Havelock Europa PLC Interim Results

22 September 2016

HAVELOCK EUROPA PLC

("Havelock" or the "Company")

Interim Results

Havelock Europa PLC (HVE.L), the international interior solutions provider, announces its results for the half year to 30 June 2016.

Financial Highlights

· Strong public sector demand has enabled the Group to deliver revenue of £25.4m (2015: £28.9m), despite the expected downturn in corporate sector activity and a weaker retail sector.

· The operating loss, before tax, was more than halved in the period to £0.7m (2015: £1.6m), reflecting the benefits accruing from business decisions made in late 2015.

· The investment in the new business structure and our Enterprise Resource Planning (ERP) project led to a small increase in net debt to £3.6m at the half year (2015: £3.1m).

Operational Highlights

· Anticipated overhead reductions achieved, with further savings being identified and realised.

· The drive to simplify and standardise the business has resulted in strong margin improvement against H1 2015.

· Higher Public Sector volumes offsetting reduced Corporate Sector and Retail and Lifestyle demand.

· Developed new Retail and Lifestyle customers in the period, growing a significant pipeline of opportunities.

· Expanded design capability to help develop the new customer pipeline and the launch of a London design office to further increase our coverage.

· International sales delivering over 15% of turnover.

Outlook

· Business reorganisation is on track, with main cost savings delivered. Focus now on developing deeper relationships with existing and new customers.

· The vote for Britain to leave the European Union and subsequent political developments have increased the market uncertainty across our customer base.

· Pricing pressure has increased post the Brexit vote. Activity within the Retail and Lifestyle Sector remains subdued.

· However, trading remains in line with market expectations.

David Ritchie, Chief Executive Officer of Havelock Europa, said: "I am pleased to be able to report that, largely due to the actions we took last year to right size the business and standardise business processes, the business has benefited from strong margin improvement which has led to a significant reduction in the first half loss compared to last year. In addition, strong demand from the public sector has helped to offset weakness in retail and the expected downturn in the corporate sector."

Enquiries

Robert Ballantyne

David Gaffney www.havelockeuropa.com

INTERIM STATEMENT

The Board is pleased to report strong progress during the first half of 2016 with the operating loss before exceptional costs reducing by more than 50% to £0.7m (2015: £1.6m).

The business has traditionally been loss-making in the, normally quieter, first half of the year; however, this loss reduction confirms that the strategic decisions taken in late 2015 to restructure and right size the business are proving to be effective.

FINANCIAL REVIEW

Group revenue for the six months ended 30 June 2016, decreased by 12% to £25.4m (2015: £28.9m), largely as a result of the reduction in contracting spend from a major banking customer announced in November 2015. Despite the reduction in turnover, the Group was able to more than halve its operating loss for the period. Group operating loss for the period, before taxation and exceptional items, was £0.7m (2015: loss £1.6m). The loss per share after exceptional items was 2.3p (2015: loss of 5.0p)

Net debt at the end of June 2016 of £3.6m was slightly higher than that recorded in June 2015 (£3.1m). The increase reflects the investment made in restructuring the business in Q4 2015 and the ongoing investment in our ERP project. The half yearly increase in Group net debt to £3.6m (December 2015: Nil) also reflects the seasonality of the business, as revenue is typically summer / second half loaded, and this pattern is consistent with previous years.

During the six months to 30 June 2016 the pension deficit, before deferred tax, increased to £3.5m (December 2015: £1.0m). In December 2014 the deficit was £3.7m and subsequent movements reflect the volatility which the pension scheme is subject to, largely due to the reduction in long term interest rates. The Trustees and the Company are exploring ways of reducing this volatility.

TRADING REVIEW

The strong order book carried into 2016, largely comprising Public Sector work, helped to offset the downturn in demand within the Corporate sector, caused mainly by the announcement by our largest banking customer in November 2015 of a major reduction in spending. Sales for the period fell 12% (£3.5m) to £25.4m with demand within the Retail and Lifestyle sector also being lower than expected.

However, the business reorganisation undertaken in late 2015 has started to be effective and the operating loss for the period was more than halved to £0.7m (2015: £1.6m). The reduced loss, on lower sales, is attributable to a £0.7m (17%) year on year reduction in overhead costs, which were helped by a credit on research and development costs, stronger margins from a richer mix of sales, with fewer pure contracting sales, and simpler business processes. Gross margin for the six months increased by 25%, from 8% to 10%.

