HEADLAM GROUP PLC

Interim / Quarterly Report • Aug 24, 2016

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RNS Number : 9545H

Headlam Group PLC

24 August 2016

24 August 2016

Headlam Group plc

("Headlam" or "the group")

Interim Results for the six-month period ended 30 June 2016

Headlam Group plc (LSE: HEAD), Europe's leading floorcovering distributor, announces its Interim Results for the six months ended 30 June 2016.

Financial highlights

·      Group revenue up 4.8% to £328.7 million (H1 2015: £313.5 million)

·      Operating profit up 18.5% to £15.4 million (H1 2015: £13.0 million)

·      Profit before tax up 22.4% to £15.11 million (H1 2015: £12.35 million)

·      Basic earnings per share up 23.1% to 14.4 pence (H1 2015: 11.7 pence)

·      Interim dividend up 11.7% to 6.7 pence (H1 2015: 6.0 pence)

·      Net funds of £33.9 million as at 30 June 2016 (30 June 2015: £26.0 million)

Operational highlights

·      Further gains achieved in UK market share with like-for-like revenues increasing by 3.4% and an additional working day in 2016 adding a further increase of 0.9%

·      Headlam Corporate, the group's newest business, making good progress in its target market of specified commercial flooring

·      Lifestyle Floors' revenue up 34.8% to £21.1 million (H1 2015: £15.6 million)

·      Further expansion of the service centre network with centres in Croydon, Hull and Bristol opened in the first half bringing the total to 32 with a further three centres in development

Tony Brewer, Headlam's Group Chief Executive, said:

"It is pleasing to report further progress during the first half of 2016, reflecting the continued outperformance of our UK business, an improving trend in our Continental Europe businesses and the ongoing delivery of our strategy to increase market share.

"August is traditionally one of the group's peak trading months in the UK with the annual summer refurbishment of educational institutions.  To date, this seasonal business seems to have been unaffected by the result of June's referendum on EU membership.

"However, the referendum result gave rise to a weakening in sterling, and the group has sought to mitigate this adverse inflationary effect by implementing price increases earlier this month for residential floorcoverings imported from Continental Europe.  It is pleasing that these price increases appear to have had no adverse impact on the level of residential revenues to date.

"Our market appears to be robust and, subject to the key trading period in the run-up to Christmas, the board remains confident of achieving full year expectations."

Analyst meeting

A meeting for analysts will be held at 10am this morning, 24 August 2016, at the offices of Buchanan, 107 Cheapside, London EC2V 6DN. For further details, please contact Buchanan on 020 7466 5000.

Enquiries:

Headlam Group plc	Tel: 01675 433000
Tony Brewer, Group Chief Executive
Stephen Wilson, Group Finance Director
Investec Bank plc (Joint Corporate Broker)	Tel: 020 7597 4000
Garry Levin / David Flin / Alex Wright
Arden Partners plc (Joint Corporate Broker)	Tel: 0121 423 8900/020 7614 5900
Jonathan Keeling / Steve Douglas / Catherine Miles
Buchanan (Financial PR and IR)	Tel: 020 7466 5000
Mark Court / Sophie Cowles / Catriona Flint

Notes for Editors

About Headlam

Headlam is engaged in the marketing, supply and distribution of an extensive range of floorcovering products. The group's activities and facilities are located throughout the UK, France, Switzerland and the Netherlands.

The group's operations are focused on providing customers, principally independent floorcovering retailers and contractors, with a comprehensive and up to date range of competitively priced floorcovering products supported by a next day delivery service.

The approach provides Headlam's suppliers with an opportunity to achieve extensive market access backed by cost effective distribution.

In order to offer this level of service to its customers and suppliers, Headlam has developed a diverse and autonomous operating structure that includes 56 businesses across the UK and a further five in continental Europe all trading under their individual brands.

The autonomous operating structure is a key contributor to the group's success, presenting experienced management teams with an opportunity to develop the individual identity, market presence and profitability of the business for which they are responsible.

Each business is supported by the group's continued commitment to investment in people, product, operating infrastructure and IT. This commitment has underpinned the group's overall development and enabled Headlam to establish itself as Europe's leading floorcovering distributor.

For further detail on our business please visit: www.headlam.com

Chairman's Statement

It is pleasing to report further progress during the first half of 2016 with group revenue increasing by 4.8% from £313.5 million to £328.7 million, reflecting the continued outperformance of our UK business, a modest improvement in our Continental European businesses and the ongoing delivery of our strategy to increase market share.

In the UK, overall revenue growth was 4.3%, with like-for-like revenue increasing by 3.4% and an additional working day in the first half of 2016 adding additional growth of 0.9%.

