Havelock Europa Final Results

HAVELOCK EUROPA PLC

("Havelock" or the "Group")

Final Results

Havelock Europa (HVE.L), the international interiors solutions group, announces its results for the year to 31 December 2015.

Financial Highlights

· Group revenue from continuing operations of £70.3m (2014: £79.2m)

· Group operating loss from continuing operations before exceptional items of £0.6m (2014: operating profit £0.4m)

· Pre-tax loss from continuing operations before exceptional items of £0.8m (2014: profit of £0.04m)

· Loss per share from continuing operations before exceptional items of 3.0p (2014: 0.1p)

· Net assets per share 31.6p (2014: 33.6p)

· Business effectively debt free at 31 December 2015 for the second year in succession

· Cash increased to £2m; offset by hire purchasing and leasing debt of £0.9m giving a net cash position of £1.1m (2014: net cash £0.2m)

Operational Highlights

· Head office move completed on time and to budget, expected benefits accruing

· David Ritchie appointed CEO 5 May 2015

· Strategic review of the business, supported by "voice of the customer" exercise, led to a restructuring and right-sizing plan implemented final quarter 2015

· Operational gearing of the business significantly reduced; staff numbers year on year reduced by 20% to 425

· Non-core Teacherboards sold to Sundeala for £1.477m, generating a profit of £0.3m

· Business now organised into three clear divisions, Retail and Lifestyle (including International), Corporate Services and Public Sector

· International activity has increased from 10% to over 15% of Group turnover

Outlook

· Strategy of making the business more agile and able to respond to customer demand beginning to show results

· International retail activity continues to make good progress,; traditional retail activity continues to be challenging

· Have secured orders with a number of new major national customers for 2016 in line with with the strategy of diversifying the core of the business across and within sectors

· Order book for current year delivery of £25m secured, up 25% year on year (2014: £20m); the order book excludes work expected from existing framework contracts

David MacLellan, Havelock Chairman, said:

"2015 was a challenging year with a significant restructuring of the business led by David Ritchie, who was appointed CEO in early May. The scale of this work is reflected in the exceptional costs incurred during the year, with the full benefit of these management actions expected to accrue in 2016. Despite this restructuring and the cash impact it had, the business ended the year with a materially larger net cash balance than the previous year. I am pleased with the progress that David and his team have made and the increased opening order book gives encouragement for 2016".

Enquiries

Havelock Europa www.havelockeuropa.com

David Ritchie, Chief Executive Tel. 01592 648480

Ciaran Kennedy, Finance Director

WH Ireland Group plc (Nomad) Tel. 020 7220 1650

Chris Fielding

Charlotte Street Partners (media enquiries) Tel. 0131 516 5310

David Gaffney

Patrick Galbraith

CHAIRMAN'S STATEMENT

The restructuring and right sizing of the business that we initiated in late summer 2015 is progressing well and the headcount reductions indicated in September and November 2015 were all completed by the end of the year. The business continues to concentrate on simplifying its structure and processes to make it more agile and better able to maximise the customer experience.

For the second year in succession, the business was debt free, on a net basis, at the year end with a cash balance of £2m and an unused overdraft facility of £4.75m.

Financial Overview

Reduced UK retail activity and delayed public sector contracts were the main reasons why sales from continuing operations fell by 11% in the year to £70.3m (2014: £79.2m). Management action to reduce costs has contained the operating loss from continuing operations to £0.6m. The full benefit of these management actions should accrue in 2016. Exceptional costs in the year amounted to £1.9m with the bulk of this relating to the business restructuring, as a result of which the business recorded an operating loss of £2.4m.

Financial Position

Since the year end, the Group has agreed a renewal of the existing £4.75m overdraft facility. The renewal also allows for an increased facility of £5.5m over the traditionally busy summer period. The overdraft facility remains repayable on demand and is subject to review in April 2017.

The sale of Dalgety Bay for £0.7m net of costs was completed on 2 April 2015. These monies financed wholly the fitting out of a new modern head office facility at Kirkcaldy, situated very close to the factory. On 5 May 2015 the business relocation was completed seamlessly, on time and on budget. The anticipated benefits of being in a modern, economical and functional workspace, near to the factory, are currently being realised.

On 1 September 2015 the business completed the sale of Teacherboards Limited to Sundeala Limited for a total consideration of £1.447m. Completion accounts for this transaction were finalised in October 2015 and the sale gave rise to a profit of £0.3m.