Public Sector volumes in the period have benefited from the strong order book taken into the year. The challenge for the second half is to ensure that this order book is replenished for 2017 and the sales team is focused on this. Public Sector margins in the period also benefited from the changes made to simplify and standardise the business, which has enabled more efficient and effective delivery.

As expected, the Corporate Sector experienced significantly reduced volumes in the period and we are working to develop this sector and increase our market share within the office fit out market. The Retail and Lifestyle sector had a challenging six months with customers continuing to re-evaluate their business case for proposed investments and searching for more cost effective solutions. To respond to this and to deliver an enhanced customer experience, we are expanding our design capability and are increasingly working with clients early in the life cycle of a project to ensure that affordability and buildability are incorporated into the base designs. A key element of this will involve the business investing in a London design office which we expect to be operational during Q4 2016.

This new design office facility will also help with our stated strategy of diversifying our customer base by bringing in additional clients. During the period we developed two major UK retailers into significant customers and, with a refocused sales team, are now also beginning to grow a pipeline of opportunities. International retail continues to be a significant element of our business, again delivering in excess of its 15% of turnover benchmark.

Operationally, we continue to review our cost base and have identified further cost savings within the infrastructure of the business which the manufacturing management team has been tasked with delivering. Additional savings and benefits will also accrue in 2017 from the new Enterprise Resource Planning system which will be operational by the year end. This new system will provide the operational framework that will better enable us to continue the process of simplifying and standardising the business and delivering an enhanced customer experience.

DIVIDENDS

The Board does not propose to pay a dividend in 2016.

BOARD

As previously announced, Alastair Kerr retired from the Board at the AGM on 10 June 2016. Alastair has contributed significantly to the business over the period since he joined the Board and I am grateful to him for his support and wise counsel over that time.

Hew Balfour was appointed to the Board on 28 April 2016 as a non-executive director. Hew was chief executive of Havelock Europa from 1989 until 2010. I am delighted to welcome him to the Board and pleased that Havelock will benefit from his experience both as a non executive director and of working in the markets in which the company operates.

At the AGM this year, having been on the Board for over six years, I announced my intention to stand down as Chairman once a suitable external replacement has been identified. My colleagues on the Board, led by Richard Sweetman, have commenced the search for my successor with the aim of concluding this appointment by the year end.

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties are set out in the notes to this statement. The risks and uncertainties are largely unchanged from those set out in the Annual Report for 2015 with the exception of the uncertainty created by Britain voting to leave the European Union.

GOING CONCERN

The current market conditions continue to create uncertainty over demand for the Group's products and services. The financial position of the Group, its cash flows and liquidity position are set out in the interim financial statement.

During the period, the Group operated under a bank overdraft facility of £4.75m. This facility increases over the traditional busy summer period to £5.5m. The Group also makes use of HP finance facilities when applicable. The overdraft facility is subject to review in April 2017. During the six months to 30 June 2016, the conditions of the facilities were met and the Directors expect to be able to comply with the conditions in the future, based on the most recent forecasts and taking account of mitigating actions that could be taken in any periods where headroom is tight.

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 accounts.

CURRENT TRADING

Although demand within the Retail and Lifestyle Sector is subdued, demand in the Public Sector has been strong and, overall, trading across the business remains in line with market expectations. Our revised strategy of simplifying the business and maximising the customer experience is continuing and benefits and opportunities from this are now beginning to accrue. We are now focusing much more on product development alongside our customers and the new London office will increase our coverage, capability and ability to respond.

David MacLellan

Chairman

Condensed Consolidated Income Statement

for the six months ended 30 June 2016 (unaudited)

for the six months ended 30.June 2015 (unaudited)

for the year ended 31 December 2015

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONDENSED CONSOLIDATED BALANCE SHEET

as at 30 June 2016

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

for the 6 months ended 30 June 2016

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

NOTES TO THE FINANCIAL STATEMENTS

1. Basis of preparation

These interim financial statements represent the condensed consolidated financial information of the Company and its subsidiaries (together referred to as "the Group") for the 6 months ended 30 June 2016. They have been prepared in accordance with the Disclosure and Transparency Rules of the UK's Financial Services Authority and the requirements of IAS 34 Interim Financial Reporting as adopted by the EU and have been prepared on the historical cost basis except for the assets of the defined benefit pension scheme which are stated at their fair value and the liabilities of the defined benefit pension scheme which are measured by the projected unit credit method.