During the year to date, we have continued to concentrate on developing and maintaining the group's operational excellence and achieving further benefits from the development of our infrastructure, staff and IT systems.

The group's cash balances remain robust, with net funds at 30 June 2016 of £33.9 million, an increase of 30.4% compared with £26.0 million at 30 June 2015, despite the first half including the payment of a special dividend in April 2016 totalling £5.0 million and the repayment of £5.0 million on a term loan.  The increase in net funds highlights the cash generative nature of the group's operations.

Earnings and dividend

Basic earnings per share increased by 23.1% from 11.7p to 14.4p compared with the first six months of 2015.  As a result, the Board has decided to increase the interim dividend by 11.7% to 6.7p (H1 2015: 6.0p).  The interim dividend will be paid on    3 January 2017 to shareholders on the register as at 2 December 2016.

UK operations

Business performance

The UK is by far the largest part of Headlam's business, representing 87.1% (H1 2015: 87.6%) of group revenue during the first half of the year.  UK revenues in the first half were up 4.3% at £286.3 million (H1 2015: £274.6 million), which is comfortably ahead of the estimated market growth in 2016 of 3.2% forecast by AMA Research Ltd.

The split of residential and commercial revenue moved slightly in favour of residential at 70%, with commercial at 30% (H1 2015: residential 69%, commercial 31%).  Residential demand has been robust and the slight movement in the split is due to stronger residential growth during the first half.

On a like-for-like basis, the total commercial business grew by 0.4% (H1 2015: 6.1%) and residential by 4.7% (H1 2015: 5.0%).  The lower growth rate in commercial against last year can be attributed, anecdotally at least, to the run-up to the referendum in June on the UK's membership of the European Union, which gave rise to some order deferral.

As we highlighted in our July 2016 Half Year Trading Update, the weakening of sterling following the referendum has increased the cost to the group of imported residential floorcoverings, which predominantly come from Belgium and the Netherlands.  We have passed this increased cost on to our customers by introducing earlier this month an average price rise of 6% for these products.  To date, we have not seen any adverse impact on residential revenues following these price increases.

The continuing resilience in residential revenues is in part owing to the affordability of a typical purchase by a residential end-user, who tends to replace carpets one room at a time with an average purchase size of 20 square metres. In contrast, a typical commercial purchase amounts to 200 square metres.  In both cases, orders are processed in our distribution centres using sophisticated, computer-controlled picking, cutting and packing machines prior to delivery which is usually on the next day following receipt of the order.

The residential trend towards carpet colours based on a grey palette and the use of polypropylene and nylon yarns with a softer touch has continued and the increasing demand for luxury vinyl tile products has been maintained.

All of the group's principal product groups comprising carpets, residential vinyl, wood and laminate, luxury vinyl tile, commercial, rugs and underlay, showed growth over the same period last year.

Sales at Lifestyle Floors (http://www.lifestyle-floors.co.uk/home), the group's contemporary floorcovering brand continued to grow well compared with the first half last year.

During the first half we continued to develop the group's newest business, Headlam Corporate, which is targeting the specified commercial flooring market.  The business, which has a showroom in London's Clerkenwell, is seeking to capitalise on the many opportunities of combining the extensive product portfolio of a number of our premium businesses, principally JHS, Crucial Trading and Kersaint Cobb.

The Headlam Corporate sales team has already visited 250 of the 500 architects' practices in the Clerkenwell area and is targeting projects ranging in size from 100 to 10,000 square metres with a typical order being between 250 and 750 square metres.

Investment

In the UK, the group operates with 56 businesses (H1 2015: 56) served from four national distribution hubs (H1 2015: 4), 14 regional distribution centres (H1 2015: 14) and 32 service centres (H1 2015: 29).

The three new service centres opened in the first half are in Croydon, Hull and Bristol and we anticipate opening a further three service centres in the second half, in Peterborough, Derby and Warrington.

This investment in the service centre network, which has a bias towards the commercial sector, is aimed at providing an enhanced service to our customers, and attracting new customers, through the establishment of readily accessible product collection points.

The UK operations are structured into the five business sectors of regional multi-product, national multi-product, regional commercial, residential specialist and commercial specialist. 

We are making progress in the planned construction of the 160,000 square foot purpose built distribution centre in Ipswich for Faithfull's Floorcovering, one of our regional multi-product businesses.  The cost of the land is approximately £3.2 million and the total cost of the project, including land cost, is expected to be around £15.0 million.  In common with all of our other distribution centres, the Ipswich site will be owned on a freehold basis.  Planning permission, approving the development of the facility, is expected towards the end of 2016 with construction commencing during early 2017 and the facility operational by the end of 2017 or early 2018.  The new facility will enable Faithfull's to increase its presence and improve the level of customer service across the south east of England.

