Chief Executive's ReviewFinance Director's Review
Despite turmoil in the markets, the recession and a contraction
in credit availability, the Group remains well positioned
Finance Director's Review
The financial review provides a summary of how the Group has performed during the year and provides additional information to that contained in the financial statements on Accounts section. The report also comments further on the Group’s funding and liquidity; risks and policies and the key performance measures that are used to manage the ongoing performance of the Group.
Financial Objectives
Despite the turmoil of the last 12 months in the financial markets, the recession and a contraction in credit availability, the Group remains well positioned. The Board has sought to ensure that the Group is conservatively financed, that management are focused on cash generation and that debt raised to fund investment and acquire businesses is repaid. During the financial year ended 31 March 2009, net debt reduced from £104.3m to £86.0m. The Group was refinanced on 29 April 2009 with a new £90m facility on a three year term to add to the £72m US Private Placement maturing in 2013 and 2016. The Group has £162m of committed debt facilities for the next three years providing funding capacity and flexibility for the medium term.
Profit before tax in the year was 0.9% below last year after deducting exceptional costs of £1.2m (2008: £0.4m) and amortisation of intangibles of £2.5m (2008: £1.6m). Earnings per share is in line with the prior year and action has been taken to reduce costs by an annualised £12m. The BSS Group plc remains financially secure and the finances of the Group remain strong.
Our views on the creation of long term value for our shareholders have not changed in the last year. We believe long term value is achieved by sales growth, improved profitability, cash generation and strong return on capital employed. These shared views drive decision making and behaviour in the Group with the financial objectives aligned to this end and focused on four key objectives:
- Increasing revenue
- Improving operating margins
- Maximising return on capital employed
- Maximising free cash flow
| Earnings per Share | Return on Capital | Net Debt | ||
|---|---|---|---|---|
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The five year record for financial measures used by the Group is set out below:
| 2009 | 2008 | 2007 | 2006 | 2005 | |
|---|---|---|---|---|---|
| Revenue growth | 4.0% | 27.4% | 17.2% | 15.7% | 12.6% |
| Operating margin | 4.80% | 4.92% | 5.07% | 4.80% | 5.11% |
| Earnings per share | 33.3p | 33.3p | 27.1p | 21.0p | 19.7p |
| Free cash flow | £27.9m | £30.7m | £25.5m | £10.3m | £15.2m |
| Return on capital | 20.3% | 21.4% | 20.1% | 20.7% | 24.9% |
| Net debt | £86.0m | £104.3m | £81.9m | £77.9m | £62.3m |
| Net debt / EBITDA | 1.18 times | 1.49 times | 1.44 times | 1.70 times | 1.49 times |
Financial Results
For the year ended 31 March 2009, Group revenue increased by 4.0% to £1,340.6m (2008: £1,289.0m). Like for like revenue, which excludes the impact of acquisitions and new branches, decreased by 0.7% (2008: 8.5% increase), with a 4.2% decrease (2008: 9.9% increase) growth in the second half of the year. Both the Domestic and Industrial Divisions showed growth in revenue, with Industrial revenue increasing by 4.3% and Domestic by 3.7%. On a like for like basis both Industrial and Domestic Divisions continue to outperform the market but as the year progressed, the impact of the recession became more evident: there has been some tightening of repair and maintenance spend plus deflation on copper and steel prices. In reaction, the cost base of the Group has been managed down with the headcount reduced by 300 (6%) and annualised cost savings of £12m have been achieved.
Revenue growth on an organic basis, which includes the benefit of new branches, was up 2.3%, with bolt on acquisitions contributing a further 1.3% of growth.
New branches contributed 3.0% growth to Group revenue with a further 30 branches opened in the year. New branches continue to provide a satisfactory return on capital with their performance closely monitored against expected returns and they continue to represent a good use of shareholder capital.
Gross profit of £306.6m was £16.5m (5.7%) up on last year. The gross margin percentage was 22.9%, up 0.4% on 2008, contributing incremental margin of £5.1m. Improved sales mix, commercial negotiation plus the direct sourcing capability of Birchwood Products has assisted the Group in achieving gross margin improvement.
