Final Results

HAVELOCK EUROPA PLC

("Havelock Europa","Havelock" or the "Company" or the "Group")

Final Results

Havelock Europa (HVE.L), the international interiors solutions group, is pleased to announce its Final Results for the year to 31 December 2014.

Financial Highlights

· Business debt free as at 31 December 2014 with net cash at bank of £1.4m, offset by Hire Purchase ("HP") and leasing debt of £1.2m. (2013 net debt:£0.3m)

· Group operating profit before exceptional items of £0.5m (2013: £1.1m)

· Pre-tax profit before exceptional items of £0.2m (2013: £0.6m)

· Group revenue of £83.4m (2013: £89.6m)

Operational Highlights

· Secured new three year framework contract with the Post Office

· Secured framework contract with ISS for delivery to Financial Services and other clients

· Won first major Healthcare orders

· International business now accounts for more than 10% of Group revenue, as targeted

· Launch of the graduate training and senior management leadership programmes

Outlook

· Recovery in Education underway, will continue through 2016

· International activity continues to make good progress

· Financial Services and Retail markets expected to be challenging

· Opening order book of £25m secured (2014: £14m)

· Head Office move and Enterprise Resource Planning ("ERP") system will bring significant benefits to the business

David MacLellan, Chairman of Havelock Europa, said:

"Whilst 2014 was a challenging year for the Group, progress continued to be made in developing a broader mix of business and laying foundations for the future. It is particularly pleasing to report that, as at 31 December 2014, the business was effectively debt free. Bank debt at 31 December 2009 was £19.4m and this movement reflects the progress that has been made over the last five years.

Looking forward, the Company is focused on continuing to diversify its customer base across its chosen sectors and reducing its reliance on second half performance. The upcoming office relocation and ERP implementation should bring cost benefits and improve our overall efficiency.

I am pleased to be able to announce our new graduate training and senior management leadership programmes which together with our apprenticeship scheme launched last year, demonstrates our commitment to the local community and the future of our business."

Enquiries

Shan Shan Willenbrock

Tom Horsman

www.havelockeuropa.com

CHAIRMAN'S STATEMENT

The 12 months ending December 2014 was a challenging period for the business, largely as a result of the lower than expected activity in the Education sector, coupled with the downturn in Financial Services. However, progress continued to be made in debt reduction and in developing a broader mix of business, in line with the strategy set by the Board.

Financial Overview

Stronger Retail and International sales helped to offset some of the impact of the reduced activity in the Education and Financial Services sectors. Group revenue for the year ended 31 December 2014 was £83.4m (2013: £89.6m) and Group pre-tax profit, before exceptional costs, was £0.2m (2013: £0.6m). Exceptional costs in the period, which are detailed in the Operational and Financial Review, totalled £5.9m.

Financial Position

At 31 December 2014, the Group was effectively debt free with net cash at bank of £1.4m (2013: £0.1) offset by hire purchase and leasing debt of £1.2m (2013: £0.4m). Since the year end, the Group has agreed a new £5m overdraft facility, repayable on demand and subject to review in April 2016.

The sale of Dalgety Bay and lease of new premises at Kirkcaldy was completed with Fife Council on 2 April 2015 and the head office relocation remains on plan for the start of May. The net proceeds of £0.7m from the sale of Dalgety Bay will be reinvested in fitting out the new head office.

The Group has changed its operating procedures and is rationalising its stock holding policy to hold fewer and newer lines so that it no longer needs to carry so much stock. The surplus stock will, where possible, be disposed of and the Group has made an exceptional provision against its carrying value.

During the year, we consolidated the operations of Stage Systems with the Interiors business. Following a review of the trading prospects of Teacherboards, the Board has reassessed the carrying value of the related goodwill and has decided to write this off in full.

The exceptional costs incurred in the year, together with an increased pension deficit, has resulted in a reduction in Shareholders' funds to £12.9m (2013: £20.5m).

During 2014, we invested £1.1m in a new ERP system which is planned to go live at the end of 2015 and should bring cost benefits to the business and improve overall efficiency.

Dividends

No dividend is proposed for this year. When the Group's profitability has further improved, the Board will consider the resumption of dividend payments.

Future Strategy

The focus of the business continues to be centred on developing and diversifying across five main sectors: Retail, Financial Services, Education/Accommodation, Healthcare and International. Retail, Financial Services and Education are currently the strongest and most mature sectors and each is capable of delivering around 30% of Group revenue. Over the long term, we aim to create a balance between sectors with no one sector contributing more than 30% of long term sales. Expansion of Healthcare and International are key elements of this strategy.

