REG - Card Factory PLC - Half Yearly Report <Origin Href="QuoteRef">CARDC.L</Origin> - Part 2
29/10/2014 12:42
- Part 2: For the preceding part double click ID:nRSR9732Ra
Underlying operating profit 26.1 23.9 72.9
Depreciation and amortisation 4.1 3.6 7.5
Underlying EBITDA 30.2 27.5 80.4
6 Non-underlying items
Six months ended 31 July 2014 Six months ended 31 July 2013 Year ended 31 January 2014
£'m £'m £'m
Cost of sales
Gains/(losses) on foreign currency derivative financial instruments not designated as a hedge (0.3) 1.9 (1.9)
Operating expenses
IPO costs (3.6) - -
Residual management equity share based payment (11.2) - -
(14.8) - -
Net finance expense
Refinanced debt issue cost amortisation (7.7) - -
Net fair value remeasurement gains and losses on derivative financial
instruments
The Group utilises foreign currency derivative contracts to manage the foreign
exchange risk on U.S. Dollar denominated purchases. Fair value gains and
losses on such instruments are recognised in the income statement to the
extent they are not hedge accounted under IAS 39. Such gains and losses are
unrealised and relate to future cash flows. In accordance with the commercial
reasoning for entering into these agreements, the gains/losses are deemed not
representative of the underlying financial performance in the year and
presented as non-underlying items.
IPO costs
In May 2014, Card Factory plc floated on the London Stock Exchange.
Non-recurring IPO related costs totalled £5.2m of which £3.6m was charged to
the income statement and £1.6m was recognised within share premium as costs
directly related to the issue of new shares.
Residual management equity share based payment
On admission to the London Stock Exchange, shares with a fair value of £9.8m
were issued in relation to residual management equity as detailed in the IPO
prospectus. Employer national insurance of £1.4m was incurred on the issue of
the shares. These non-recurring share based payments are presented as a
non-underlying item in the income statement.
Refinanced debt issue cost amortisation
Debt issue costs not yet amortised totalling £7.7m were expensed to the income
statement when bank borrowings were repaid and re-financed on 30 May 2014. See
note 14 for details of net debt movements.
7 Finance income and expense
Six months ended 31 July 2014 Six months ended 31 July 2013 Year ended 31 January 2014
£'m £'m £'m
Finance income
Bank interest received (0.2) (0.3) (0.5)
Finance expense
Interest on bank loans and overdrafts 6.0 3.2 9.5
Amortisation of loan issue costs 8.7 0.8 1.9
Interest on loan notes 4.3 18.3 29.9
Other interest payable 0.1 0.1 0.1
19.1 22.4 41.4
Net financing expense 18.9 22.1 40.9
Amortisation of loan issue costs include £7.7m relating to the refinancing of
bank borrowings on 30 May 2014 and are treated as non-underlying, see note 6.
8 Taxation
The tax charge on underlying profit before tax for the interim period has been
calculated on the basis of the estimated effective tax rate on underlying
profit before tax for the full year to 31 January 2015 of 21.6% (July 2013 and
January 2014 37.9%).
The effective tax rate was higher in the prior year principally due to
non-deductible interest costs in relation to shareholder loan notes.
Shareholder loan notes were part repaid in October 2013 and the remaining
balance settled by share exchange in May 2014 prior to the IPO. Furthermore,
under a new thin capitalisation agreement approved in the current period,
shareholder loan note interest for the period October 2013 to May 2014 is now
deductible in full giving rise to a £0.7m non-underlying current period tax
credit on interest accrued to 31 January 2014.
The tax credit on non-underlying items is recognised at an effective tax rate
of 18.0% (July 2013 and January 2014: 23.2%) reflecting non-deductible items
in relation to IPO fees. In addition, the non-underlying tax credit also
includes the £0.7m one-off adjustment detailed above.
9 Earnings per share
Basic earnings per share is calculated by dividing the profit for the period
attributable to ordinary shareholders by the weighted average number of
ordinary shares in issue during the period.