In addition to the expansion of our distribution infrastructure, we have continued to develop our IT and digital capabilities.  Highlights in the first half have included the roll out of the driver app on the iPhone Plus which provides the delivery drivers with a comprehensive range of information aimed at increasing customer satisfaction and business efficiency.

Customers

Our market presence in independent floorcovering retailers and contractors continues to be enhanced through our ongoing product development with suppliers, resulting in the launch during the first half of 2,054 new products (H1 2015: 2,057) supported by 377,430 point of sale items (H1 2015: 414,498).

Continental Europe

Headlam's businesses in Continental Europe, which are located in the Netherlands, France and Switzerland, collectively achieved further progress during the first half.  The businesses on the Continent represent a relatively modest part of Headlam's revenues, contributing 12.9% of group revenues in the first six months of the year at £42.4 million (H1 2015: £39.0 million).

Continental Europe's overall like-for-like revenues were up 2.8% at constant currency, 8.9% when translated into sterling, reflecting improvements in France and the Netherlands.  Whilst revenues have continued to be a little more subdued in Switzerland, the business is still the most significant contributor to the combined Continental profitability.

Trading performance

Gross margin

Gross margin increased by 30 basis points from 29.7% to 30.0% during the period, the improvement being driven by favourable pricing and product mix.  In absolute terms, gross margin increased by £5.6 million from £93.1 million to £98.7 million of which £1.1 million was attributable to pricing and mix.

Expenses

Distribution and administrative expenses increased by £3.2 million, up 4.1%, from £80.1 million to £83.3 million.  People cost continues to be the single largest contributor to the overall increase, which at £2.7 million represents 83% of the total movement compared with the first half of 2015.  A cost of living award implemented at the start of the year amounting to 2.5% accounts for 46.3% of the increase with the balance attributable to an increase in people numbers, 91, compared with the first half of 2015, recruited to support the organic growth.

Other expense increases tended to relate to the revenue improvement and in total amounted to £1.0 million. However, a one off currency gain of £0.5 million reduced the overall increase to £0.5 million.

Operating profit

		£000
Operating profit 2015		13,022
Gross margin improvement:
	Volume benefit	4,492
	Pricing benefit	1,102
		5,594
Expenses increase:
	Distribution	(2,985)
	Administration	(266)
	Total increase	(3,251)
Operating profit 2016		15,365
Drop through rate as a percentage of incremental revenue		15.5%

Operating profit during the first six months of 2016 increased by 18.0% compared with 2015 with the operating margin improving from 4.2% to 4.7%.  The drop through rate of additional operating profit arising from the additional revenue generated in 2016 compared with 2015 amounted to 15.5%.

Cash flow

As highlighted in the table below, the movement in cash flows during the first six months of 2016 compared with 2015 amounted to a net outflow of £16.2 million.

						£000
Cash flow first half of 2015						986
		Cash flow from operating activities				2,464
		Working capital				(9,501)
		Dividends				(5,741)
		Taxation				(1,286)
		Acquisitions				1,978
		Movement in net debt				(4,921)
		Other				798
						(16,209)
Cash flow first half of 2016						(15,223)

The three principal contributors to the movement were the net working capital investment of £9.5 million, dividend payments of £5.7 million and a decrease in net debt of £4.9 million.

The working capital investment was simply due to re-establishing a normalised working capital position following the unusually favourable working capital reduction at 31 December 2015. 

The movement in dividend payments was a consequence of the special dividend payment during April and the reduction in debt due to a repayment of £5.0 million on the term loan.

The favourable acquisitions movement is due to the absence of further activity during the first half compared with the prior year when the group acquired Matty's Wholesale Carpets.  We will continue to look at making additional acquisitions as opportunities arise.

Changes in net funds

As shown below, the group's net funds at 30 June 2016, £33.9 million, highlights further improvement compared to £26.0 million as at 30 June 2015.  The contraction in net funds during the first half compared with the position at 31 December 2015 is not unusual and tends to be a typical feature of the first half cash flow.