International sales in 2014 exceeded our target of 10% of Group revenue and we have set a new goal of 15%. Healthcare revenue is currently small but rising, and in the near term, we have plans to grow this to 5%. Within Retail we had a strong 2014, but the sector remains very competitive and we are concentrating on winning new customers to increase our resilience. A similar strategy is being developed in Financial Services as we see this sector becoming more challenging over the next few years. In 2013, Financial Services accounted for 43% of revenue; in 2015 we expect this to be below 30%. Education is expected to rebound strongly over the next two years and we are working hard to ensure that this improvement is sustainable in the longer term. Whilst the diversification across sectors helps to balance the business better, we remain over-reliant on second half performance, with more than 60% of sales occurring in the period July to December. This remains an area of risk that we are actively addressing.

Margin enhancement remains a key focus for the business and the ongoing development of the ERP system will enable us to identify opportunities to effect more efficient and effective delivery of projects for our customers, thereby reducing costs and enhancing the customer experience.

The Board

Following the statement on 30 January 2015 that Eric Prescott would be leaving the company during the course of the year, we announced on 30 March 2015 that Mr Prescott had ceased to be Chief Executive and had also resigned as a Director of the Company. Work is ongoing to identify and appoint a new CEO and an announcement will be made in due course. The Board would like to thank Eric for his contribution over the last four and a half years.

On 30 March 2015, we also announced that David Ritchie had been appointed to the Board. Mr Ritchie joined the Company in 2013 as Group Commercial Manager and we are delighted that he has agreed to take on the newly created role of Chief Operating Officer.

As in previous years, I would like to pay tribute to all of our colleagues in the Group and to record the Board's thanks for their hard work and contributions over the course of the last year.

Outlook for 2015

Consistent with previous years, the Company has a high dependence on second half orders which makes visibility on the outlook for the full year difficult. However, we will benefit from an opening order book of £25m at the start of the year £20m of which is for delivery in 2015 which compares with £14m at the same time last year. In addition, the Board believes that the improved sector balance and broader customer base mean that the Group is in a stronger position to maximise the opportunities that lie ahead. 

David MacLellan

Chairman

OPERATIONAL AND FINANCIAL REVIEW

Operational Review

Interiors

With reduced activity in both Financial Services and Education, revenues from Interiors for the year, at £76.9m, were 7% down on the prior year (2013: £82.2m). Due to the revenue shortfall, operating profits before exceptional costs fell from £2.1m to £1.7m, but this fall would have been more pronounced had we not benefited from a better sales mix.

In Retail, we had a strong 2014, delivering a number of key initiatives for our established customer base. These initiatives were supported by the development of an Eastern European supply chain that complements our existing UK and China capabilities. During 2015, we aim to develop the new relationships established with a number of major retailers into significant sales. Within Financial Services a number of our customers are evaluating their offering which has led to reduced opportunities from their estates in the year and to counter this we need to develop the new relationships with clients such as ISS, whilst at the same time optimising the opportunities provided from winning a new three year framework contract with the Post Office.

The recovery in Education, forecast for 2015, has now commenced and we expect to benefit from this throughout 2015 and 2016. In addition, and underpinned by the two major orders secured in 2014, we expect Healthcare to start delivering significant sales from 2015 onwards. International recorded a strong performance in 2014, delivering volumes in excess of 10% of Group revenue. This was achieved by the continued development of our relationship with a major Australian retailer and by partnering with a number of our established UK customers' overseas operations. For 2015 we expect to continue this development.

Development of the ERP system commenced in September 2014. The design process is complete, the build phase has commenced and we remain on course for implementation in Q4 2015. In December, we signed Heads of Terms with Fife Council for the sale of the Dalgety Bay office and warehouse facility and the lease of new office premises in Kirkcaldy, close to our manufacturing facility. Plans to effect the move are well developed and the business will relocate early in May 2015. The stock rationalisation programme announced at the end of December in conjunction with the office move is on target and will achieve its first milestone of clearing all stock from Dalgety Bay by May 2015.

Educational Supplies

2014 was a difficult year for the educational supplies businesses. Revenues, at £6.9m were 21% down on the prior year (2013:£8.7m), partially reflecting the withdrawal from the Sound, Light and Seating business effected at the end of October. This exit was part of the full restructure of Stage Systems and, since the year end, this business has been incorporated within Interiors. The Teacherboards business also had a challenging year with reduced opportunities in universities, schools and Interiors.We continue to develop our Web-based sales offering and good progress was made on this in the year.

Management and Staff

During the year, we launched our first Graduate Recruitment Programme, successfully recruiting five graduates who joined the Group across various departments including Manufacturing, Finance, Design and Projects. This year we are continuing with our Apprentice Programme, recruiting a number of young people to join the Group in manufacturing and office training. We continue to invest in our Leadership population with over 30 leaders currently enrolled in a long-term development programme.