The weighted average number of shares for periods prior to the reverse
acquisition (see note 2 for details of the reverse acquisition) reflect the
weighted average number of ordinary shares of CF Topco Limited, multiplied for
a 1:50 share split effected on the reverse acquisition.
Diluted earnings per share is based on the weighted average number of shares
in issue for the period, adjusted for the dilutive effect of potential
ordinary shares. Potential ordinary shares represent share incentive awards
granted to employees in the period and have nil dilutive impact at the average
share price for the period.
The Group has chosen to present an alternative earnings per share measure,
with profit adjusted for non-underlying items to reflect the Group's
underlying profit for the year. Underlying earnings is not a recognised profit
measure under IFRS and may not be directly comparable with 'adjusted' profit
measures used by other companies.
Six months ended 31 July 2014 Six months ended 31 July 2013 Year ended 31 January 2014
(Number) (Number) (Number)
Weighted average number of shares 283,974,614 245,635,000 245,635,000
£'m £'m £'m
Profit for the financial period (6.3) 2.6 18.4
Non-underlying items 18.0 (1.5) 1.5
Total underlying profit for underlying earnings per share 11.7 1.1 19.9
pence pence pence
Basic and diluted earnings per share (2.2) 1.1 7.5
Underlying basic and diluted earnings per share 4.1 0.4 8.1
10 Intangible Assets
31 July 2014 31 July 2013 31 January 2014
£'m £'m £'m
Net book value
At beginning of the period 331.2 330.8 330.8
Additions 0.6 1.1 1.4
Amortisation (0.6) (0.5) (1.0)
At end of period 331.2 331.4 331.2
11 Property, plant and equipment
31 July 2014 31 July 2013 31 January 2014
£'m £'m £'m
Net book value
At beginning of the period 36.7 32.7 32.7
Additions 5.0 6.5 10.6
Disposals - (0.1) (0.1)
Depreciation (3.5) (3.1) (6.5)
At end of period 38.2 36.0 36.7
12 Financial instruments
Financial instruments carried at fair value are measured by reference to the
following fair value hierarchy:
- Level 1: quoted prices in active markets for identical assets or
liabilities
- Level 2: inputs other than quoted prices included within Level 1 that
are observable for the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices); and
- Level 3: inputs for the asset or liability that are not based on
observable market data (unobservable inputs).
Financial instruments carried at fair value within the Group are derivative
financial instruments measured under a level 2 valuation method. Valuations
are provided by the instrument counter-party.
13 Notes to the cash flow statement
Reconciliation of operating profit to cash generated from operations:
Six months ended 31 July 2014 Six months ended 31 July 2013 Year ended 31 January 2014
£'m £'m £'m
Profit/(loss) before tax (7.9) 3.7 30.1
Net finance expense 18.9 22.1 40.9
Operating profit 11.0 25.8 71.0
Adjusted for:
Depreciation and amortisation 4.1 3.6 7.5
Cash flow hedging foreign currency losses (0.7) - -
Share based payments charge 9.9 - -
Operating cash flows before changes in working capital 24.3 29.4 78.5
(Increase)/decrease in receivables (8.7) (12.6) 0.5
Increase in inventories (0.6) (5.1) (4.7)
Increase in payables 15.5 16.6 4.8
Cash inflow from operating activities 30.5 28.3 79.1
14 Analysis of net debt
Six months ended 31 July 2014 At 1 February 2014 Cash flow Non-cash changes At 31 July 2014
£'m £'m £'m £'m
Secured bank loans (277.8) 108.7 (8.5) (177.6)
Loan notes and accrued interest (109.7) - 109.7 -
Finance leases (0.1) - - (0.1)
Total borrowings (387.6) 108.7 101.2 (177.7)
Cash and cash equivalents 40.7 (7.2) - 33.5
Total net debt (346.9) 101.5 101.2 (144.2)
Six months ended 31 July 2013 At 1 February 2013 Cash flow Non-cash changes At 31 July 2013
£'m £'m £'m £'m
Secured bank loans (128.1) - (0.8) (128.9)
Loan notes and accrued interest (296.9) 47.1 (18.4) (268.2)
Finance leases (0.3) 0.1 - (0.2)
Total borrowings (425.3) 47.2 (19.2) (397.3)
Cash and cash equivalents 64.7 (36.1) - 28.6
Total net debt (360.6) 11.1 (19.2) (368.7)
Year ended 31 January 2014 At 1 February 2013 Cash flow Non-cash changes At 31 January 2014
£'m £'m £'m £'m
Secured bank loans (128.1) (147.8) (1.9) (277.8)
Loan notes and accrued interest (296.9) 217.1 (29.9) (109.7)
Finance leases (0.3) 0.2 - (0.1)
Total borrowings (425.3) 69.5 (31.8) (387.6)
Cash and cash equivalents 64.7 (24.0) - 40.7
Total net debt (360.6) 45.5 (31.8) (346.9)
In May 2013 the Group utilised retained cash balances to redeem £35.0 million
10% loan notes and pay £12.1 million related accrued interest.