	At 1 January 2016 £000	Cash flows £000	Translation differences £000	At 30 June 2016 £000
Cash at bank and in hand	63,932	(14,818)	184	49,298
Bank overdraft	-	(405)	(24)	(429)
	63,932	(15,223)	160	48,869
Debt due within one year	-	(15,000)	-	(15,000)
Debt due after one year	(20,000)	20,000	-	-
	43,932	(10,223)	160	33,869

The group's total bank facilities at 30 June 2016 amounted to £82.2 million of which £42.2 million is repayable on demand and £40.0 million relates to committed facilities which expire on 7 March 2017.  Given the expiry date falls within the next twelve months, the amount drawn on the facility, £15.0 million, has been reclassified as a current liability in the Consolidated Interim Statement of Financial Position and therefore transferred from debt due after one year to debt due within one year in the table above.  The group is satisfied that renewed facilities will be in place prior to 7 March 2017.

Principal risks and uncertainties

The board has ultimate responsibility for identifying and managing the effect of risk and uncertainty on the group's business, results and financial condition.  Whilst the board maintains a policy of continuous identification and review, it nevertheless recognises that a number of risks and uncertainties lie beyond its control.

Currently, the key risks and uncertainties, which have potential to affect the group's operations are, market demand, competition, credit risk, IT failure, people, pension costs, legislation and regulation.  The potential impact and mitigation of these risks and uncertainties are discussed in more detail on pages 38 and 39 of the 2015 Annual Report and Accounts.

Outlook

It is pleasing to report further progress during the first half of 2016, reflecting the continued outperformance of our UK business, an improving trend in our Continental Europe businesses and the ongoing delivery of our strategy to increase market share.

August is traditionally one of the group's peak trading months in the UK with the annual summer refurbishment of educational institutions.  To date, this seasonal business seems to have been unaffected by the result of June's referendum on EU membership.

However, the referendum result gave rise to a weakening in sterling, and the group has sought to mitigate this adverse inflationary effect by implementing price increases earlier this month for residential floorcoverings imported from Continental Europe.  It is pleasing that these price increases appear to have had no adverse impact on the level of residential revenues to date.

Our market appears to be robust and, subject to the key trading period in the run-up to Christmas, the board remains confident of achieving full year expectations.

Statement of Directors' Responsibilities

We confirm to the best of our knowledge:
(a)   the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as endorsed and adopted by the European Union;
(b)   the interim management report includes a fair review of the information required by: (i) 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 (ii) 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.

This report has been approved by the board of directors and signed on its behalf by

Tony Brewer

Group Chief Executive

24 August 2016

Condensed Consolidated Interim Income Statement

Unaudited

	Note	Six months ended 30 June 2016 £000	Six months ended 30 June 2015 £000	Year ended 31 December 2015 £000
Revenue	2	328,673	313,546	654,078
Cost of sales		(229,961)	(220,428)	(453,568)
Gross profit		98,712	93,118	200,510
Distribution expenses		(62,150)	(59,165)	(120,070)
Administrative expenses		(21,197)	(20,931)	(43,663)
Operating profit	2	15,365	13,022	36,777
Finance income	3	498	115	738
Finance expenses	3	(752)	(789)	(1,891)
Net finance costs		(254)	(674)	(1,153)
Profit before tax		15,111	12,348	35,624
Taxation	4	(3,022)	(2,500)	(7,213)
Profit for the period attributable to the equity  shareholders	2	12,089	9,848	28,411
Dividend paid per share	6	20.70p	17.50p	17.50p
Earnings per share
Basic	5	14.4p	11.7p	33.8p
Diluted	5	14.3p	11.7p	33.7p

All group operations during the financial periods were continuing operations.

Condensed Consolidated Interim Statement of Comprehensive Income

Unaudited

	Six months  ended 30 June  2016 £000	Six months  ended 30 June  2015 £000	Year ended 31 December  2015 £000
Profit for the period attributable to the equity   shareholders	12,089	9,848	28,411
Other comprehensive income:
Items that will never be reclassified to profit or loss
Re-measurement of defined benefit plans	908	2,039	1,292
Related tax	(61)	(396)	(554)
	847	1,643	738
Items that are or may be reclassified to profit or loss
Foreign exchange translation differences arising on   translation of overseas operations	778	(132)	6
Effective portion of changes in fair value of cash flow hedges	362	(14)	(556)
Transfers to profit or loss on cash flow hedges	205	63	172
Related tax	(102)	(12)	58
	1,243	(95)	(320)
Other comprehensive income for the period	2,090	1,548	418
Total comprehensive income attributable to the equity shareholders for the period	14,179	11,396	28,829