We continued to develop our new Enterprise Resource Planning ("ERP") system and costs in the year totalled £1.5m. We expect to start a phased implementation of the system from June 2016 and, as well as offering cost and efficiency benefits, this system should provide a framework for better implementation of the new business strategy and enable the business to become more agile and responsive.

Due largely to increased corporate bond rates, the pension deficit at 31 December fell to £1.0m (2014: £3.7m). This reduction partially offset the impact of the losses in the year on shareholders' funds which fell from £12.9m to £12.2m.

Dividends

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

Future Strategy

On 1 September 2015 we announced a streamlining and simplification of the business model designed to focus on and maximise the customer experience across the business. In tandem, a "right sizing" of the business was also announced. The right sizing was designed to reflect changes in Havelock's market places and the Board's expectation was that this would lead to a 10% reduction in staff numbers. These changes will supplement and complement our strategy of diversifying within and across trading sectors.

The announcement, in November 2015, of the reduction in activity for 2016 planned by our largest financial services customer reinforced the necessity of this revised strategy and led to an intensification of the right sizing process. This was completed by the end of the year and, at 31 December 2015, the business had a total staff of 425. On 1 January 2015 staff numbers were 536.

The business is now organised into three divisions, Retail and Lifestyle, including international retail, Corporate Services, which comprises mainly the financial services sector and Public Sector, which includes the education and health care sectors. Over the long term, our goal is to create a balance between divisions and to have a diversified spread of customers within each division with no one customer responsible for more than 10% of sales.

Within Retail and Lifestyle we are having some success in winning new clients. Whilst current volumes are low, the full benefits from these new clients will accrue as these relationships begin to mature and as we deliver a best in class customer experience. Corporate Services is currently the smallest of our sectors but we are developing a number of opportunities and expect to make progress in this sector during the year. Public Sector is currently the largest sector and within it sit education, healthcare and student accommodation. All of these markets are serviced by the large contracting companies and, by combining our offering, we intend to offer customers a one stop shop, leveraging our strong position in education across the other markets.

The Board

After a comprehensive and rigorous selection process, including both external and internal candidates, the Board was pleased to announce that David Ritchie succeeded Eric Prescott as Chief Executive Officer on 5 May 2015.

Due to overseas commitments, Andrew Burgess, the company's largest shareholder, resigned from the Board on 4 June 2015. Andrew was succeeded by Peter Dillon on 6 October 2015. Peter resigned from the Board on 16 December 2015. On behalf of the Board I would like to thank them for their contribution to the business.

The remuneration report in the annual accounts sets out in detail the amounts paid to directors. In relation to the non-executive directors, I am presently paid a salary of £55,000 per year as chairman and the other non-executive directors £30,000 per year. Taking into account the Company's recent performance, with effect from 1 April 2016, I will defer £25,000 per year of my annual salary and the other two non-executive directors will defer £5,000 of their salary until such time as the Company returns to profit.

In what was a challenging year, I would like to pay tribute to the continued positive attitude and focus on customer delivery displayed by our staff as they went through the restructuring process and, on behalf of the Board, I would like to register our thanks to all members of the Havelock team for their contribution during this difficult time.

Outlook for 2016

Supported by an opening order book for delivery in the year of £25m (2015: £20m), current trading within the business is in line with market expectations, which we believe will continue for the first half of the year. Although the business is continuing to progress and diversify, it still retains a high dependence on second half orders which restricts our visibility for the full year outturn. The implementation of the revised strategy of simplifying the business and maximising the customer experience is continuing and the Board believes that this strategy is strengthening our ability to identify and develop opportunities in our chosen markets.

David MacLellan

Chairman

CHIEF EXECUTIVE'S REVIEW

Operational Review

Interiors

Revenues in the year totalled £70.3m (2014: £79.2m). The main reason for the 11% reduction in sales was a weak UK retail market. The reduced sales levels have led to an operating loss before exceptional items from continuing operations of £0.6m. As is noted in the Chairman's Statement, we took decisive action in the latter part of the year to streamline and simplify the business model. This has addressed the business's high operational leverage and, by December 2015, the business had effected a 20% reduction in headcount.

During 2015 we developed a number of new UK retail customers and we will work to turn these relationships into significant accounts over the next few years. This follows our strategy of diversification within market areas. However, the impact of these new customers was not sufficient to negate the reduction in work from one of our major UK retail customers. Consequently, UK retail sales in the period were more than responsible for the 11% reduction in total sales. International retail sales had a good year, recording sales in excess of the 15% of Group revenue which had been targeted.