The preparation of the interim statements requires the directors to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and judgements applied have not changed from those used in the 2015 Annual Report.

The interim financial statements were approved by the Board of Directors on 22 September 2016. The interim financial statements do not include all of the information and disclosures required for full annual financial statements. They should be read in conjunction with the Annual Report 2015 which is available on request from the Company's registered office or to download from www.havelockeuropa.com.

The financial information contained in this report in respect of the year ended 31 December 2015 has been extracted from the Annual Report 2015 which has been filed with the Registrar of Companies. The auditor's report on these financial statements was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying his report and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

The interim statements have been prepared on a going concern basis. The reasons for this are outlined in the Chairman's Statement.

The interim financial statements are unaudited and have not been reviewed by the Company's auditor.

 2. Significant accounting policies

The accounting policies applied by the Group in these condensed consolidated interim financial statements are the same as those applied by the Group as disclosed in its consolidated financial statements as at and for the year ended 31 December 2015. 

Although the Group has adopted a number of other new interpretations and amendments to existing standards in the period, the application of

these has not had any significant impact on the net assets or results of the Group.

3. Income tax

The Group has decided not to recognise further deferred tax assets in respect of losses incurred during the period.

A reduction in the main UK Corporation tax rate to 18% from 1 April 2020 had been substantively enacted by the balance sheet date. The Group and Company's deferred tax assets and liabilities are therefore recognised at 18%.

4. Earnings per share

The calculation of basic loss per share for the period ended 30 June 2016 is based on the loss attributable to ordinary shareholders as follows:

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

Basic earnings per share

Diluted earnings per share

5. Equity dividends

No dividends have been declared or proposed for 2016.

6. Property, plant and equipment

 Contracts placed for future capital expenditure not provided in the financial statements amount to £nil (30 June 2015: £306,000,

31 December 2015: nil)

7. Intangible assets

8. Discontinued activities

On 30 June 2015, Teacherboards (1985) Limited 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 to Assets classified as held for sale or Liabilities classified as held for sale from the following categories (the table below also shows the effect of the discontinuing operation on the financial position):

On 1 September 2015, the Group sold Teacherboards (1985) Limited.

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. Related parties

Transactions with key management personnel

Group key management personnel receive compensation in the form of salaries and short-term benefits, compensation for loss of office, post-employment benefits and share-based payments. Group key management received total compensation of £420,000 for the six months ended 30 June 2016 (six months ended 30 June 2015: £748,000).

10. Pension liabilities

During the period, the pension deficit, net of deferred tax, increased to £2.8 million (December 2015: £0.8 million) mainly as a result of a fall in corporate bond yields which places a higher value on the scheme's liabilities.

11. Exceptional costs

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

(b) Compensation for loss of office and fees related to recruitment of new Chief Executive.

12. Financial instruments - fair value

The methods and assumptions used in estimating the fair value of financial instruments are described in note 20 of the Annual Report 2015. There have been no changes in the valuation methods during the period.

Fair values versus carrying amounts

The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are as follows:

Group

13. Principal risks and uncertainties

The principal risks and uncertainties facing the Group for the remainder of 2016 are shown below and have not changed from those disclosed in the Annual Report for 2015 with the exception of the uncertainty created by Britain voting to leave the European Union.

The Group must operate within its bank facilities. 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 business has 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.

In the current economic climate, there is less certainty for all businesses about future trading. This is particularly true in the retail sector, where customers may change their plans and programmes at short notice. The Group manages this risk by reviewing trading outlook more frequently, including the review of weekly order intake figures.

The Group has had a number of major clients each of which constituted more than 10% of revenue. The loss of a major client would adversely impact the Group's profitability and cash flow. The business focusses 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.

RESPONSIBILITY STATEMENT

We confirm that to the best of our knowledge:

· the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union;

· the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

David Ritchie Ciaran Kennedy

Chief Executive Officer Finance Director

22 September 2016