Condensed Consolidated Interim Statement of Financial Position

Unaudited

		At 30 June 2016 £000	At 30 June 2015 £000	At 31 December 2015 £000
Assets
Non-current assets
Property, plant and equipment		100,749	102,581	101,263
Intangible assets		10,388	10,013	10,388
Deferred tax assets		1,981	2,509	2,238
		113,118	115,103	113,889
Current assets
Inventories		128,029	122,598	119,143
Trade and other receivables		123,499	119,714	120,154
Cash and cash equivalents		49,298	49,061	63,932
		300,826	291,373	303,229
Total assets		413,944	406,476	417,118
Liabilities
Current liabilities
Bank overdraft		(429)	(393)	-
Other interest-bearing loans and borrowings		(15,000)	(2,681)	-
Trade and other payables		(172,300)	(168,983)	(172,701)
Dividends payable		(12,368)	(10,300)	-
Employee benefits		(2,135)	(2,980)	(2,171)
Income tax payable		(5,640)	(5,514)	(6,974)
		(207,872)	(190,851)	(181,846)
Non-current liabilities
Other interest-bearing loans and borrowings		-	(20,000)	(20,000)
Employee benefits		(15,301)	(15,842)	(16,843)
		(15,301)	(35,842)	(36,843)
Total liabilities		(223,173)	(226,693)	(218,689)
Net assets		190,771	179,783	198,429
Equity attributable to equity holders
of the parent
Share capital		4,268	4,268	4,268
Share premium		53,512	53,512	53,512
Other reserves		1,076	(1,632)	(275)
Retained earnings		131,915	123,635	140,924
Total equity		190,771	179,783	198,429

Condensed Consolidated Interim Statement of Changes in Equity

Unaudited

	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)	140,924	198,429
Profit for the period attributable to the equity shareholders	-	-	-	-	-	-	12,089	12,089
Other comprehensive income	-	-	-	778	567	-	745	2,090
Total comprehensive income for the period	-	-	-	778	567	-	12,834	14,179
Transactions with equity shareholders, recorded directly in equity
Share-based payments	-	-	-	-	-	-	714	714
Share options exercised by employees	-	-	-	-	-	6	(2)	4
Current tax on share options	-	-	-	-	-	-	2	2
Deferred tax on share options	-	-	-	-	-	-	(93)	(93)
Dividends to equity holders	-	-	-	-	-	-	(22,464)	(22,464)
Total contributions by and distributions to equity shareholders	-	-	-	-	-	6	(21,843)	(21,837)
Balance at   30 June 2016	4,268	53,512	88	6,207	51	(5,270)	131,915	190,771

Condensed Consolidated Interim Statement of Changes in Equity continued

Unaudited

	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 2015	4,268	53,512	88	5,423	(132)	(7,100)	126,018	182,077
Profit for the period attributable to the equity shareholders	-	-	-	-	-	-	9,848	9,848
Other comprehensive income	-	-	-	(132)	49	-	1,631	1,548
Total comprehensive income for the period	-	-	-	(132)	49	-	11,479	11,396
Transactions with equity shareholders, recorded directly in equity
Share-based payments	-	-	-	-	-	-	557	557
Share options exercised by employees	-	-	-	-	-	172	(19)	153
Deferred tax on share options	-	-	-	-	-	-	255	255
Dividends to equity holders	-	-	-	-	-	-	(14,655)	(14,655)
Total contributions by and distributions to equity shareholders	-	-	-	-	-	172	(13,862)	(13,690)
Balance at   30 June 2015	4,268	53,512	88	5,291	(83)	(6,928)	123,635	179,783

Condensed Consolidated Interim Statement of Changes in Equity continued

Unaudited

	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 2015	4,268	53,512	88	5,423	(132)	(7,100)	126,018	182,077
Profit for the period attributable to the equity shareholders	-	-	-	-	-	-	28,411	9,848
Other comprehensive income	-	-	-	6	(384)	-	796	1,548
Total comprehensive income for the period	-	-	-	6	(384)	-	29,207	11,396
Transactions with equity shareholders, recorded directly in equity
Share-based payments	-	-	-	-	-	-	1,100	1,100
Share options exercised by employees	-	-	-	-	-	1,824	(819)	1,005
Current tax on share options	-	-	-	-	-	-	95	95
Deferred tax on share options	-	-	-	-	-	-	(22)	(22)
Dividends to equity holders	-	-	-	-	-	-	(14,655)	(14,655)
Total contributions by and distributions to equity shareholders	-	-	-	-	-	1,824	(14,301)	(12,477)
Balance at   31 December 2015	4,268	53,512	88	5,429	(516)	(5,276)	140,924	198,429