Thanks to a strong second half, Corporate Services had a good year with both sales and margin above target. This made the announcement in November 2015 that our largest financial services customer will be substantially reducing its anticipated spend on refurbishment and development for the foreseeable future particularly disappointing. This sector was substantially restructured at the end of the year to reflect ongoing opportunities. We continue to target opportunities for both furniture and fit out sales within this market and are pursuing a number of prospects.

Although Public Sector sales improved in 2015, the scale of the increase and the margins achieved were disappointing. Action has been taken to address these issues as part of our restructuring plan and education now forms an integral and large element of our Public Services division. The Public Sector division will be focused on securing work from those markets where the final customer is government funded, primarily education, healthcare and student accommodation.

The restructuring of the business at the end of 2015 interrupted the development and implementation of the ERP system and will result in an increased cost of delivery. However, as well as offering cost and efficiency benefits, the new ERP system will provide a framework to support the new business strategy and will allow the business to become more agile and customer responsive. We expect to start operating aspects of the system from June 2016.

The relocation of the head office from Dalgety Bay to a new modern facility close to the factory in Kirkcaldy, was completed on 5 May 2015. The move is cost neutral for the business and was completed on time, to budget and to a very high standard. As well as providing a modern, safe and productive working environment, this new facility has become a showcase for our office fit out capabilities and this is a market that we intend to target more intensively.

Educational Supplies

On 1 January 2015 the restructured and refocused Stage Systems business was incorporated into the core Interiors operations. This was followed by the sale of Teacherboards Limited to Sundeala Limited on 1 September 2015, as a result of which the Group has now exited the educational supplies market.

Management and Staff

During the business right sizing exercise we selected for retention those employees most likely to adopt and develop the new strategy. The right sizing of the business was an extensive but necessary exercise and I would like to add my thanks to all our staff who continued to perform and remain focused during these challenging times. The right sizing exercise was difficult as it involved a number of staff, some of whom had been with the business many years, leaving the company. I thank them for their contribution to the company and wish them success in finding new opportunities.

Despite the challenges, we continue to invest in our graduate and apprentice programmes and hope to invest further this year. We are also investing in training for our key staff to ensure that we fully respond to the comments received from the voice of the customer interviews we conducted in the year. It is pleasing to note that we fully comply with the UK and Scottish Government's programme of paying the living wage to our UK colleagues.

Current Trading and Prospects

We continue to pursue opportunities that will include new sector activity. We are now targeting these to build on the new customers we have successfully secured within the year and we are working towards converting these opportunities to secure this year's revenue. This involves consolidating on the frameworks awarded, but waiting for the works to be allocated. We remain on track to achieve our first half 2016 market expectations and are cautiously optimistic for the full year.

David Ritchie

Chief Executive

FINANCE DIRECTOR'S REVIEW

Results for the Year and Financial Position

Revenues from continuing operations for the year were £70.3 million. This represents an 11% reduction on 2014 levels (2014: £79.2m) with the reduced activity in UK retail and delayed Public Sector contracts being the main drivers. Management action in the second half of the year to reduce costs and right size the business has contained the operating loss before exceptional items from continuing operations to £0.6m. Discontinued operations generated sales of £2.9m and an operating profit of £41k.

Exceptional costs of £1.9m were incurred in the year and these related largely to the restructuring and right sizing of the business. Overall, the Group made an operating loss of £2.4m (2014: £5.4m loss) for the year on sales of £73.1m (2014: £83.4m).

A reduction of £2.7m in the pension scheme deficit has helped reduce the impact of the losses made and, as a result, net assets of the Group finished the year at £12.2m (2014: £12.9m)

Taxation

The reduction in corporation tax from 20% to 18% has increased the non-cash,tax charge for the year by £0.2m (Note 5). In addition, the Group has decided not to recognise further deferred tax assets in respect of losses incurred during the year.

The Group continues to carry forward substantial losses and does not expect to be in a tax paying position for a significant period of time.

Cash Flow

The continued focus on working capital management has enabled the Group to generate net cash from operating activities in the year to 31 December 2015 of £1.1m (2014: £1.8m). Capital expenditure of £2.3m (2014: £1.3m) represented the continued investment in the ERP project and the investment in the new head office. The head office facility was wholly financed by the release of capital from the sale of the Dalgety Bay site and a further £1.3m of cash was achieved from the sale of Teacherboards.

Net Debt and Bank Facilities

For the second year in succession, the business was debt free on a net basis at the year end. On 31 December 2015 cash at bank totalled £2m, bank debt was nil and hire purchase / leasing debt was £0.9m (2014: net cash £1.4m, leases £1.2m).