Current Trading and Prospects

The upturn in Education activity forecast for 2015 and 2016 is expected to more than offset the ongoing weakness in the Financial Services sector. However, the continued reliance on second half orders, particularly in Retail, means that visibility on the year end out-turn remains difficult. We will benefit from the carry in of £20m of orders for delivery in 2015 ( 2014:£13.8m) and trading performance for the year to date is as expected.

We are continuing to pursue our strategy of diversifying the business across and within sectors to increase resilience and reduce dependence on particular markets and customers. We are also continuing to invest in the development of the business and its people and expect the head office relocation (May 2015) and completion of the ERP project to generate further opportunities for cost reduction, operational efficiency and improved margins.

Financial review

Results for the year and financial position

Revenues for the year at £83.4m were 7% lower than the previous year (2013: £89.6m). A better margin sales mix helped mitigate the volume shortfall but pre-tax profits, before exceptional costs, fell to £0.2m (2013: £0.6m). In addition, exceptional costs of £5.9m were incurred in the year and these were as follows:

These exceptional costs, together with an increase in the pension scheme deficit to £3.7m, have reduced net assets from £20.5m to £12.9m.

Taxation

 As the business is carrying forward substantial losses, the Group does not expect to be in a tax paying position for a significant period of time.

Cash flow

The Group generated operating cash flows before changes in working capital and provisions of £0.6m (2013: £1.9m) in the year. The continued focus on working capital management has enabled the business to generate net cash from operations of £1.8m (2013: £2.3m). Capital expenditure of £1.3m (2013: £1.2m) was mainly centred on the ERP project and was largely funded by finance leases.

Net debt and bank facilities

Building on the progress made over the previous four years in reducing bank debt from £19.4m at 31 December 2009, it is particularly pleasing to note that, as at 31 December, the business was effectively debt free with net cash at bank of £1.4m and hire purchase / leasing debt of £1.2m (2013: cash £0.1m, leases £0.4m). The Group has the support of the following facilities:

· An overdraft facility of £5m which is subject to review in April 2016

· Finance lease facilities of £1.2m fully drawn

Going concern accounting basis

The Group's business activities, together with the factors likely to affect its future development, performance and position, are set out in the Chairman's Statement and the Operational Review section of this Operational and Financial Review. The financial position of the Group, its cash flows and liquidity position are set out in the financial statements.

During the year, the Group operated under a bank facility which included a term loan, a revolving credit facility, HP finance and an overdraft facility. The facilities, excluding HP finance, have been amended and have now been consolidated into a £5m overdraft facility which is subject to review in April 2016. As set out in Note 1 (Basis of Preparation), the Group expects to be able to comply with the conditions of the Group's bank facilities based on its forecasts.

The directors, therefore, have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, the directors continue to adopt the going concern basis in preparing the annual report and accounts.

Principal risks and uncertainties

The Group must operate within its bank facilities. As set out in Note 1, the Group's financial forecast shows that this can be achieved. A material disruption to the Company's business or a shortfall in operational or financial performance could mean that the Group's ability to operate within its overdraft facility would be at risk. The Group addresses this risk by detailed monitoring of financial performance and the expected outcome for each measurement period.

The Group's businesses have a strong seasonal element, with a peak of activity in the middle and second half of the year. This could result in peak output requirements exceeding the available capacity. The Group manages this risk by detailed and regular capacity planning reviews, with additional shifts and early production being planned.

The Group operates in highly competitive markets and deals with major customers who increasingly employ procurement strategies designed to ensure that all purchases, and not just those of stock items, are acquired at the lowest possible cost. The business is addressing this risk by seeking production cost savings including, where appropriate, procurement from lower cost overseas suppliers.

The Group is involved as a supplier to major construction projects which can be subject to time delays and slippage caused by both commercial and weather-related issues. The business addresses this risk by building allowance for slippage into its production forecasts and budgets.

The Group undertakes work as a sub-contractor under industry standard written contracts. The risks involved in working under such contracts are controlled by the employment of qualified and knowledgeable contract managers and quantity surveyors.

The largest element of working capital employed by the Group is trade receivables and accrued income. These are subject to credit risk and, as a consequence, the Group employs credit insurance to cover the risk on most of its commercial debtors. However, in addition to debt owed by the public sector and local government, the Group bears the credit risk on a proportion of receivables where its credit insurers are unwilling to provide cover. The Group's procedures require that material uninsured credit limits are approved by the Board. The Group also monitors the credit status of its major customers.