In October 2013 the Group redeemed 14% loan notes and accrued interest,
together totalling £170.0 million, funded by an additional £165.0 million
secured bank loan facility and retained cash balances.
In May 2014, prior to the IPO, the Group issued shares at market value in full
settlement of the remaining £114.0m loan notes and accrued interest.
In May 2014 the Group re-financed secured bank borrowings, utilising retained
cash and proceeds from the IPO to reduce secured bank debt to £180.0m. The new
facilities agreement includes a term loan of £180.0m and a £20.0m revolving
facility for working capital purposes, both terminating in April 2019. The
term loan facility attracts interest at LIBOR plus a margin in the range 1.50%
to 2.50%, subject to a leverage ratchet. The RCF facility attracts interest at
LIBOR plus a margin in the range 1.25% to 2.25%, subject to a leverage
ratchet. The facilities are subject to financial covenants typical to an
arrangement of this nature.
15 Share capital and share premium
31 July 2014 31 July 2013 31 January 2014
Share capital (Number) (Number) (Number)
Allotted, called up and fully paid ordinary shares of 1 pence
At the start of the period 245,635,000 245,635,000 245,635,000
Issued in settlement of shareholder loan notes 50,686,235 - -
Issue of residual management equity 4,375,000 - -
Issued on IPO 40,000,000 - -
At the end of the period 340,696,235 245,635,000 245,635,000
Share capital £'m £'m £'m
At the start of the period 2.5 2.5 2.5
Issued in settlement of shareholder loan notes 0.5 - -
Issue of residual management equity - - -
Issued on IPO 0.4 - -
At the end of the period 3.4 2.5 2.5
Share premium £'m £'m £'m
At the start of the period - - -
Issued in settlement of shareholder loan notes 113.5 - -
Issued on IPO 89.6 - -
Share issue costs (1.6) - -
At the end of the period 201.5 - -
16 Related party transactions
In May 2014, as detailed in the IPO prospectus, the company issued 50.7m
ordinary shares at market value, in full settlement of 114.0m 14% loan notes
due to related parties as follows:
· 40.1m shares to funds managed by Charterhouse General Partners (IX)
Limited in settlement of £90.1m loan notes. Loan note interest of £3.4m
accrued in the current financial period prior to settlement. Funds managed by
Charterhouse General Partners (IX) Limited control 41.3% of the ordinary share
capital and are represented on the Board of Directors by Graeme Coulthard,
Non-Executive Director;
· 1.2m shares to Richard Hayes, Chief Executive Officer, in settlement of
£2.6m loan notes. Loan note interest of £0.1m accrued in the current financial
period prior to settlement;
· 0.03m shares to Darren Bryant, Chief Financial Officer, in settlement of
£0.1m loan notes. Loan note interest of £0.002m accrued in the current
financial period prior to settlement; and
· 9.4m shares to other key management personnel in settlement of £21.2m loan
notes. Loan note interest of £0.8m accrued in the current financial period
prior to settlement.