The Group has the support of the following facilities:

· An overdraft facility of £4.75m which is subject to review in April 2017 and which allows for an increased overdraft of £5.5m over the traditional busy summer period; and

· Finance lease facilities of £0.9m which are 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 Chief Executive's 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 with bank facilities which included a term loan, a revolving credit facility, HP finance and an overdraft facility. In April 2015 these facilities, excluding HP finance, were amended and consolidated into a £5m overdraft facility and the term loan of £4m was repaid at this time. The new overdraft facility was subject to review in April 2016. After the sale of Teacherboards Limited in September 2015 for £1.477m, the overdraft facility was reduced slightly to £4.75m. Since the year end, the Group's overdraft facility has been extended for a further year and the facility is now subject to review in April 2017. The revised facility allows for an increased overdraft of £5.5m over the traditional busy summer period. 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, or a reduction in the ability to secure appropriate credit terms 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 of 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 has a number of clients each of which constitute more than 10% of revenue. The loss of any one of these would adversely impact the Group's profitability and cash flow. The business focuses on maintaining a good working relationship with all its customers, in particular these larger clients. 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.

The Group operates in highly competitive markets and deals with major customers which 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:

Pension Scheme

Higher corporate bond rates, which place a lower value on the liabilities, were the main driver in the £2.7m reduction in the pension deficit to £1.0m. Given the large volatility associated with the scheme's liabilities, the Trustees are continuing to review options within the market place to hedge better some of this risk. The final salary pension scheme has been closed to both new entrants and further accrual for some time.

Ciaran Kennedy

Group Finance Director

Consolidated Income Statement

Consolidated Income Statement

Consolidated Statement of Comprehensive Income

Consolidated Balance Sheet

Consolidated Cash Flow Statement

for the year ended 31 December 2015

Consolidated Statement of Changes in Equity

for the year ended 31 December 2015

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 2015 or 2014 but is derived from the 2015 accounts. Statutory accounts for 2014 have been delivered to the Registrar of Companies and those for 2015 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 2015, the Group was debt free with headroom of £4.75 million on committed facilities at that point.

Cash flow forecasts have been prepared for the period through to 31 May 2017, including sensitivity analyses, taking account of the risks and uncertainties facing the Group as detailed in the Finance Director's Review. Since the year end, the Group has agreed with its bankers a renewal of the existing £4.75m overdraft facility in place at the year-end. The renewal also allows for an increased facility of £5.5m over the traditionally busy summer period. The facility has no covenants, is repayable on demand and is subject to review in April 2017.

The Group is projected to operate within this facility for the foreseeable future although mitigating action may be required during periods when headroom is tight. These mitigating actions may include, 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.

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 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 Chief Executive's Review.

2. Segment reporting

No segmental analysis has been presented as, following the sale of Teacherboards (1985) Limited, continuing operations consist of a single segment and therefore segmental disclosure has, in effect, been presented on the face of the income statement with the continuing operations representing the interiors segment and the discontinued operations representing the educational supplies segment.

No geographical analysis has been presented as exports constitute less than 18% of revenue. Sales to Lloyds Banking Group plc represent 30% of revenue in 2015 and 26% of revenue in 2014. Sales in 2014 to Marks & Spencer represent 14% of revenue. No other client represents more than 10% of revenue.

3. Loss before tax

4. Exceptional costs

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

(b) 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.

(c) The Group changed its operating procedures and rationalised its stock holding policy to hold fewer and newer lines so that it no longer needed to carry so much stock. The surplus stock was, where possible, disposed of and the Group made a provision against its carrying value.

(d) Compensation for loss of office and fees related to recruitment of a new Chief Executive in the current year and new Finance Director in the previous year.

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 2015 is based on the loss 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. Assets held for sale and discontinued operations

On 31 December 2014, a property at Dalgety Bay in Fife met the criteria for classification as a non-current asset held for sale under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. As such, the relevant carrying values were reclassified from Property, plant and equipment to Non-current assets classified as held for sale.

An impairment charge of £740,000 was applied to reduce the carrying value to the agreed consideration of £750,000.

On 1 September 2015, the Group sold Teacherboards(1985) Limited. Comparatives have been restated accordingly to include Teacherboards within the discontinued activities column in the income statement. 

Effect of disposal on the financial position of the Group.

The results included in the income statement were as follows:

The assets disposed of were as follows:

Cash flows from discontinued operation

9. Trade and other receivables

10. Interest-bearing loans and borrowings

11. Trade and other payables

Amounts disclosed in current liabilities