Condensed Consolidated Interim Cash Flow Statements

Unaudited

		Six months ended 30 June 2016 £000	Six months ended 30 June 2015 £000	Year ended 31 December  2015 £000
Cash flows from operating activities
Profit before tax for the period		15,111	12,348	35,624
Adjustments for:
Depreciation, amortisation and impairment		2,389	2,422	5,179
Finance income		(498)	(115)	(738)
Finance expense		752	789	1,891
Profit on sale of property, plant and equipment		(11)	(8)	(31)
Share-based payments		714	557	1,100
Operating profit before changes in working capital and other payables		18,457	15,993	43,025
Change in inventories		(7,682)	(5,506)	(1,827)
Change in trade and other receivables		(4,251)	(725)	(1,524)
Change in trade and other payables		166	3,965	7,270
Cash generated from the operations		6,690	13,727	46,944
Interest paid		(487)	(461)	(1,268)
Tax paid		(4,306)	(3,020)	(6,245)
Additional contributions to defined benefit plan		(1,121)	(1,447)	(2,925)
Net cash flow from operating activities		776	8,799	36,506
Cash flows from investing activities
Proceeds from sale of property, plant and equipment		37	119	277
Interest received		512	95	726
Acquisition of subsidiaries, net of cash acquired		-	(1,978)	(1,977)
Acquisition of property, plant and equipment		(1,456)	(1,768)	(2,856)
Net cash flow from investing activities		(907)	(3,532)	(3,830)
Cash flows from financing activities
Proceeds from the issue of treasury shares		4	153	1,005
Repayment of borrowings		(5,000)	(79)	(2,817)
Dividends paid		(10,096)	(4,355)	(14,655)
Net cash flow from financing activities		(15,092)	(4,281)	(16,467)
Net (decrease)/increase in cash and cash equivalents		(15,223)	986	16,209
Cash and cash equivalents at 1 January		63,932	47,589	47,589
Effect of exchange rate fluctuations on cash held		160	93	134
Cash and cash equivalents at end of period		48,869	48,668	63,932

Notes to the Condensed Consolidated Interim Financial Statements

Unaudited

1 BASIS OF REPORTING

Reporting entity

Headlam Group plc, the "company", is a company incorporated in the UK.  The Condensed Consolidated Interim Financial Statements consolidate those of the company and its subsidiaries which together are referred to as the "group" as at and for the six months ended 30 June 2016. 

The Consolidated Financial Statements of the group as at and for the year ended 31 December 2015 are available upon request from the company's registered office or the website.

The comparative figures for the financial year ended 31 December 2015 are not the group's statutory accounts for that financial year. Those accounts have been reported on by the group's auditor and delivered to the registrar of companies. The report of the auditor was (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.

These Condensed Consolidated Interim Financial Statements have not been audited or reviewed by the auditor pursuant to the Auditing Practices Board's Guidance on Financial Information.

Statement of compliance

These Condensed Consolidated Interim Financial Statements have been prepared and approved by the directors in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and International Accounting Standard IAS 34 Interim Financial Reporting as adopted by the EU.  They do not include all of the information required for full annual financial statements, and should be read in conjunction with the Consolidated Financial Statements of the group as at and for the year ended 31 December 2015.

These Condensed Consolidated Interim Financial Statements were approved by the board of directors on 24 August 2016.

Significant accounting policies

As required by the Disclosure and Transparency Rules of the Financial Conduct Authority, the condensed set of financial statements has been prepared applying the accounting policies and presentation that were applied in the preparation of the group's published Consolidated Financial Statements for the year ended 31 December 2015, except as explained below.

Impacts of standards and interpretations in issue but not yet effective

The following standards and interpretations, which were not effective as at 30 June 2016 and have not been early adopted by the group, will be adopted in future accounting periods: 

·      International Financial Reporting Standard (IFRS) 15 'Revenue from contracts with customers' (effective 1 January 2018)

·      International Financial Reporting Standard (IFRS) 9 'Financial instruments' (effective 1 January 2018)

·      International Financial Reporting Standard (IFRS) 16 'Leases' (effective 1 January 2019)

·      Clarification of Acceptable Methods of Depreciation and Amortisation - Amendments to IAS 16 and IAS 38.

·      Equity Method in Separate Financial Statements - Amendments to IAS 27

·      Disclosure Initiative - Amendments to IAS 1

·      Annual Improvements to IFRSs - 2012 -2014 Cycle.

The Directors anticipate that adoption of these standards and interpretations in future periods will have no material impact on the financial statements of the group.

Notes to the Condensed Consolidated Interim Financial Statements continued

Unaudited

1 BASIS OF REPORTING - continued

Going concern

The group's business activities, together with the factors likely to affect its future development, performance and position are described in the Chairman's Statement.

