p paid 2 January 2016 | - | 5,048 |
Special dividend for 2015 of 6.00p paid 25 April 2016 | - | 5,048 |
Final dividend for 2015 of 14.70p paid 1 July 2016 | - | 12,368 |
| 25,729 | 22,464 |
Interim dividends of 7.55p per share (2016: 6.70p per share) are provided for when the dividend is paid. The dividend was paid on 3 January 2018 and totalled £6,372,000.
The final proposed dividend of 17.25p per share (2016: 15.85p per share) will not be provided for until authorised by Shareholders at the forthcoming AGM. There are no income tax consequences.
The total value of dividends proposed but not recognised at 31 December 2017 is £20,932,000 (2016: £18,997,000 excluding special dividend).
6 Acquisitions
On 28 February 2017, a subsidiary company of Headlam Group plc entered into an agreement to acquire Mitchell Carpets Limited. The company is a distributor of floorcovering in the south east of England.
On 28 April 2017, a subsidiary company of Headlam Group plc entered into an agreement to acquire the business and certain assets of McMillan Flooring. McMillan Flooring is a distributor of contract floorcovering in Scotland.
On 7 December 2017, Headlam Group plc entered into an agreement to acquire Domus Group of Companies Limited and its subsidiary entities. The Domus Group is the UK's leading specification consultant and supplier of hard surfaces for premium construction and refurbishment projects.
The acquired businesses contributed revenues of £4.5 million and an operating loss of £0.1 million to the Group for the year ended 31 December 2017. If the acquisitions had occurred on 1 January 2017, pro-forma revenue and operating profit for the year ended 31 December 2017 would have increased by £33.9 million and £3.1 million respectively.
Details of the acquisitions are provisional and are shown in aggregate below:
| Acquiree's book value £000 | Fair value adjustments £000 | Acquisition amounts £000 |
| ||
Acquiree's provisional net assets at the acquisition date: |
|
|
|
| ||
Intangible assets | - | 11,809 | 11,809 |
| ||
Acquired goodwill | 8,778 | (8,778) | - |
| ||
Tangible fixed assets | 870 | - | 870 |
| ||
Inventories | 3,893 | (747) | 3,146 |
| ||
Trade and other receivables | 6,192 | 375 | 6,567 |
| ||
Cash at bank and in hand | 2,171 | - | 2,171 |
| ||
Trade and other payables | (7,190) | 254 | (6,936) |
| ||
Borrowings | (6,643) | (399) | (7,042) |
| ||
Provisions | - | (195) | (195) |
| ||
Deferred tax | - | (1,914) | (1,914) |
| ||
Net identifiable assets and liabilities | 8,071 | 405 | 8,476 |
|
|
|
Goodwill on acquisition |
| 23,396 | 23,396 |
| ||
Consideration |
|
| 31,872 |
| ||
Satisfied by: |
|
|
|
| ||
Cash |
|
| 26,934 |
| ||
Deferred and contingent consideration |
|
| 4,938 |
| ||
|
|
| 31,872 |
| ||
|
|
|
|
| ||
Analysis of cash flows: |
|
|
|
| ||
On completion |
|
| 26,934 |
| ||
Cash acquired |
|
| (2,171) |
| ||
Borrowing repayment |
|
| 7,042 |
| ||
Costs of acquisition |
|
| 869 |
| ||
|
|
| 32,674 |
| ||
Professional fees of £0.9 million were incurred on the acquisitions and have been expensed to the income statement within administration expenses.
The book value of receivables given in the table above represents the gross contracted amounts receivable. At the acquisition date, the entire book value of receivables was expected to be collected.
Goodwill of £23.4 million arose on the acquisitions, there were also intangible assets on acquisition of £11.8 million which were attributed to brand names, order book and customer relationships as shown in note 11. During the year £0.9 million of intangibles have been amortised to the income statement.
The residual goodwill reflects the significant benefit the acquisitions will have on the Group by bringing further geographic coverage, offering an expanded product range, developing a more sophisticated customer route to market, providing an additional avenue for growth and a different order profile. The Domus acquisition is complementary to the Group's market-leading core business which supplies a high volume of small orders into both the residential and commercial sectors and has minimal overlap in terms of current product lines, suppliers and customer base. Domus diversifies and broadens Headlam's overall position in the floorcoverings market with entry into ceramics and an increased weighting in engineered wood, LVT and laminate, incorporating product lines that continue to achieve ongoing growth in the market.
In addition, Domus significantly increases the Group's presence in the commercial specification market and brings considerable expertise into the Group, providing a platform to pursue further domestic and international growth opportunities.
Furthermore, acquired businesses gain access to the Group's extensive product ranges and benefit from enhanced sales and marketing investment. These changes typically enable acquired businesses to enhance the service provided to their customers and ultimately, develop and grow.
Deferred and contingent consideration
The acquisition of Domus Group of Companies Limited was financed by initial cash consideration of £24.2 million paid on completion and satisfied by the Group's existing cash and debt facilities; a deferred consideration of £3.3 million, payable in cash and Ordinary shares of 5 pence each in the capital of the Company ('Ordinary Shares'), of which £1.6 million is payable on 7 December 2019 and £1.7 million is payable on 7 December 2020; and a further maximum contingent consideration of £2.7 million, payable in cash based on Domus achieving certain EBITDA targets over the three-year period ending 31 December 2020.
The deferred and contingent consideration have been discounted back and reported at present value, and contingent consideration has been recognised based on management's assessment of the probability of it being paid.
There were no acquisitions made by the Group during the year ended 31 December 2016.
7 Subsequent events
Management has given due consideration to any events occurring in the period from the reporting date to the date these financial statements were authorised for issue and has concluded that there are no material adjusting or non-adjusting events to be disclosed in these financial statements, with the exception of the acquisition of Dersimo BV. On 2 March 2018, Headlam Holdings BV, a group subsidiary company acquired 100% of the issued share capital of Dersimo BV, a floorcovering distribution business based in The Netherlands, for a consideration of €4.1 million, subject to finalising the net assets position.
8 Additional information
The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2017 or 2016 but is derived from those accounts. Statutory accounts for 2016 have been delivered to the registrar of companies, and those for 2017 will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.
The Company anticipates that the Company's statutory accounts will be posted to shareholders during March 2018 and will be displayed on the Company's website at www.headlam.com during March. Copies of the statutory accounts will also be available from the Company's registered office at Headlam Group plc, PO Box 1, Gorsey Lane, Coleshill, Birmingham, B46 1LW.
This final results announcement for the year ended 31 December 2017 was approved by the Board on 6 March 2018.