Heywood Williams Interim Results Shows Group Back in Black

Robert Barr, Chief Executive of Heywood Williams Group PLC, said: ‘The first half of 2004 saw the successful implementation of a substantial programme of change designed to streamline and strengthen the group. Heywood Williams is now focused on its market leading businesses of specialist distribution of building products in the US and UK and the extrusion of plastic profiles in the UK. The group is now profitable on an ongoing basis and we continue to work towards delivering full year expectations. We are determined to realise the potential from our market leading positions as the group moves forward.’

Headline financials
• Turnover reduced mainly due to disposals to £194.2 million (2003: £278.3 million)
• Operating profit increased to £3.7 million* (2003: £0.6 million loss*)
• Pre-tax profit up to £3.1 million* (2003: £1.7 million loss*)
• Pre-tax profit after exceptionals and goodwill amortisation £2.7 million (2003: £3.4 million loss)
• Earnings per share 2.0p* (2003: 1.3p loss per share*)
* before exceptionals and goodwill amortisation

Results from continuing operations
• Turnover from continuing operations £156.7 million (2003: £152.6 million)
• Operating profit from continuing operations £2.4 million (2003: £1.5 million)

Recent developments
• Significant elements of the restructuring programme now complete
• Robert Barr, new Chief Executive, joined the group
• Bristolpipe sold for £15.4 million in the second half, removing volatile business with limited strategic fit
• Balance sheet strengthened, debt-free after Bristolpipe disposal
• Head office functions rationalised
• Operationally focused management team – returning Plastic Systems to profit is the no.1 priority

Interim Report from the Chairman

Restructuring Programme Update
In my report to shareholders in March, I said that 2003 was one of the most difficult years that Heywood Williams had encountered in its long history.

As a consequence of this, the major focus in the first half of 2004 was to continue to implement the comprehensive restructuring programme, announced in October 2003, in parallel with returning the Plastic Systems division to profitability. The restructuring programme was designed to strengthen the group following the difficulties encountered during 2003. Significant elements of the programme have now been completed including:

• The sale of the trade fabricators Coastal and Cestrum Conservatories early in the year;
• On target headcount reductions in the continuing operations, particularly Plastic Systems;
• Elimination of excess stocks and distribution equipment and write-down of debtors associated with the supply chain issues which had arisen in Plastic Systems;
• The downsizing of the electronic locking project, primarily Centralock;
• Finalisation of new financing facilities for the period to December 2005;
• An ongoing drive to increase the focus on cash and therefore optimise the levels of capital employed throughout the operations and minimise the cash component of the exceptional expenditure.

The group’s balance sheet has improved significantly through the settlement of the second part of the group’s legacy product rectification claim, resulting in the receipt of £14.5 million in June 2004, and the sale of Bristolpipe, the US pipe operation, for a net cash receipt of £15.4 million in the second half.

The sale of Bristolpipe enabled the group to exit an activity, which provided limited strategic opportunities and created a significant degree of volatility in group earnings from year to year. Following the sale, banking facilities have been extended until the end of 2005 with more conventional covenants.

Head office functions have also been rationalised and a number of senior managers have left the company. These changes are part of a programme designed to create an operationally focused management team, align the central resources to the size of the operations and save costs.

As a result of the above actions the continuing group:
• Will be substantially debt-free throughout the rest of the year;
• Is profitable, recording an operating profit of £2.4 million in the first half of 2004.

The results to date demonstrate that the group’s operations have been substantially improved through a wide-ranging and effectively managed series of actions. I would like to thank the management teams, both in the operations and at the centre for their commitment and skill, which augurs well for our future endeavours, but we must not be complacent, as much remains to be done.

Management Changes
During this period the board has been strengthened with the appointment of Robert Barr as group chief executive and Graham Menzies as non-executive director. As previously announced, I stepped down as executive chairman to become chairman from 1st July and Edward Roderick has ceased to be deputy chairman from the same date, remaining as senior non-executive director.
Following the decision of Laurence Campbell to leave the group in September 2004, a programme is in place to recruit a replacement.

Financial Performance
Group profit before taxation, goodwill amortisation and exceptionals was £3.1 million (H1 2003: loss of £1.7 million) on turnover of £194.2 million (H1 2003: £278.3 million). The profit before tax, after exceptionals and goodwill amortisation was £2.7 million (H1 2003: loss of £3.4 million).

The continuing business, after the sale of Coastal, Cestrum Conservatories and Bristolpipe, made an operating profit of £2.4 million on sales of £156.7 million.
Diluted earnings per share, before goodwill amortisation and exceptional items were 2.0p (H1 2003: loss of 1.3p).