The directors have reviewed current performance and forecasts, combined with borrowing facilities and expenditure commitments, including capital expenditure, pensions and proposed dividends. After making enquiries, the directors have a reasonable expectation that the group has adequate financial resources to continue its current operations, including contractual and commercial commitments for the foreseeable future.  For these reasons, the going concern basis has been adopted in preparing the financial statements.

Bank facilities at 30 June 2016

	Committed credit facilities	Uncommitted credit facilities	Total facilities
	£ million	£ million	£ million
Drawn funds	15.0	0.4	15.4
Undrawn funds	25.0	41.8	66.8
	40.0	42.2	82.2

The group will renew the terms of its banking facilities by March 2017 and therefore the committed credit facilities drawn funds of £15 million are shown on the Consolidated Interim Statement of Financial Position as due within one year.

Estimates

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense.  Actual results may differ from these estimates.

In preparing these Condensed Consolidated Interim Financial Statements, the significant judgements made by management in applying the group's accounting policies and key sources of estimation uncertainty were the same as those that applied to the Consolidated Financial Statements as at and for the year ended 31 December 2015.

Risks and uncertainties

The risk factors which could cause the group's results to differ materially from expected results and the result of the board's review of those risks are set out in the Chairman's Statement.

Notes to the Condensed Consolidated Interim Financial Statements continued

Unaudited

2 SEGMENT REPORTING

The group has 56 operating segments in the UK and five 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, with relevance to products and services, type and class of customer, methods of sale and distribution and the regulatory environment in which they operate.  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
	30 June 2016 £000	30 June 2015 £000	31 December 2015 £000	30 June 2016 £000	30 June 2015 £000	31 December 2015 £000	30 June 2016 £000	30 June 2015 £000	31 December 2015 £000
Revenue
External revenues	286,260	274,587	575,341	42,413	38,959	78,737	328,673	313,546	654,078
Reportable segment operating profit	15,504	13,786	37,363	528	206	575	16,032	13,992	37,938
Reportable segment assets	255,194	247,961	257,984	34,333	30,720	34,067	289,527	278,681	292,051
Reportable segment liabilities	(156,387)	(154,039)	(158,859)	(16,342)	(15,254)	(13,326)	(172,729)	(169,293)	(172,185)

During the periods shown above there have been no inter-segment revenues for the reportable segments (2015: £nil). 

Reconciliations of reportable segment profit, assets and liabilities and other material items:

				30 June 2016 £000	30 June 2015 £000	31 December 2015 £000
Profit for the period
Total profit for reportable segments				16,032	13,992	37,938
Unallocated expense				(667)	(970)	(1,161)
Operating profit				15,365	13,022	36,777
Finance income				498	115	738
Finance expense				(752)	(789)	(1,891)
Profit before taxation				15,111	12,348	35,624
Taxation				(3,022)	(2,500)	(7,213)
Profit for the period				12,089	9,848	28,411

Notes to the Condensed Consolidated Interim Financial Statements continued

Unaudited

2 SEGMENT REPORTING - continued

			30 June 2016 £000	30 June 2015 £000	31 December 2015 £000
Assets
Total assets for reportable segments			289,527	278,681	292,051
Unallocated assets:
Properties, plant and equipment			91,637	95,403	89,828
Deferred tax assets			1,981	2,509	2,238
Cash and cash equivalents			30,747	29,883	33,001
Derivative assets			52	-	-
Total assets			413,944	406,476	417,118
Liabilities
Total liabilities for reportable segments			(172,729)	(169,293)	(172,185)
Unallocated liabilities:
Employee benefits			(17,436)	(18,822)	(19,014)
Other interest-bearing loans and borrowings			(15,000)	(22,681)	(20,000)
Income tax payable			(5,640)	(5,514)	(6,974)
Proposed dividend			(12,368)	(10,300)	-
Derivative liabilities			-	(83)	(516)
Total liabilities			(223,173)	(226,693)	(218,689)

	UK	Continental Europe	Reportable segment total	Unallocated	Consolidated total
	£000	£000	£000	£000	£000
Other material items 30 June 2016
Capital expenditure	991	412	1,403	53	1,456
Depreciation	1,108	276	1,384	1,005	2,389
Other material items 30 June 2015
Capital expenditure	1,142	309	1,451	317	1,768
Depreciation	1,147	261	1,408	1,014	2,422
Other material items 31 December 2015
Capital expenditure	2,064	543	2,607	287	2,894
Depreciation	2,246	538	2,784	2,020	4,804
Amortisation	-	-	-	375	375

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.

