14th Sep 2006 07:02
Swallowfield PLC14 September 2006 SWALLOWFIELD PLC ANNOUNCEMENT OF PRELIMINARY RESULTS FOR THE YEAR ENDED 30 JUNE 2006 Chairman's Statement Highlights The trading results below cover a 53 week period to 30 June 2006 (2005: 52week); • Net debt reduced by 15.5% to £7.13m (2005: £8.44m);• Turnover increased by 12.5% to £49.00m (2005: £43.54m);• EBITDA (pre exceptional costs) increased by 14.6% to £2.10m (2005: £1.83m);• Operating profit before exceptional items increased by 44.8% to £0.60m (2005: £0.41m);• Exceptional costs £0.56m (2005: £nil);• Loss before taxation £0.45m (2005: loss £0.20m); These results show that the first stage of the turnaround, underpinningprofitability, strengthening the balance sheet, and rebuilding confidence, isunderway. Results and Background Operating profit before exceptional items for the year was £0.60m which, afteran interest charge of £0.49m and net exceptional costs of £0.56m, resulted in aloss before taxation of £0.45m. These results are slightly better thanexpected. The business environment has been challenging for the last 18 months. Costpressures from utilities, and oil and metal related raw material prices, havecontinued. Retail spending has remained weak in our sector, and competitivepressures have limited our ability to pass on all of these increased costs. During the second half, operating profit before exceptional items was £0.62m andthis compares favourably to the operating loss before exceptional items of£0.02m in the first half of this year and the operating loss of £0.43m made inthe second half of last year. Many of the restructuring and efficiencyimprovements that we put into place at the turn of the year, are beginning todeliver results. At the same time, we commenced the supply of cosmetics to amajor new customer which should provide an annualised turnover of around £2m. Our operation in China continues to be a positive addition to the Group, both interms of profitability enhancement and sourcing capability. We have recentlyshipped our first accessory products from China to the UK and we see this as agrowth area for us in the medium to long-term. Cash and Net Debt Continued focus on working capital management, together with a reduction in ourcapital expenditure programme, enabled us to reduce net debt by £1.31m to£7.13m, from £8.44m last year. This is an encouraging result, particularlytaken against a background of having paid £0.68m in restructuring costs. Following a comprehensive and competitive tendering process, we recently changedthe Group's main bankers to Barclays Bank plc from Royal Bank of Scotland plc.The change was made to take advantage of the improved facility structure andquantum on offer from Barclays. Cosmetics Division At 30 June 2006, the Cosmetics division was utilising £6.4m of net assets, areduction of £1.2m over the previous year. Even though the division hasgenerated operating cash flow of £1.3m before corporate cost allocations overthe last 2 years, it has not been making a satisfactory return on net assets. Following the recent strategic review, the Board has set a hurdle level ofreturn on assets (before corporate cost allocations) of 12% for this division.We have concluded that, at present, we would be unable to realise the net assetvalue of this division by means of either a trade sale or a wind-up and aredetermined to enhance shareholder value through a combination of profitabilityimprovement and robust asset management. This strategy will be vigorously pursued and includes a combination of overheadreductions, lower unit labour costs through automation, additional outsourcingof production to the Far East, and a continued move to reduce assets used. Todate, annual overhead costs have been cut by a further £0.3m. Net assets willdecrease by £1.1m from year-end levels, by the end of January 2007, followingthe close-out of the M&S colour cosmetics contract. Our relationship with M&S,however, remains strong and our business in Household and Toiletries is growing. As an additional step towards this strategy, we have reached agreement toestablish a long-term partnership with a Chinese manufacturer for them to supplycolour cosmetic products to us for sale into our European market. Our partnerwill build a factory to our required standards and provide us with exclusivityof supply into Europe. In return we will supply them with intellectual propertyin respect of formulations, quality standards and manufacturing know-how. Wewill update you on progress in due course. We are in ongoing negotiations on four specific contract opportunities which, inaggregate, would enable the division, on a fully established basis, to go wellbeyond meeting the hurdle rate of return. We will be rigorous in our evaluationof these and any other opportunities, and have set a target that by the end ofJanuary 2007, we will be in a position to categorically decide on future plansand update shareholders accordingly. Looking Forward We do not anticipate any upturn in the general business environment and do notexpect the market for our products, particularly in Western Europe, to grow atany significant rate and, as