Costs of £242.2m were £15.5m (6.8%) up on last year. Excluding the impact of acquisitions and new branches, like for like costs were 2.0% up on last year with bad debts accounting for 1.1% of the increase. Bad debts cost £6.9m (0.51% of revenue) an increase of £2.5m on the prior year. An exceptional charge of £1.2m (2008: £0.4m) was made for redundancy costs and amortisation of intangibles cost £2.5m (2008: £1.6m).
Operating profit increased by 1.6% to £64.4m (2008: £63.4m) with the Industrial Division showing strong growth and the Specialist Division achieving an adjusted operating margin of 4.0% (2008: 2.6%) in its second full year post acquisition.
Operating profit of the Domestic Division was £6.3m (15%) lower than 2008 reflecting the impact of lower sales as new build revenues contracted and R & M markets tightened plus increased bad debts. Action taken on costs resulted in 7% reduction in Divisional headcount. Group costs to sales ratio prior to exceptional costs and amortisation of intangibles, was 17.8% against 17.4% in 2008.
Group interest charges (gross) decreased from £7.4m to £7.1m reflecting the reduction in LIBOR in the second half partly offset by higher average net debt due to the acquisition of Birchwood Products in March 2008. Interest cover was a healthy 9.1 times (2008: 8.6 times) and gearing closed the year at 37.1% (2008: 49.3%).
Profit before tax decreased by 1% to £57.8m (2008: £58.3m). Earnings per share on a statutory basis was held flat at 33.3 pence per share (2008: 33.3 pence). There is no material difference between earnings per share and the diluted earnings per share.
The tax charge for the year was £16.8m (29.1% of profit before tax) compared with a £17.5m charge in 2008 (30.0%). The total tax charge is above the basic rate due to expenditure not eligible for tax relief.
Shareholders’ Return
Total equity has increased in the year by £20.1m (10%) to £231.6m (2008: £211.5m).
The share price on 31 March 2009 was 288 pence (31 March 2008: 390.5 pence), having been at a high in the year of 402 pence and a low of 185 pence. The share price on 22 May 2009, the latest practical day before the publishing of these accounts was 289.25 pence. At the year end the market capitalisation was £355.7m (2008: £479.8m), which represents 1.5 times (2008: 2.3 times) shareholders’ funds.
Based on operating profit generated in the year, return on capital employed (equity and debt) was 20.3% against 21.4% in 2008.
Given that earnings per share is flat year on year and that dividend cover remains satisfactory, the Board recommend that the final dividend is held at 5.54 pence per share, making a total for the year of 7.43 pence (2008: 7.43 pence).
Cash Flow
Free cash flow in the year of £27.9m (2008: £30.7m) was £2.8m lower than last year reflecting higher operating profit offset by increases in working capital. The working capital to sales ratio at year end was 14.0%, in line with the prior year.
Working capital in the year, excluding acquisitions, increased by £5.3m (2.9%) against 4.0% revenue growth. Tight control of working capital has been maintained and in-take of stock has been carefully managed to meet sales expectations.
Net debt decreased in the year by £18.3m (18%) to £86.0m (2008: £104.3m). Borrowings and interest cover continue to remain at comfortable levels relative to the earnings and cash flow of the Group.
Debt Facilities
The Group has a mixture of unsecured bank borrowings, unsecured loan notes at fixed and floating rates and retained profits to fund its day to day activities. The $125m of US loan notes are repayable in 2013 ($75m) and 2016 ($50m) and are used to fund the core debt of the Group. The loan notes were swapped into Sterling at $1.73 = £. There is no currency risk. We have a new £90m Revolving Credit Facility (RCF) provided by a syndicate of banks which is used to fund bolt on acquisitions and supplementary working capital requirement. The £90m RCF was entered into on 29 April 2009 and is repayable in April 2012. In addition, there is a £35m overdraft facility with HSBC Bank plc which is used to fund the Group’s short term fluctuations in working capital.