In May 2014, as detailed in the IPO prospectus, the company issued 4.4m
ordinary shares at nominal value in relation to residual management equity as
follows:
· 1.9m shares to Darren Bryant, Chief Financial Officer; and
· 2.5m to other key management personnel.
17 Principal risks and uncertainties
There are a number of risks and uncertainties that could have a material
impact on the Group's operating and financial performance.
Detailed disclosure of the risks and uncertainties to which the Group is
currently subject can be found on pages 22 to 31 of the IPO prospectus,
published by the Company on the admission of its shares to the Official List
of the Financial Conduct Authority and to trading on the London Stock
Exchange. The Group considers the following to be its principal risks:
Commercial
Business strategy - Our business strategy has been developed with the aim of
achieving long-term value for our shareholders. The Board recognises that if
the strategy of and vision for the business are inappropriately developed,
communicated or delivered there could be an adverse impact on our business and
its prospects.
Competition - The greeting cards sector is highly competitive, including with
respect to product selection and quality, store location and design, price and
customer service. We compete with a wide range of retailers that offer
competing products of varying quality and price. Some of our competitors,
particularly supermarkets, general merchandise discounters and stationery
retailers, may have greater market presence, name recognition, financial
resources and purchasing economies of scale, any of which could give them a
competitive advantage.
Our brands - The "Card Factory" and "Getting Personal" brands are important
assets of the Group. If we are unable to protect our brand names or there is
an event which materially damages the reputation of our brands and/or we fail
to sustain our appeal to our customers this could have an adverse impact on
our sales and future prospects.
Store portfolio expansion - Expansion of our store portfolio to approximately
1,200 stores over the next 10 years is part of our growth strategy. Growth in
the Group's sales and profits over the period will depend on our ability to
find suitable locations for new stores which, when trading, will have a
positive impact on the profitability of the Group. Competition among
retailers for store sites and our ability to acquire them on acceptable terms
and operate them profitably are key to us achieving our growth objectives. Any
failure to achieve these will negatively impact on the Group's sales and
profits. Additionally, a growing store portfolio will increase the operational
complexity of the Group. Our ability to support this growing portfolio through
our operational infrastructure (including our production and distribution
capabilities and our supplier base), financial systems and managerial controls
and procedures will be critical to the Group's success as it continues to
grow.
Financial
Treasury - Our funding arrangements and the fact that we source the majority
of our non-card merchandise, as well as certain raw materials used in the
production and printing of our greeting cards, from suppliers located in the
Far East mean that a lack of appropriate levels of covenant headroom and/or
cash resources in the Group, or significant variations in interest or exchange
rates, could have an impact on our operations and performance.
Supply Chain
Sourcing/supply chain - We rely on third-parties, including many in the Far
East, for the supply of nearly all of our non-card products, as well as our
handcrafted greeting cards and the supply of helium and raw materials used in
the production of our greeting cards. Although we have well-established
relationships with many of our suppliers, any failure by them to satisfy
orders on acceptable terms may adversely affect our business or result in us
having to seek alternative suppliers, who may not be able to fulfil our
requirements. We are also exposed to changes in supplier dynamics and
vulnerable to industry-wide increases in the prices of raw materials and the
products we sell.
The international nature of our supplier base means we are also subject to the
risks of manufacturing and importing of goods from overseas including, but not
limited to increases in the costs of goods and raw materials, interruptions in
supply and reputational risk arising from the labour practices of suppliers.
Business integration - The Group has developed a vertically integrated retail
business model whereby we can perform our own design, print, sourcing,
warehousing, merchandising and retail functions.
Any major disruption to any of the parts of our business performing these
functions, and in particular to our in-house printing facility, Printcraft,
and our design studio, could severely affect our ability to supply our
stores which would, in turn, affect the performance of the business.
Disruption to any of these functions could also force us to use third-party
providers to perform these for us and this could be expensive and may be on
onerous terms.