a consequence, our current planning horizons takethis into account. The first phase of our turnaround is ongoing and our renewed focus on marginimprovement and product capabilities will lead to a reduction in turnover in thecoming year. Additionally, internal targets to improve efficiencies throughoutthe business and to reduce material costs should ensure that our operatingresults show continued improvement in profit. The next phase of the turnaround can now begin in earnest. Our corporatepurpose has been amended to "Creating and Delivering Solutions for ourCustomers' Success". Over the next year, in support of this purpose, we willextend product capabilities in China and other low cost locations; we willinitiate plans to ensure we have a team which is trained and capable; we willconcentrate on continuously improving our cost base and service levels. Theseactions should enable us to deliver profitable sales growth in the medium term. We continue to review the Group's balance sheet and expect that we can furtherreduce our net debt position in the coming year. At the same time, it is imperative that we continue to maximise the use of ourskills to focus on developing products for our customers that consumers want tobuy. We are determined to stay ahead of our competition, whilst looking tobroaden our offering of products which we do not manufacture. Dividend Policy It is the Board's intention to resume dividend payments as soon as is reasonablypossible after achieving our first priority of strengthening the Group's balancesheet. Following this, we expect to resume dividend payments using anapproximate dividend cover of three times with a progressive approach to futuredividends over time. S J WinningChairman14 September 2006 GROUP INCOME STATEMENTFor the year ended 30 June 2006(Results for 2005 have been restated for IFRS) 2006 2005Continuing Operations Notes £'000 £'000 Revenue 1 48,995 43,539Cost of sales (42,779) (37,227) Gross profit 6,216 6,312Commercial and administrative costs (5,621) (5,901) Operating profit before exceptional items 595 411Exceptional items reorganisation costs (684) renegotiation of Jubilee costs 431 other exceptional costs (310) (563) - Operating profit 2 32 411Finance income 6 7Finance costs (488) (615) Loss before taxation (450) (197)Taxation 3 182 102 Loss for the year (268) (95) Attributable to equity shareholders (268) (95) Loss per share - basic and diluted 4 (2.4p) (0.8p) GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSEFor the year ended 30 June 2006 2006 2005 £'000 £'000Loss for the year (268) (95)Total recognised income and expense for the year (268) (95) GROUP BALANCE SHEETAs at 30 June 2006 2006 2005 £'000 £'000ASSETSNon-current assetsProperty, plant and equipment 12,324 13,035Intangible assets 66 65 12,390 13,100Current assetsInventories 7,347 9,312Trade and other receivables 9,518 8,822Assets held for sale 51 -Current tax receivable - 74Cash and cash equivalents 10 25Total current assets 16,926 18,233 Total assets 29,316 31,333 LIABILITIESCurrent liabilitiesTrade and other payables (9,555) (9,191)Interest-bearing loans and (2,526) (2,052)borrowingsTotal current liabilities (12,081) (11,243) Non-current liabilitiesInterest-bearing loans and (4,612) (6,379)borrowingsPost retirement benefit (2,677) (2,605)obligationsOther long-term employee - (482)benefitsDeferred tax liabilities (228) (380)Derivative financial (4) (37)instruments Total non-current liabilities (7,521) (9,883) Total liabilities (19,602) (21,126) Net assets 9,714 10,207 EQUITYShare capital 563 563Share premium 3,796 3,796Revaluation reserve 96 110Profit and loss account 5,259 5,738Total equity 9,714 10,207 GROUP CASH FLOW STATEMENTFor the year ended 30 June 2006 2006 2005 £'000 £'000Cash inflow from operating activitiesLoss before taxation (450) (197)Depreciation 1,389 1,397Amortisation 28 23(Profit)/loss on disposal of equipment (1) 24Impairment of property, plant and equipment 84 -Impairment of intangible assets 2 -Finance income (6) (7)Finance cost 488 615Decrease/(increase) in inventories 1,965 (1,330)(Increase)/decrease in trade and other (696) 5,397receivablesIncrease/(decrease) in trade and other 486 (3,205)payables(Decrease)/increase in other long-term employee benefits (482) 12Increase in retirement benefit obligations 15 70Cash generated from operations 2,822 2,799 Finance expense paid (583) (458)Taxation recovered/paid 101 (232)Net cash flow from operating activities 2,340 2,109 Cash flow from investing activitiesFinance income received 6 7Purchase of property, plant and equipment (813) (1,204)Purchase of intangible assets (31) -Sale of property, plant and equipment 1 4Net cash flow from investing activities (837) (1,193) Cash flow from financing activitiesCapital element of finance lease liabilities (230) (345)Repayment of loans (1,421) (3)Dividends paid (225) (541)Net cash flow from financing activities (1,876) (889) Net (decrease)/increase in cash and cash equivalents (373) 27 Cash and cash equivalents at beginning of year (1,737) (1,764) Cash and cash equivalents at end of year (2,110) (1,737) Cash and cash equivalents consist of:Cash 10 25Overdraft (2,120) (1,762)Cash and cash equivalents at end of year (2,110) (1,737) NOTES: 1. Turnover and Segmental Analysis 2006 2005 Revenue Profit/ Net Revenue Profit/(loss) Net (loss) assets before tax assets before taxClass of business £'000 £'000 £'000 £'000 £'000 £'000 Toiletries products 36,318 819 11,481 31,788 227 12,655Cosmetics products 12,677 (224) 6,396 11,751 184 7,565 48,995 17,877 43,539 20,220 Operating profit 595 411before exceptionalitems Exceptional items (563) -Operating profit 32 411Net finance costs (482) (608) Loss before tax (450) (197) Unallocated net (8,163) (10,013)liabilities Group net assets 9,714 10,207 Geographic segmentBy destination: UK 41,001 35,394 Other Europe 7,754 7,379 Rest of World 240 766 48,995 43,539 All turnover is derived from operations established in the UK. Unallocated net liabilities comprise bank loans, overdrafts, finance leases andtaxation. 2. Loss before taxation 2006 2005 £'000 £'000This is stated after charging:Depreciation of tangible fixed assets: Leased assets 261 273 Purchased assets 1,128 1,124Amortisation of intangible assets 28 23Impairment of property, plant and equipment 84 -Impairment of intangible assets 2 -Research and development 726 686Foreign exchange losses/(gains) 4 (31)Operating leases: Hire of plant and machinery 82 57 Rent of buildings 77 87Auditors' remuneration: Audit services 44 51 Non-audit services 48 98Other exceptional items 310 - Other exceptional items relate to legal and professional fees for an abortive acquisition andother non-recurring items 3. Taxation 2006 2005 £'000 £'000(a) Analysis of tax credit for the yearUK corporation tax: on loss for the year - - adjustment in respect of previous years (30) (76)Foreign tax: adjustment in respect of previous years - 5Total current tax credit (30) (71) Deferred tax:Origination and reversal of timing differences: on losses for the year (152) (38) adjustment in respect of previous years - 7Total deferred tax (152) (31)Total tax on loss on ordinary activities (182) (102) (b) Factors affecting current tax credit for the year The tax assessed on the loss on ordinary activities for the year is lower than the standard rateof UK corporation tax of 30% (2005: 30%). The differences are reconciled below: 2006 2005 £'000 £'000Loss before tax at 30% (135) (59)Expenses not deductible for tax purposes 38 25Effect of R&D tax credits (25) -Capital allowances for the year in excess of depreciation (17) (45)Other timing differences (148) 79Tax losses carried forward 287 -Current tax credit - - 4. Loss per Share 2006 2005(a) Basic and dilutedLoss for the year (£000) (268) (95)Basic weighted average number of ordinary shares in issue 11,256,416 11,256,416during the yearDilutive potential ordinary shares - executive share options - 14,970 11,256,416 11,271,386Loss per share (2.4p) (0.8p)(b) Adjusted earnings/(loss) per shareBasic and dilutedLoss for the year (£000) (268) (95)Add back: Exceptional items 563 -Notional tax charge on exceptional items (169) -Adjusted profit/(loss) before exceptional items 126 (95)Basic weighted average number of ordinary shares in issue 11,256,416 11,256,416during the yearDilutive potential ordinary shares - executive share options - 14,970 11,256,416 11,271,386Adjusted earnings/(loss) per share 1.1p (0.8p) 5. Notes to Statement of Cash Flows (a) Reconciliation of cash and cash equivalents to movement in net debt: 2006 2005 £'000 £'000(Decrease)/increase in cash and cash equivalents (373) 27Net cash outflow from decrease in borrowings 1,651 348Change in net debt resulting from cash flows 1,278 375Net debt at 1 July (8,443) (8,753) (7,165) (8,378)Fair value of swaps hedging fixed rate borrowing 33 (65)Net debt at 30 June (7,132) (8,443) (b) Analysis of net debt 1 July 2005 Fair value 30 June adjustment 2006 £'000 Cashflow £'000 £'000 £'000Cash at bank and in hand 25 (15) - 10Bank overdraft (1,762) (358) - (2,120)Cash (1,737) (373) - (2,110)Borrowings due within one year - (147) - (147)Borrowings due after one year (6,000) 1,568 - (4,432)Finance leases (669) 230 - (439) (8,406) 1,278 - (7,128)Fair value of swaps hedging fixed rate borrowing (37) - 33 (4)Total (8,443) 1,278 33 (7,132) 6. Statutory Accounts The financial information does not constitute statutory accounts as defined insection 240 of the Companies Act 1985, but has been extracted from the statutoryaccounts for the year ended 30 June 2006, on which an unqualified audit reporthas been issued and which will be delivered to the Registrar following theiradoption at the Annual General Meeting. The statutory accounts for the financial year ended 30 June 2005 have beendelivered to the Registrar of Companies with an unqualified audit reportthereon. Copies of the 2006 Annual Report and Accounts will be posted to shareholders by29 September 2006. Further copies may be obtained by contacting the CompanySecretary at Swallowfield plc, Swallowfield House, Station Road, Wellington,Somerset, TA21 8NL. 7. Annual General Meeting The Annual General Meeting will be held on Thursday 2 November 2006 at theCompany's Registered Office, at 12.00 noon. 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