Key performance indicators

Havelock Europa's Board and Group Management monitor a range of financial and non-financial indicators, reported on a periodic basis, to measure the Group's performance over time.

Of these, the key performance indicators (KPIs) are:

Financial

Non-financial

Pension scheme

As at 31 December 2014, the deficit on the Group's final salary pension fund was £3.7m, significantly up from the £1.3m deficit recorded in 2013. As the pension assets contributed a positive return, the deficit has increased largely due to the reduction in corporate bond yields across the market. Corporate bond yields are used to discount the schemes liabilities.

During 2014, the Pension fund Trustees and the Board reviewed the allocation of the scheme's investment assets which contained a relatively high exposure to equities. The review resulted in a decision to reduce the equities allocation. Given the large volatility associated with the schemes liabilities, the Trustees are reviewing options within the market place to better hedge some of this risk.

David Ritchie Ciaran Kennedy

Chief Operating Officer Group Finance Director

Consolidated Income Statement

Consolidated Statement of Comprehensive Income

Balance Sheet

Cash Flow Statement

for the year ended 31 December 2014

Statement of Changes in Equity

for the year ended 31 December 2014

Notes to the financial statements

1. 

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2014 or 2013 but is derived from the 2014 accounts. Statutory accounts for 2013 have been delivered to the Registrar of Companies and those for 2014 will be delivered in due course. The auditor has reported on those accounts; his reports (i) were unqualified, (ii) did not include references to any matters to which the auditor drew attention by way of emphasis without qualifying his reports and (iii) did not contain statements under either section 498(2) or section 498(3) of the Companies Act 2006.

Basis of preparation

The consolidated financial statements comprise Havelock Europa PLC and its subsidiaries. The financial statements of subsidiaries are prepared to the same reporting date using accounting policies consistent with those of the parent company. Intra-group transactions and balances, including any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in full.

As at 31 December 2014, the Group was debt free with headroom of £4 million on committed facilities at that point.

Cash flow forecasts have been prepared for the period through to 31 December 2016, including sensitivity analyses, taking account of the risks and uncertainties facing the Group as detailed in the Operational and Financial Review. These forecasts assume, as in previous years, that the payment terms with some of the group's debtors and creditors will be carefully managed during the periods of peak working capital requirement. The directors have identified further mitigating steps and in this regard have commenced a review of all overhead costs. Since the year end, the Group has, as detailed on page 5, agreed with its bankers that the £4m revolving credit facility in place at the year-end is replaced with an overdraft facility of £5m. The facility has no covenants, is repayable on demand and is subject to review on 30 April 2016. The Group is projected to operate within this facility for the foreseeable future.

While the directors cannot envisage all possible circumstances that may impact the Group in the future, the directors believe that, taking account of the forecasts, sensitised forecasts, future plans and committed funding levels, the Group has sufficient resources to remain compliant with the relevant covenants and conditions attached to the Group's banking facilities and to meet all debts as they fall due for the foreseeable future.

Accordingly, after making reasonable enquiries, the directors have a reasonable expectation that the Group can continue in operational existence for the foreseeable future and therefore continue to adopt the going concern basis in preparing the financial statements.

Further information regarding the Company's business activities, together with the factors likely to affect its future development, performance and position, is set out in the Operational and Financial Review.

2. Segment reporting

Management information is presented to the main board (the chief operating decision maker) based upon business segments. There has been no change to the operating segments during the year. The reported segments are:

Segment revenues and results

Segment assets

3. Profit before tax

4. Exceptional costs

(a) In December 2014, the company entered into an agreement to sell the Dalgety Bay site and to lease new office premises near the Kirkcaldy factory. The impairment charge relates to the writing down of the carrying value of the existing premises to the agreed consideration of £750,000.

(b) The Group has changed its operating procedures and is rationalising its stock holding policy to hold fewer and newer lines so that it no longer needs to carry so much stock. The surplus stock will, where possible, be disposed of and the Group has made a provision against its carrying value.

(c) Impairment recognised in the carrying amount of goodwill in relation to Teacherboards (1985) Limited.

(d) Compensation for loss of office and fees related to recruitment of new Finance Director.

(e) Redundancy and other costs incurred in the restructuring of the Educational Supplies and Interiors businesses.

5. Income tax expense

Recognised in the income statement

6. Earnings per share

The calculation of basic earnings per share and underlying earnings per share at 31 December 2014 is based on the profit attributable to ordinary shareholders as follows:

The weighted average number of shares used in each calculation is as follows:

Undiluted earnings per share

Diluted earnings per share

8. Trade and other receivables

9. Interest-bearing loans and borrowings

10. Trade and other payables

Amounts disclosed in current liabilities