Net borrowings reduced to £6.4 million as a result of strict cash management, the disposal of Coastal and Cestrum Conservatories and the receipt of the second part of the legacy product rectification claim of £14.5 million. This compares to net debt at the end of June 2003 of £43.8 million. Following the receipt of the net proceeds of £15.4 million from the disposal of Bristolpipe, the group is, on average, debt-free.

As announced at the time of the settlement of the legacy product rectification claim, the group has undertaken a further update to its lifetime cost assessment, based on the latest scientific evidence and claims experience and has increased the provision by the value of the second claim. The board considers that this amount is sufficient to meet the cost of future claims. For technical accounting reasons, it will be necessary to discount the provision and charge notional interest in respect of the provision which is estimated at £3 million over the life of the provision, of which £0.6 million will be charged in the second half of 2004.

The board has not declared an interim dividend (2003: 5.25p). The board recognises the importance of dividends to shareholders, and dividends will be restored once the board is satisfied that the group demonstrates its ability to deliver acceptable and sustainable earnings.

Operational Review for the First Half of 2004
The UK PVC window, door and conservatory market was weaker than expected in the first six months of 2004 and this continues to date. There are no firm industry statistics on the whole sector, but the industry view is a market decline of at least 5%. Against this background, the sales of our Hardware businesses were broadly flat, as were operating profits. Plastic Systems sales declined by 12.4% largely due to the effect of customers lost during the period of supply chain disruption in 2003. All efforts are being directed to generating new business to arrest and reverse this trend. Despite the lower sales and higher PVC resin costs (£0.8 million), the operating loss of Plastic Systems was restricted to £2.3 million, a little better than the first half of 2003. This was achieved primarily through lower customer credits, better raw material efficiency, lower distribution costs, and reduced headcount. Customer service levels have improved, but much more work remains to be done. The focus on increasing sales volumes is absolute, but inevitably time will be required to generate the additional sales necessary, at acceptable net margins, to return the division to profitability.

In the US, early market weakness in both Manufactured Housing and PVC pipe gave way to a more positive picture later in the first half, only to deteriorate again. We remain positive for the Manufactured Housing recovery as the level of repossessions falls, but the multi-section market has not yet enjoyed the improvement achieved by single section homes. Recreational Vehicles grew strongly throughout the period, which is supportive to our remaining US operations. Our merchanting and operational effectiveness continued to deliver acceptable returns in depressed market conditions. Overall, the US businesses generated operating profit of £4.0 million in the first six months of 2004 despite the deterioration in average US Dollar/Sterling exchange rate to 1.82 from 1.61 in the first half of 2003.

The Development of the Simplified Group
As a result of the restructuring programme, the first stage of simplifying and focusing the group has been completed. In essence, the group is now a supplier of products to the building industry and consists of two major activities: specialist sales, marketing and distribution of building products in the UK and US (approximately 80% of turnover) and extrusion of plastic rigid and cellular profiles in the UK (approximately 20% of turnover). Of the specialist distribution sales, approximately 20% is vertically integrated value-added manufacturing sold under group brands.

Looking ahead, the board is now focusing the group on developing its continuing operations, supported by a strong balance sheet with a low level of borrowings. This will result from well planned activity which is effectively executed across all our businesses.

In specialist distribution in the US, we are already the market leader in Manufactured Housing with approximately 25% market share in those products we supply, but will seek to accelerate market share growth through new product introductions and upgrades, whilst taking full advantage of the expected upturn in the Manufactured Housing market. In parallel, we will seek to extend our product offering and penetration into the high growth Recreational Vehicle and Modular Housing markets.

In the UK specialist distribution sector, we are the market leader in hardware distribution to the PVC windows, doors and conservatory market with a share of approximately 26%. Product development will now receive extra impetus, as will the full extension of product sourcing options and distribution into the already established Eastern European markets. We will also evaluate the options available for the development of our regional sealed unit operation.

In UK Plastic Systems, despite the loss of volume in recent years, we remain the largest producer, with an estimated market share of 11%. Clearly, the drive to reverse the sales decline will be the central focus of the group for the second half of 2004 and all of 2005. In addressing this, it is important to recognise that the customer base for cellular profiles is primarily specialist stockists, whereas our rigid profile customers are mostly fabricators of windows, doors and conservatories. Our future sales initiatives will be designed in a bespoke manner, for these different customer groups. Nevertheless, the realisation of the potential performance will take time to achieve, and eliminating losses is the first target.

The new simplified group structure presents many opportunities across our businesses and a clear and focused approach creates the environment necessary to realise them.

Outlook
Overall market conditions remain weak in the UK and the momentum of improvement in the US Manufactured Housing market has slowed. Nevertheless, we continue to work towards the achievement of full year expectations. Equally important, the platform for future growth, which has been established, will enable Heywood Williams to realise the potential from our leading market positions as the group moves forward.