Notes to the Condensed Consolidated Interim Financial Statements continued

Unaudited

2 SEGMENT REPORTING - continued

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:

	UK			Continental Europe			Total
	30 June 2016 £000	30 June 2015 £000	31 December 2015 £000	30 June 2016 £000	30 June 2015 £000	31 December 2015 £000	30 June 2016 £000	30 June 2015 £000	31 December 2015 £000
Revenue
Residential	200,610	189,972	399,453	20,777	19,345	40,281	221,387	209,317	439,734
Commercial	85,650	84,615	175,888	21,636	19,614	38,456	107,286	104,229	214,344
	286,260	274,587	575,341	42,413	38,959	78,737	328,673	313,546	654,078

3 FINANCE INCOME AND EXPENSE

	Six months  ended 30 June 2016 £000	Six months  ended 30 June 2015 £000	Year ended 31 December 2015 £000
Interest income:
Bank interest	243	115	699
Other	255	-	39
Finance income	498	115	738
Interest expense:
Bank loans, overdrafts and other financial expenses	(449)	(356)	(1,150)
Net change in fair value of cash flow hedges transferred from equity	(23)	(63)	(125)
Net interest on defined benefit plan obligation	(280)	(310)	(616)
Other	-	(60)	-
Finance expenses	(752)	(789)	(1,891)

Notes to the Condensed Consolidated Interim Financial Statements continued

Unaudited

4 TAXATION

The group's consolidated effective tax rate in respect of continuing operations for the six months ended 30 June 2016 was 20% (for the six months ended 30 June 2015: 20.25%; for the year ended 31 December 2015: 20.25%).

Reductions in the UK corporation tax rate from 20% to 19% (effective from 1 April 2017) and to 18% (effective 1 April 2020) were substantively enacted on 26 October 2015.  A further reduction to 17% (effective from 1 April 2020) was announced in the Budget on 16 March 2016. This will reduce the company's future current tax charge accordingly. The deferred tax asset at 30 June 2016 has been calculated based on the rate of 18% substantively enacted at the balance sheet date.

5 EARNINGS PER SHARE

The calculation of the basic and diluted earnings per share is based on the following data:

	Six months  ended 30 June 2016 £000	Six months  ended 30 June 2015 £000	Year ended 31 December 2015 £000
Earnings
Earnings for the purposes of basic and diluted earnings per share being profit attributable to equity holders of the parent	12,089	9,848	28,411
	2016	2015	2015
Number of shares
Issued ordinary shares at end of period	85,363,743	85,363,743	85,363,743
Effect of shares held in treasury	(1,330,565)	(1,501,893)	(1,331,576)
Weighted average number of ordinary shares for the purposes of basic earnings per share	84,033,178	83,861,850	84,032,167
Effect of diluted potential ordinary shares:
Weighted average number of ordinary shares at period end	84,033,178	83,861,850	84,032,167
Dilutive effect of share options	617,808	402,528	282,078
Weighted average number of ordinary shares for the purposes of diluted earnings per share	84,650,986	84,264,378	84,314,245

Notes to the Condensed Consolidated Interim Financial Statements continued

Unaudited

6 DIVIDENDS

	Six months ended 30 June 2016 £000	Six months ended 30 June 2015 £000	Year ended 31 December 2015 £000
Interim dividend for 2015 of 6.0p paid 2 January 2016	5,048	-	-
Special dividend for 2015 of 6.0p paid 25 April 2016	5,048	-	-
Final dividend for 2015 of 14.7p proposed	12,368	-	-
Interim dividend for 2014 of 5.2p paid 2 January 2015	-	4,355	4,355
Final dividend for 2014 of 12.3p proposed	-	10,300	10,300
	22,464	14,655	14,655

The final proposed dividend for 2015 of 14.7p per share was authorised by shareholders at the Annual General Meeting on 20 May 2016 and paid on 1 July 2016.  The final proposed dividend for 2014 of 12.3p per share was authorised by shareholders at the Annual General Meeting on 21 May 2015 and paid on 1 July 2015.

7 CAPITAL COMMITMENTS

As at 30 June 2016, the group had contractual commitments relating to the purchase of property, plant and equipment of £408,000 (30 June 2015: £371,000, 31 December 2015: £728,000). 

8 RELATED PARTIES

The group has a related party relationship with its subsidiaries and with its key management.  There have been no changes to the nature of related party transactions entered into since the last annual report.

9 SUBSEQUENT EVENTS

Management have given due consideration to any events occurring in the period from the reporting date to the date these Interim Financial Statements were authorised for issue and have concluded that there are no material adjusting or non-adjusting events to be disclosed in these Interim Financial Statements.

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END

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