Legal
Compliance - Many aspects of our business and operations are governed by
legislation, regulations and other standards and rules in areas including, but
not limited to, corporate governance, the listing and trading of our shares,
employment, product quality, trading, the environment, health and safely,
bribery and data protection. Any failure to comply with these could lead to
penalties, fines, damages claims or reputational damage which could, in turn,
have an impact on the financial performance of the business.
Human Resources
National Minimum Wage - The majority of the Group's employees are paid the UK
national minimum wage. Increases in the national minimum wage or changes to
labour market laws or conditions in the UK could increase the Group's
operating costs (and therefore adversely affect its profitability) and reduce
our operational flexibility.
Key personnel - The successful implementation of the Group's strategy and the
success of our business in general depend on the continuing availability of
our experienced management team and our ability to continue to attract,
motivate and retain other highly qualified employees. We also rely on our
in-house design team to design nearly all of the cards and non-card
merchandise sold in our stores. The loss of, or inability to attract, key
members of these teams could adversely affect our business.
IT
IT - The Group is dependent on reliable and efficient information and
communication technology ("ICT") systems and processes. These include all
systems and processes supporting our retail operations (both physical and
online), our head office function and our in-house design and printing
operations. A failure to adequately maintain the Group's ICT systems or any
prolonged system performance problems could seriously affect our ability to
implement the Group's strategy and to carry on the business.
Online - The Group's online presence in the personalised greeting card and
gift market, through our Getting Personal and Card Factory transactional
websites, is relatively new to our business. The integration, operation and
development of these online businesses within our predominantly store based
business provides an opportunity to the Group. However, there can be no
assurance that these transactional websites will compete effectively in a very
competitive market with low barriers to entry. If we fail to develop our
transactional websites in line with changing customer tastes and evolving
technology, they may not deliver the anticipated growth in sales. This may
also adversely impact our reputation and our customers' perception of our
brands.
Responsibility statement of the directors in respect of the half-yearly
financial report
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 EU;
• 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.
By order of the Board
Richard Hayes Darren Bryant
Chief Executive Officer Chief Financial Officer
18 September 2014
Independent review report to Card Factory plc
Introduction
We have been engaged by the company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 31
July 2014 which comprises the consolidated income statement, the consolidated
statement of comprehensive income, the consolidated statement of financial
position, the consolidated statement of changes in equity, the consolidated
cash flow statement and the related explanatory notes. We have read the other
information contained in the half-yearly financial report and considered
whether it contains any apparent misstatements or material inconsistencies
with the information in the condensed set of financial statements.
This report is made solely to the company in accordance with the terms of our
engagement to assist the company in meeting the requirements of the Disclosure
and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority
("the UK FCA"). Our review has been undertaken so that we might state to the
company those matters we are required to state to it in this report and for no
other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the company for our review work,
for this report, or for the conclusions we have reached.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been
approved by, the directors. The directors are responsible for preparing the
half-yearly financial report in accordance with the DTR of the UK FCA.
As disclosed in note 2, the annual financial statements of the group are
prepared in accordance with IFRSs as adopted by the EU. The condensed set of
financial statements included in this half-yearly financial report has been
prepared in accordance with IAS 34 Interim Financial Reporting as adopted by
the EU.
Our responsibility
Our responsibility is to express to the company a conclusion on the condensed
set of financial statements in the half-yearly financial report based on our
review.
Scope of review
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410 Review of Interim Financial Information
Performed by the Independent Auditor of the Entity issued by the Auditing
Practices Board for use in the UK. A review of interim financial information
consists of making enquiries, primarily of persons responsible for financial
and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK and Ireland) and consequently
does not enable us to obtain assurance that we would become aware of all
significant matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 31 July 2014 is not prepared, in all
material respects, in accordance with IAS 34 as adopted by the EU and the DTR
of the UK FCA.
Chris Hearld
Senior Statutory Auditor for and on behalf of KPMG LLP, Statutory Auditor,
Chartered Accountants
1 The Embankment
Neville Street
Leeds
West Yorkshire
LS1 4DW
18 September 2014
This information is provided by RNS
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