The Group had unutilised credit facilities in excess of £110m as at 31 March 2009. The ratio of net debt to earnings before interest tax depreciation and amortisation (EBITDA) was 1.18 times (2008: 1.49 times) at year end.
Capital Expenditure
During the year the Group invested £15.4m (2008: £15.6m) in capital expenditure of which £4.6m was invested in opening new branches and £7.4m on upgrading IT systems. IT investment included £4.5m to replace Buck & Hickman’s operating, financial and branch based systems.
Capital expenditure and significant disposals are subject to capital appraisal reviews with clear authority levels in place throughout the Group.
Pension Funds
The Group have three closed final salary pension schemes. The total Group pension deficit calculated on an IAS 19 basis for the defined benefit schemes was £30.9m at 31 March 2009 (2008: £13.1m). Although the risk of economic slowdown has had an adverse effect on the equity values of the assets of the schemes, this reduction has been partly offset by lower liabilities as inflation rates on payroll have been reassessed. The Group has applied a higher discount rate reflecting the higher AA corporate bond rate that is used to value the future cash flows at today’s value. The pension deficit is manageable and we expect the assets to appreciate in value when the economic recovery takes effect. At year end, the deficit represented 9% (2008: 3%) of Group market value. As at 30 April 2009, the pension assets had increased in value by £10.2m (9.7%) in the month.
Financial Risk Management
The Group Treasury team continues to coordinate the Group’s banking and borrowing requirements, and controls exposure to foreign exchange and interest movements. The aim is to minimise the effect of changes in external and internal conditions on the financial performance and net assets of the Group. The Group manages these risks using Board approved policies and procedures and does not enter into speculative contracts. Derivative instruments are used but only to manage our exchange and interest exposure.
Interest Rate Risk
At the year end, 84% of the Group’s net debt is subject to interest rate fixing through swap transactions. The Group uses these interest rate swaps to manage its exposure to variable interest rates. Further information is set out in note 16 to the financial statements.
Liquidity Risk
The Group finances its operations through a mixture of retained profits, bank borrowings and private placement finance. The borrowings are denominated primarily in Pounds Sterling and the private placement debt is denominated in US Dollars. Cash deposits are placed with banks at floating rates on periods ranging from overnight to monthly depending on forecast cash flow requirements and earn interest at prevailing rates in the money market. The maturity profile of borrowings is set out in notes 15 and 16 to the financial statements. The Group maintains the mixture of long term, medium term and short term committed facilities as part of its liquidity risk management, which enables the Group to ensure that it is able to meet the funding needs of the business.
Currency Risk
The Group’s exposure to foreign currency risk is minimal. The Group’s wholly owned Irish subsidiary’s revenues and expenses are denominated in Euros. The Group faces currency exposure on the translation of profits earned within the subsidiary, and is subject to currency exposure on the translation of its net assets. The Group finances its investment in this subsidiary by means of borrowings in Pounds Sterling, together with a Euro overdraft facility. Dividends are paid by the Irish subsidiary to the Group at spot exchange rates. The Group does not consider it appropriate to hedge its net investment due to the materiality of the Irish operation. The Group’s trade purchases from overseas suppliers are either purchased in Pounds Sterling or in the relevant foreign currency. The Group enters into finance contracts to buy foreign currency forward to lock input costs at levels that enable the commercial teams to price and trade effectively. The Group’s balance sheet transaction exposure relates primarily to foreign currency trade creditors and is not material to the Group. Furthermore the Group’s US denominated borrowings have been converted to Sterling using currency swaps.
Credit Risk
The Group has no significant concentration of credit risk and limits the amount of credit exposure to any particular customer across all trading Divisions via credit insurance and a Group wide credit limit. It has policies in place to ensure that sales of product are made to customers only with an appropriate credit standing and history. Regular credit review meetings are held to manage key debtors and overdue debts. Consequently, management believe that no further credit risk provision is required in excess of normal provision for doubtful debtors.
Roddy Murray
Group Finance Director
27 May 2009